STATUTORY DEMANDS. Christopher Prestwich Senior Associate. Adrian Fisher Lawyer

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1 STATUTORY DEMANDS Christopher Prestwich Senior Associate Adrian Fisher Lawyer Allens Arthur Robinson Deutsche Bank Place Corner Hunter and Phillip Streets Sydney NSW 2000 Australia Tel Fax Copyright Allens Arthur Robinson 2007 cvps A v Page 1

2 Table of Contents 1. Introduction 3 2. Requirements for a valid statutory demand 4 3. Who can issue a statutory demand? 5 4. Service 6 5. Effect of non-compliance with a statutory demand 6 6. Setting aside statutory demands 7 7. Genuine disputes and offsetting claims the threshold 8 8. Defects in the demand and substantial injustice 9 9. Some other reason for setting aside the demand Contracting out of a right to assert an offsetting claim Will a statutory demand be set aside if the company can prove it is solvent? Statutory demands and arbitration/mediation clauses Effect of succeeding or failing in a setting aside application 14 cvps A v Page 2

3 STATUTORY DEMANDS Christopher Prestwich and Adrian Fisher 1. Introduction The purpose of the statutory demand regime in Part 5.4 of the Corporations Act 2001 (Cth) 1 is to create a situation where a company that owes money to creditors cannot delay matters by putting on 'colourable defences' to liquidated claims. Instead, unless the company can show a genuine dispute about the claim, a presumption of insolvency arises if the debt is not paid. This serves the public interests by preventing or discouraging insolvent companies from continuing to trade. 2 Statutory demands are commonly used by creditors as a means of seeking to require a company to pay its debts. However, there is an important distinction to be drawn between a debt recovery action and the service of a statutory demand. In Australian Beverage Distributors Pty Ltd V Cranswick Premium Wines Pty Ltd, 3 Justice Barrett commented: A company on which a statutory demand is served is in no sense required to comply with it. It may, if it wishes, allow the statutory presumption of insolvency to arise (by not paying the demanded sum) and, if a winding-up application follows, seek to show that it is in fact in a solvent state so that a winding-up order is not justified. The statutory demand process is no more than a process that defines where the burden of proof lies in winding-up proceedings. It has frequently been said that the winding up process should not be used as a means of debt collection, following the approach of Sir George Jessel MR in Niger Merchants Co v Capper 4 that: [w]hen a company is solvent, the right course is to bring an action for the debt [s]o, to pursue a winding-up petition in such circumstances is an abuse of the process of the court. Prior to issuing a statutory demand, a creditor should bear in mind: (a) (b) a company can apply to have a statutory demand set aside, and if it succeeds, will be entitled to recover its legal costs of that application; and even if a company fails to comply with a statutory demand or to have the statutory demand set aside, that does not create any right for the creditor to enforce its debt. The company may choose to pay the debt, or it may be wound up, in which case 1 All references in this paper to sections are references to sections of the Corporations Act 2001, unless otherwise specified. 2 Scolaro's Concrete Construction Pty Ltd v Schiavello Commercial Interiors (Vic) Pty Ltd (1996) FCR 319 per Sheppard J 3 (2004) 50 ACSR (1877) 18 Ch D 557 at 559 cvps A v Page 3

4 the creditor would be entitled to prove for that debt. However, it is by no means guaranteed that the process will conclude with one of those two outcomes. Geoffrey Bush v Wardair Pty Limited 5 is an example of a case where a company applied to set aside a statutory demand, had that application dismissed, but was nonetheless subsequently able to persuade the Court that it was solvent without paying the debt. In practice, receipt of a statutory demand presents a company with a powerful motive to pay its debts and allowing a presumption of insolvency to arise is a dangerous strategy for any company. 2. Requirements for a valid statutory demand S459E specifies that a statutory demand is validly made if: (a) (b) it relates to a debt or debts, including certain taxation liabilities (set out in s459e(5)), which total at least $2000 and which are due and payable to the person who makes the demand (s459e(1) and s9); it: (i) (ii) (iii) (iv) (v) is in writing; specifies the total amount of the debt(s); requires the company to pay the total amount of the debt(s) within 21 days after the demand is served on the company; is signed by or on behalf of the creditor; and is in the form prescribed by Form 509H in Schedule 2 of the Corporations Regulations 2001 (s459e(2)); and (c) it is accompanied by a verifying affidavit in the event that the debt(s) are not judgement debts (s459e(3)). The Court has held that creditors should ensure that demands are expressed in clear, correct and unambiguous terms if they are to gain the benefit of presumed insolvency. 6 The verifying affidavit must: (a) (b) verify that the debt(s) is due and payable by the company; and comply with the relevant Court rules. Rule 5.2 of the Federal Court (Corporations) Rules 2000, for example, states that the affidavit must: (i) comply with the prescribed Form 7; (ii) (iii) be made by the creditor or an authorised person; and not refer to a Court proceeding in its heading or title. 5 [2003] NSWSC Topfelt Pty Ltd v State Bank of New South Wales Ltd (1993) 12 ACSR 381 per Lockhart J cvps A v Page 4

