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Restructuring & Insolvency

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Focus: Want to set aside a statutory demand? First try to settle or be prepared to explain yourself!

15 May 2012

In brief: The Federal Court has recently determined that a company applying to the Federal Court to set aside a statutory demand must file a 'genuine steps' statement. This means that the party must try to settle the dispute before bringing the application or explain why it has failed to do so. Partner Michael Quinlan and Lawyer David Harris report.

How does it affect you?

  • A 'genuine steps' statement is a statement required in the Federal Court that sets out the steps the parties have taken to resolve the issues in dispute before commencing proceedings or the reasons why no such steps have been taken.
  • This decision confirms that applications to set aside statutory demands in the Federal Court are not excluded from the new legislative requirement to file such a statement.
  • As a result, a company seeking to set aside a statutory demand in the Federal Court is required, at the time of filing its application, to specify what steps it has taken to attempt to resolve the dispute or to explain the reasons why no such steps have been taken.
  • Given that a company only has 21 days within which to apply to set aside a statutory demand, companies will face practical difficulties in taking steps to resolve disputes within this short timeframe.
  • A company seeking to set aside a statutory demand may prefer to commence an application in a state court where the genuine steps requirements do not currently operate.
  • This decision also highlights that lawyers who fail to advise clients to file a genuine steps statement in the Federal Court can be joined to proceedings for the purpose of determining costs.

Background

Setting aside a statutory demand

When a company is served with a statutory demand, the company has 21 days within which to comply with the demand or apply to have it set aside. If the company fails to comply with or apply to set aside the demand, an application can be made to wind up the company in insolvency. In order to set aside a statutory demand, the company must commence a proceeding by making an application to either the Federal Court or one of the state Supreme Courts under section 459G of the Corporations Act 2001 (Cth).

New requirement to file a 'genuine steps statement'

The Civil Dispute Resolution Act 2011 (Cth) (the Act) recently commenced operation with the stated object of ensuring that, 'as far as possible, people take genuine steps to resolve disputes before certain civil proceedings are instituted.'1 The Act attempts to achieve this object by requiring an applicant who institutes proceedings in the Federal Court to file a 'genuine steps' statement at the time of filing an application.2 A genuine steps statement is required to specify what steps the parties have taken to resolve the issues in dispute before commencing proceedings or to specify the reasons why no such steps have been taken.

The decision

The recent decision of Justice Reeves in the Federal Court of Australia highlights the problems associated with the process of a company applying to set aside a statutory demand and its obligation to file a genuine steps statement at the time of filing the application. The decision concerned a dispute between Superior IP International Pty Ltd and Ahearn Fox Patent and Trade Mark Attorneys about nine invoices issued by Ahearn for work it performed prosecuting a patent application for Superior IP. Ahearn issued a statutory demand for payment of the invoices, totalling a little over $10,000. Superior IP commenced proceedings applying to have the statutory demand set aside.3

On the question of whether the statutory demand should be set aside, Justice Reeves found that a genuine dispute existed concerning the amounts claimed in the invoices and ordered that the demand be set aside. However, his Honour noted that Superior IP had not filed a genuine steps statement in connection with its application to set aside the demand. The parties conceded that there had been no attempt to resolve the dispute before the application to set aside the demand was filed. Applications under s459G of the Corporations Act to set aside a statutory demand are not specifically excluded from the genuine steps requirements in the Act or the regulations. Accordingly, Justice Reeves held that the obligation to file a genuine steps statement remained.

Consequences of failing to file a genuine steps statement

Justice Reeves delivered a stinging criticism of the conduct of the lawyers involved in the case, noting that, together, both parties filed in excess of 400 pages of affidavit material to support their allegations concerning a relatively small monetary claim. The lawyers' conduct was described as being 'the absolute antithesis of the overarching purpose of civil practice and procedure' whereby disputes are to be resolved as justly, quickly and cheaply as possible.4

Justice Reeves held that the failure of either party to file a genuine steps statement should be taken into consideration in determining the costs of the proceeding. The matter was adjourned to allow the parties to make submissions on costs. His Honour ordered that the parties' lawyers be joined as parties to the proceeding for the purpose of determining costs. The lawyers were ordered to advise their clients to obtain independent legal advice on costs. The Registrar was also directed to provide a copy of Justice Reeves's reasons to various legal professional bodies so that appropriate action may be taken in relation to the lawyers' conduct.

Comment

This decision confirms that applications to set aside a statutory demand are not excluded from the new legislative requirement to file a genuine steps statement before commencing proceedings in the Federal Court. Accordingly, a company wishing to set aside a demand must take genuine steps to attempt to resolve the dispute before commencing proceedings in the Federal Court. This will raise practical difficulties given the short timeframe of 21 days in which a company must respond to a statutory demand.

The decision also confirms that the failure to file a genuine steps statement in the Federal Court is a relevant consideration in the determination of costs. Where a lawyer has failed to comply with their obligation to advise and assist their client with filing a genuine steps statement, the lawyer may be joined as a party to the proceeding for the purpose of determining costs.

An application to set aside a statutory demand can be commenced in either the Federal Court or a state Supreme Court. The requirement to file a genuine steps statement before commencing proceedings currently applies only in the Federal Court. At this stage, there is no equivalent state legislation in operation. The commencement of similar legislation in NSW (which is the only state where such legislation is currently in place) has been suspended for 18 months from 13 September 2011. Accordingly, given the time constraints involved with statutory demands, a company served with a statutory demand may prefer to make an application to set aside the demand in a state Supreme Court. Otherwise, if the company has failed to take genuine steps to resolve the dispute before bringing an application in the Federal Court, it will need to be prepared to provide a statement specifying the reasons why no such steps have been taken. A failure to do so could attract severe costs penalties.

Footnotes
  1. Civil Dispute Resolution Act s3.
  2. Civil Dispute Resolution Act s6. A similar provision in s7 requires respondents to proceedings to file a genuine steps statement in response.
  3. Superior IP International Pty Ltd v Ahearn Fox Patent and Trade Mark Attorneys [2012] FCA 282.
  4. Superior IP International Pty Ltd v Ahearn Fox Patent and Trade Mark Attorneys [2012] FCA 282, [9].

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