Failure to comply with a statutory demand is commonly used as the basis for an application to wind up an insolvent company.
A statutory demand requires the prescribed Form 509H to be used. The compliance with the form was recently considered to be absolutely strict. In Townview Holdings Pty Ltd v Sunstate Design & Construct Pty Ltd [2012] FCA 1296 (Townview Holdings) it was held that without the inclusion of a bold warning notice added to Form 509H, the statutory demand was invalid.
In Townview Holdings the court was considering an application to wind up, based on the presumption of insolvency provided by non-compliance with a valid statutory demand. However Greenwood J observed that without strict compliance of the requirements of the Corporations Act 2001 (Cth) (the Act), the Form 509H was not valid and there was no presumption of insolvency.
The Corporations Amendment Regulations 2007 (No. 13) (the amending regulations) amended Form 509H to include a text box containing a bold warning notice, to be inserted directly after paragraph number 5, in Form 509H. The warning is set out as:
A failure to respond to a statutory demand can have very serious consequences for a company. In particular, it may result in the company being placed in liquidation and control of the company passing to the liquidator of the company.
Winding-up applications were explicitly referred to in the explanatory statement of the amending regulations as a cause for the inclusion of the bold warning. The concern being that the statutory demand which commenced the proceeding, may not be brought to the relevant company officer’s attention, and if it was, its gravity might not be recognised. They also stated that the new Form 509H “…contains a boxed, bold warning noting the seriousness of the consequences for a company of a failure to respond to the demand…”
The Court considered the validity of the statutory demand in light of these two aspects of the explanatory statement, as they establish the importance of the bold warning notice.
Section 459E of the Act provides that a statutory demand may be served by a creditor and section 459(2)(e) says that the demand must be in the prescribed form. His honour maintained that the failure to incorporate the warning notice rendered the statutory demand invalid and subsequently dismissed the winding-up application. Greenwood J also noted that this was not an application to set aside the statutory demand on the basis of a defect in the demand, under section 459J(1)(a).
In Randall v Chepan [2009] NSWC 783 (Randall) an application to set aside a statutory demand under section 459J was set aside by White J as, despite the clear exclusion of the warning notice being an obvious defect in the statutory demand, the plaintiff did not produce evidence providing that this omission caused any substantial injustice, as required by section 459(1)(a).
In Randall White J conceded that there might be situations where substantial injustice can be established in setting aside a statutory demand based on the omission of the warning statement, such as where the affidavit material required fell short of properly raising the genuine dispute, which would have prevented the statutory demand.
White J also considered section 459(1)(b) of the Act and whether the omission of the warning could be ‘some other reason’ to set aside the demand, however the plaintiff accepted that it was a defect under s459(1)(a) and it was noted that an omission would still not provide ‘some other reason’.
In JSBG Developments v Kozlowski [2010] NSWSC 97 Palmer J referred to the judgement of White J in Randall when considering an application to set aside a statutory demand under s459J of the Act. Palmer J concluded that the absence of a warning was a mere defect, and did not cause substantial injustice, dismissing the application.
In both of these cases the plaintiff did not argue that the demand was statutorily invalid where in Townview Holdings, the accepted argument was that the statutory demand was not in the prescribed form and therefore invalid. Declaring a statutory demand null is not a new argument and it was observed by Lockhart J in Topfelt Pty Ltd v State Bank of New South Wales Ltd (1993) 47 FCR 226, that where a deficiency is so fundamental the demand may be incapable of being a statutory demand under the Act.
Without an appellant court verdict on the matter, when issuing a statutory demand all precedents to be used should be checked to ensure use of the current version of the prescribed form as the Act requires. Greenwood J’s strict, literal approach to the form has not been endorsed by a Full Court as yet, however it does give some authority to the proposition that Form 509H must be strictly complied with.
If serving a demand, we suggest any creditor obtain legal input to make sure it is completed correctly. Likewise, if a company is served with a demand, advice should be taken as to whether the document complies with the legislation. If a challenge is made or upheld due to defects in a demand, it can mean thousands of dollars in costs orders against an unsuccessful party.
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