5 3. Who can issue a statutory demand? A statutory demand may be issued by a person to whom a company owes a debt or debts (s459e(1)). In other words, individual creditors of a company are able to issue statutory demands in relation to the debts owed to them by the company. A debt has been described as "a liquidated sum in money presently due, owing and payable by one person, called the debtor, to another person called the creditor." Significantly, claims for unliquidated damages are not debts. 7 Whether or not a particular claim is a claim for a 'debt' that can be claimed by way of a statutory demand is an issue that requires careful consideration prior to issuing a statutory demand. By way of example: In Odyssey Re (Bermuda) Limited (Company No ) v Reinsurance Australia Corporation Limited 8 it was held that claims against insurers and reinsurers are claims for unliquidated claims and therefore not debts unless or until there is a judgment, an arbitral award or binding settlement agreement. The New South Wales Court of Appeal in Box Valley Pty Limited v Elizabeth Kidd and David John Kidd 9 has confirmed that prospective future liabilities for unliquidated damages are not 'debts'. It was held that a liability that was almost certain to arise under a futures contract in the near future was not ascertainable and was therefore not a 'debt' at the relevant time. S459E(4) states that a person to whom a debt has been assigned may issue a statutory demand in relation to that debt. For a debt to be assigned at law, express written notice of the assignment must be given to the debtor by either the assignor or the assignee. 10 If such notice has not been given, a debt may still have been assigned in equity as between the assignor and assignee. However, the cases that have considered this issue favour the view that the debtor company must be notified of the assignment of the debt for a statutory demand issued by the assignee to be effective. 11 The Courts have generally accepted that the statutory demand itself may include notification of the assignment of the debt. In Clearance Nominees Pty Ltd v Discount Acceptance Corporation Pty Ltd 12 the statutory demand itself included details of the assignment which Master Bredmeyer held constituted sufficient notice of the assignment. In Bennell v Netlink Australia Pty Ltd 13 Justin Austin noted, in finding that a statutory demand included sufficient notifice of the assignment of the debt, that: 7 First Line Distribution Pty Ltd v Paul Whiley & Ors (1995) 13 ACLC 1,216; Odyssey Re (Bermuda) Limited (Company No ) v Reinsurance Australia Corporation Limited [2001] NSWSC [2001] NSWSC (2006) 24 ACLC See s12, Conveyancing Act 1919 (NSW). 11 Condor Asset Management Ltd v Excelsior Eastern Ltd [2005] NSWSC 1139 at [35]. 12 (1997) 25 ACSR (2002) 42 ACSR 680 cvps A v Page 5

6 [n]othing in the Conveyancing Act or the Corporations Act requires that the notice of assignment and the statutory demand be separate documents, and there is no reason of public policy for insisting that this be so. There is some authority to suggest that a statutory demand which also serves as notice of the assignment of a debt must contain more than a "bald assertion" that the issuer of the statutory demand is the assignee of the debt. Justice Barrett in Condor Asset Management Ltd v Excelsior Eastern Ltd 14 stated that such a statutory demand must include "material from which the plaintiff [debtor] could satisfy itself that there had been an assignment as alleged." 4. Service Service of a statutory demand upon a company may be effect in accordance with s 109X Corporations Act 2001 (Cth). That section provides that a document may be served on a company by leaving it at, or posting it to, the company's registered office or delivering a document of the document personally to a director of the company who resides in Australia. As described below, an application to set aside the statutory demand must be served on the demanding creditor. Form 509H requires that a statutory demand should include an address for service of the documents in the State or Territory in which the demand is served on the company. In Elan Copra Trading Pty Ltd v J K International Pty Ltd [2005] SASC 501 the Court considered the position where a statutory demand specifies an address for service outside the State or Territory in which the demand is served. In that case, a demand was served on a South Australian company, and the specified address for service was in New South Wales. The South Australian company filed an application to have the demand set aside. It sent that application to the address for service in New South Wales, but failed to effect service in accordance with the Service and Execution of Process Act 1992 (Cth). It was held that the application had not been served and the Court did not have jurisdiction to hear the setting aside application. However, in those circumstances the Court may be willing to make orders preventing the creditor from bringing winding up proceedings. 5. Effect of non-compliance with a statutory demand The consequence of a company failing either to pay the debt or apply to have a statutory demand set aside within 21 days of being served with the statutory demand is that the creditor may apply to the court for the company's winding up on the basis of its failure to comply and that company is presumed to be insolvent. Accordingly, a company that receives a statutory demand is presented with a powerful incentive to pay its debts - to avoid being wound up and put into liquidation. It is open to a company to rebut that presumption at a subsequent winding up application. To do so however is by no means straightforward. Justice Weinberg in Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd 15 emphasised that in order to discharge its onus a defendant seeking to prove solvency on a winding up application should present the Court with the fullest and best evidence of its financial position. Unaudited accounts and unverified claims of ownership 14 [2005] NSWSC [1999] FCA 728 cvps A v Page 6

