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Focus: Clarification on statutory demands

18 March 2013

In brief: A Western Australian Supreme Court of Appeal decision has clarified the law on statutory demands, holding that a statutory demand for a portion of a larger debt is permissible. Partner Philip Blaxill (view CV), Senior Associate Rebecca Collins and Lawyer Tom Langdon report.

How does it affect you?

  • The law in relation to statutory demands has been clarified, reversing the position established by an earlier South Australian Supreme Court decision.
  • A statutory demand for a portion of a debt will be valid. The portion of the debt demanded should be described in clear and unambiguous terms in the statutory demand.
  • However, it may be an abuse of process to serve multiple statutory demands for various parts of a single debt in the absence of good reasons for doing so. Accordingly, the usual practice should be to serve a statutory demand for the whole of the debt, unless there are good reasons to do otherwise. 

Background

The Commonwealth Bank of Australia advanced US$27 million to Garuda Aviation Pty Ltd, for the purchase of an aircraft. The loan was secured by a chattel mortgage over the aircraft. Following defaults under the loan agreement and the chattel mortgage, the bank made a demand on the company, declaring all monies owing or payable under the loan agreement to be immediately due and payable.

The bank then served a statutory demand on the company under section 459E(1) of the Corporations Act 2001 (Cth), accompanied by the necessary affidavit stating that there was no genuine dispute as to the amount of the debt. The amount demanded was the undisputed portion of a much larger debt claimed by the bank. The full amount of the debt was in dispute in separate proceedings between the bank and a director of the company.

The company applied to have the statutory demand set aside, on the basis that a statutory demand could only be made for the whole of the debt.


The first instance decision

At the application, the company relied on Justice Blue's decision in the South Australian Supreme Court case of Candetti Constructions Pty Ltd v M & I Samaras (No 1) Pty Ltd1, in which he held that a statutory demand could not be made for an 'undissected portion' of a debt. While Master Sanderson appeared to have some misgivings about the decision, he felt bound to follow it, and set aside the bank's statutory demand.


The appeal

The bank appealed to the Court of Appeal, in Commonwealth Bank of Australia v Garuda Aviation Pty Ltd2. The judgment was delivered by Justice Newnes, with whom President McLure and Justice Pullin agreed, holding that the demand should not have been set aside, and that the Master's decision should be set aside. The key points of the court's reasoning were as follows:

  • The words 'a demand relating to a debt' ordinarily have a wider meaning than simply 'a demand for a debt', and do not on their face preclude a demand from being made for part of the debt.
  • The provisions in the Corporations Act relating to the statutory demand process should not be construed narrowly, and be interpreted according to the practical purpose of the statutory demand procedure.
  • The statutory demand procedure was created to provide 'a convenient and quick method of resolving the issue of a company's insolvency'. A presumption of insolvency may be established by the non-payment of an undisputed portion of a debt, so long as the undisputed portion exceeds the statutory minimum.
  • If there is no dispute as to the existence of a debt, and a company is unable to pay the undisputed portion of the debt, there is no reason why the existence of a dispute as to another portion of the debt should preclude the presumption of insolvency that would otherwise arise from the statutory demand procedure.

The company argued that if a demand was allowed for part of the debt, it would be open to a creditor to make a series of demands for different portions of a larger debt. The court rejected this, noting that, unless there were a good reason for making the separate demands, they may constitute an abuse of process and be liable to be set aside under s459J(1)(b).


Conclusion

The judgment concluded that Candetti was wrongly decided and should not be followed. As CBA v Garuda is more authoritative than Candetti, creditors should be confident that they can serve a valid statutory demand for only part of a debt provided the part demanded exceeds the statutory minimum.

However, the better practice remains that creditors should, in most cases, still issue a statutory demand for the whole of the debt, unless there is a good reason not to, such as a dispute or uncertainty as to the amount of the debt.

Footnotes
  1. [2011] SASC 165.
  2. [2013] WASCA 61.

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