7 or valuation are not ordinarily probative of solvency. Nor are bald assertions of solvency arising from a general review of the accounts, even if made by qualified accountants who have detailed knowledge of how those accounts were prepared. 6. Setting aside statutory demands Under s459g a company may make an application to the court, within 21 days of receiving the demand, to set aside the statutory demand. If the company does not make such an application, it cannot later contest, without leave of the court, an application for a winding up order, on any of the grounds that it could have relied on to set aside the statutory demand (s459s). The court will not grant this leave unless it is satisfied that those grounds are material to proving solvency (s459s(2)). An application to set aside the statutory demand can only be made by filing an affidavit in support of the application with the Court and by serving a copy of the application and the supporting affidavit on the demanding creditor (s459g(3)). The court may set aside the statutory demand if it is satisfied that: (a) (b) (c) (d) there is a genuine dispute about the existence or amount of the debt(s) to which the demand relates (s459h(1)(a)); the company has an offsetting claim against the creditor (s459h(1)(b)); because of a defect in the demand, a substantial injustice will be caused unless the demand is set aside (s459j(1)(a)); or there is some other reason the demand should be set aside (s459j(1)(b)). The application to set aside a statutory demand must be made within the 21 day period, and each of the grounds on which the company seeks to set aside the statutory demand must also be identified within that period. If the affidavit in support of the setting aside application does not explain the nature of the cross-claim or quantify it, the Court may refuse to accept it. For example, in Saion Constructions Pty Ltd v Concrete Quarries Pty Ltd, 16 Justice Emmett decided that an affidavit that was served with an application to set aside a statutory demand was not an "affidavit supporting the application" as it merely stated that "[t]he debtor has a cross-claim equal to or greater then [sic] the amount claimed." Justice Emmett noted that a supporting affidavit must "specify the grounds upon which it says there should be no winding up application." While the evidence that has been adduced may be supplemented, the Court may not permit additional grounds to be raised outside the 21 day period. In Process Machinery v ACN , 17 Justice Barrett observed at [22]: The real point is that the application and affidavit filed and served within the 21 day period must fairly alert the claimant to the nature of the case the company will seek to make in resisting the statutory demand. The content of the application and affidavit must convey, even if it be by necessary inference, a clear delineation of the area of controversy so that it is identifiable with one or more of the grounds made available by s459h and s459j. That process of delineation may not be extended 16 (1997) 15 ACLC [2002] NSWSC 45 cvps A v Page 7

8 after the end of the 21 day period, although it is open to the plaintiff to supplement the initial affidavit by way of additional evidence relevant to the area of controversy identified within the period. 7. Genuine disputes and offsetting claims the threshold Precisely what constitutes a "genuine dispute" or an "offsetting claim" has been the subject of substantial judicial commentary, and the terms have been defined in a number of different ways. Common to those definitions is a general theme that the threshold for establishing a genuine dispute or an offsetting claim is not high. To have a statutory demand set aside in its entirety on these grounds, the company must persuade the Court either that: there is a "genuine dispute" in relation to: the existence of the debt; or part of the debt if, when subtracted from the total amount of the debt identified in the statutory demand, that part of the debt is less than the statutory minimum of $2,000; or there is an offsetting claim in relation to: all of the debt; or part of the debt if, when subtracted from the total amount of the debt identified in the statutory demand, that part of the debt is less than the statutory minimum of $2,000. Otherwise, the Court may make an order: varying the amount of the statutory demand; and declaring the demand to have had effect as varied from the date of service of the demand on the debtor company (s459h(4)). Genuine dispute Under s459h(1)(a), there must be a "genuine dispute" about the "existence or amount" of the debt to which the statutory demand relates. In Spencer Constructions Pty Ltd v G&M Aldrige 18 it was held by Justices Northrop, Merkel and Goldberg that a "genuine dispute" is one which is bona fide, and the grounds on which the alleged dispute is based must not be spurious, illusory or hypothetical. Once the court is satisfied that there is a "genuine dispute" it may make an order to set aside or vary the statutory demand. The court will not make a determination as to the merits of the dispute and, as Justice Barrett noted in Panel Tech Industries (Aust) Pty Ltd v Australian Skyreach Equipment Pty Ltd (No 2): (1997) 76 FCR [2003] NSWSC 896 cvps A v Page 8

9 [o]nce the [debtor] company shows that even one issue has a sufficient degree of cogency to be arguable, a finding of genuine dispute must follow even where any case apparently available to be advanced against the company seems stronger. Offsetting claim As offsetting claim is defined in s459h(5) as "a genuine claim that the company has against the respondent by way of counterclaim, set-off or cross-demand (even if it does not arise out of the same transaction or circumstances as a debt to which the demand relates)." Justice Santow in Edge Technology Pty Ltd v Lite-On Technology Corporation 20 applied the same test in determining whether there was an offsetting claim as used in Spencer Constructions in relation to whether there was a "genuine dispute" when he stated: [o]ne asks: is it bona fide, is it real and not spurious? In Gujarat NRE Australia v Williams, 21 Justice Austin commented that a genuine 'offsetting claim' is: a claim on a cause of action advanced in good faith, for an amount claimed in good faith. 'Good faith' means arguable on the basis of facts asserted with sufficient particularity to enable the court to determine that the claim is not fanciful. When advancing an offsetting claim, a company must provide the Court with some evidence supporting the quantum of its claim. Justice Burley commented in Sewmail (Australia) Pty Ltd v Booby Traps Pty Ltd 22 that: There needs to be evidence supporting the quantum of the offsetting claim so that the court may determine whether or not there is a genuine offsetting claim of a given amount. It is not necessary that the evidence be such as might be advanced at a trial but it is, in my view, necessary to adduce some evidence in that regard In the absence of such evidence it is impossible for the court to determine whether or not the statutory demand must be altered or set aside in accordance with the provisions of s459h of the Law. Notably, a claim for unliquidated damages may constitute a genuine offsetting claim, so long as the claim is "one which the court can see, without looking too deeply at the issues that may arise, has some real chances of success." 23 There is still a need to provide evidence sufficient for the Court to make a reasonable assessment of the amount of the claim. If there is not sufficient evidence to make such an assessment, courts have tended to give the claim a nominal value of $ Defects in the demand and substantial injustice S459J(1)(a) provides that a statutory demand may be set aside if a court is satisfied that, "because of a defect in the demand, substantial injustice will be caused unless the demand is set aside". S459J(2) states that a court must not set aside a statutory demand merely because of a defect. 20 (2000) 34 ACSR [2006] NSWSC (1997) 23 ACSR 339 at Intag Microelectronics Pty Ltd v AWA Ltd (1995) 18 ACSR Torrens Aloha Pty Ltd v San Modern Painting Pty Ltd (2001) 19 ACLC 755 cvps A v Page 9

10 Thus, a defect alone will not result in the demand being invalid. The defect must cause "substantial injustice". S9 defines "defect" in relation to a statutory demand as including: an irregularity; a misstatement of an amount or total; a misdescription of a debt or other matter; and a misdescription of a person or entity. As noted above, Form 509H is the prescribed form for statutory demands. S25C of the Acts Interpretation Act 1901 provides that, unless the contrary intention appears, substantial compliance with a form prescribed by an Act is sufficient and strict compliance is not required. Therefore, a failure to comply strictly with Form 509H will not mean that a statutory demand is defective. Despite this, creditors issuing statutory demands should endeavour to follow closely the form required by s459e. Examples of defects that have been held to cause substantial injustice, resulting in the demand being set aside, are as follows: the misdescription or failure to properly specify the debt in the demand: In IFA Homeware Imports Pty Ltd v Shanghai Jerrys Candle Co Ltd, 25 Justice Tamberlin stated that "[t]he specification of the debt in a statutory demand is a fundamental requirement". The statutory demand in that case was held to be inaccurate as the dishonoured cheques on which the debt was based were payable to an entity other than the demanding creditor; the failure to describe, where a statutory demand relates to more than one debt, the individual debts, as well as state the total amount of the debts: Condor Asset Management Ltd v Excelsior Eastern Ltd; 26 Chippendale Printing Co Pty Ltd v Deputy Commissioner of Taxation; 27 Delta Beta Pty Ltd v Vissers; 28 and the inclusion in the statutory demand of debts that, at the time of issuing the demand, are not due and payable: Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd. 29 A court may only set aside a defective statutory demand under s459j(1)(a) (ie in the case of "substantial injustice"). A court may not set aside the demand under s459j(1)(b) on the basis the demand is defective and has not caused substantial injustice but should be set aside for "some other reason". In other words, s459j(1)(a) and s459j(1)(b) are mutually exclusive [2003] FCA [2005] NSWSC (1995) 55 FCR (1996) 20 ACSR (1996) 20 ACSR Spencer Constructions Pty Ltd v G&M Aldridge Pty Ltd (1997) 76 FCR 452 at cvps A v Page 10

11 9. Some other reason for setting aside the demand Under s459j(1)(b), a court may set aside a statutory demand if it is satisfied that there is "some other reason" why the demand should be set aside. Examples of circumstances that the Court has found to constitute "some other reason" include: where there are deficiencies in the affidavit supporting the statutory demand. Examples of such deficiencies include: where the accompanying affidavit has been sworn before the statutory demand and no updating affidavit has been filed: Wildtown Holdings Pty Ltd v Rural Traders Company Ltd; 31 and where the deponent of the accompanying affidavit has failed to state that he or she believes that there is no genuine dispute about the existence or amount of the debt: IFA Homeware Imports Pty Ltd v Shanghai Jerrys Candle Co Ltd; 32 and where there is an appeal based on reasonable and arguable grounds which if successful would result in the existence of an offsetting claim: Eumina Investments Pty Ltd v Westpac Banking Corporation. 33 In Midas Management Pty Ltd v Equator Communications Pty Ltd, 34 the Court applied the principle in Eumina and refused to set aside a statutory demand as there was an appeal on foot that was based on reasonable and arguable grounds in relation to the judgment debt to which the demand related. In both Eumina and Midas, the Court made orders to set aside the statutory demands on the condition that the company on which the statutory demand had been served pay into Court the amount of the debt. It is important to note that an appeal against a judgment debt would not generally constitute grounds for a demand to be set aside under s459h(1)(a) (the "genuine dispute" ground) due to the doctrine of res judicata. Indeed, there have been numerous cases in which the Court has held that the fact that a judgment debt is subject to an appeal does not constitute "some other reason" why the demand should be set aside; 35 where the statutory demand has been issued to coerce an alleged debtor to pay a disputed amount. In Universal Music Australia Pty Ltd v Brown, 36 the affidavit accompanying the statutory demand stated that it would be in the best interests of the alleged debtor to make a cash offer in relation to the disputed amount to avoid "criminal prosecution of all directors for fraud." This statement was held to be coercive and constituted "some other reason" why the demand should be set aside; 31 [2002] WASCA [2003] FCA (1998) 16 ACLC (2007) 25 ACLC Amoya Holdings Pty Ltd v Metway Leasing Ltd (1997) 15 ACLC 429; Barclays Aust (Finance) Ltd v Mike Gaffikin Marine Pty Ltd (1996) 21 ACSR [2003] FCA 1213 cvps A v Page 11

12 where the amount identified as the debt in the statutory demand is grossly overstated: First State Computing Pty Ltd v Kyling; 37 where the statutory demand has been brought for an improper purpose. For example, it has been held to be an abuse of process if the person making the statutory demand is aware that there is a genuine dispute in relation to the debt: Polstar Pty Ltd v Agnew; 38 and the failure to accompany the statutory demand with a verifying affidavit: Victor Tunevitsch Pty Ltd v Farrow Mortgage Services Pty Ltd Contracting out of a right to assert an offsetting claim One issue that the Court has considered recently is whether an exclusion of rights of set-off in a contract can operate to preclude a party from raising an offsetting claim in the context of a statutory demand. In Jem Developments Pty Ltd v Hansen Yuncken Pty Ltd, 40 Justice Austin refused to set aside a statutory demand on the basis of an offsetting claim due to the existence of an agreement between the parties that gave the debt priority over other amounts owed between the parties. Justice Austin commented at [30] that: There is no good reason for denying effect to a contractual stipulation that is intended to segregate a particular debt and prevent it from being reduced by debts owing by the creditor to the debtor and by counter-claims of the debtor against the creditor. Thus, if A and B enter into a contract by which they agree that in stated circumstances, A will pay B $500,000, without any deduction for any debt that B may owe to A or any claim that A may have against B, and then the payment of $500,000 falls due and payable by A, then as a matter of contractual stipulation, A is prevented from reducing the payment obligation by reference to counter-debts or counter-claims. That being so, if B makes a statutory demand upon A under s 459E for payment of $500,000, A is prevented by the contract from relying on any claim it has against B as an offsetting claim for the purposes of s459h. 11. Will a statutory demand be set aside if the company can prove it is solvent? As mentioned at section 1 above, there is authority to the effect that the sole purpose of the statutory demand procedure is to determine where the burden of proving solvency lies in subsequent winding up proceedings. On that basis it might be argued that proof of solvency at an early stage may result in cost savings for the parties. However, the recent approach of the Court has been to reject the relevance of evidence of solvency in the setting aside application itself. In Master Paving Pty Ltd v Heading Contractors Pty Ltd 41 Justice Lander stated that: 37 (1995) 13 ACLC [2007] NSWSC (1994) 12 ACLC (2006) 205 FLR (1997) 15 ACLC 1025 cvps A v Page 12

13 It would be inappropriate, in my opinion, for a company to say, in response to that statutory demand, that it need not pay because it is solvent. That would be an inappropriate response. The solvency of the recipient of the statutory demand is not a relevant matter for an application to set aside the statutory demand under s459g and could not provide some other reason why the demand should be set aside [s459j]. It would be a very curious result if a company could avoid paying its creditors upon their making a demand by the company simply proving it could pay its creditors. Moreover it could be quite burdensome for a creditor if, upon making a demand upon a company, the creditor immediately became embroiled in an argument as to whether the debtor was solvent. The question of solvency therefore is not a question that can be raised in an application to set aside a statutory demand but can always be raised at the time of the application for winding up, whether or not the defendant company did in the time prescribed make application to set aside the statutory demand. In Transcom Australasia Pty Ltd v UTI (Aust) Pty Ltd 42 Justice Dowsett commented: There is authority for the proposition that alleged solvency alone is not a basis for setting aside a statutory demand: see the decision of Lindgren J in Chippendale Printing Co Pty Ltd v Deputy Commissioner of Taxation (1995) 13 ACLC 229, and that of Lander J in Master Paving Pty Ltd v Heading Contractors Pty Ltd (1997) 15 ACLC I find the reasoning in both cases to be highly persuasive, if not compelling. However, in Paperlinx Ltd v Skidmore 43 Justice Finkelstein commented that evidence of solvency might be relevant if it was alleged that the winding up proceedings were being threatened for a purpose which would constitute an abuse of process. 12. Statutory demands and arbitration/mediation clauses Where parties have agreed to submit any disputes to arbitration, the issue arises of whether it is still open to a party to such a contract to serve the other with a statutory demand in respect of a debt. The answer to that question appears to be that while an agreement to arbitrate requires a party to refer to any dispute to arbitration, it will only take effect if there is actually a dispute between the parties. Accordingly, to the extent that a debt is undisputed, a company is not precluded from using the statutory demand procedure to seek to recover that debt. In SMEC International v CEMS Engineering 44 Justice Austin commented at [36]: in my view it is unlikely that a Court would set aside a statutory demand on the bare ground that the service of the demand or the commencement of winding up proceedings in consequence of it, violated an arbitration clause. The question is a little artificial, because the application of the arbitration clause is likely to arise for consideration only if there is a dispute between the parties, and once there is a genuine dispute the Court will set aside the statutory demand on that ground. In Reinsurance Australia Corp Ltd v Odyssey Re (Bermuda) Ltd (2000) 36 ACSR 348 Master Macready held that the issue of a statutory demand was permitted notwithstanding a contractual provision 42 [2007] FCA (2004) 51 ACSR [2001] NSWSC 459 cvps A v Page 13

14 which ascribed jurisdiction to the English courts, as the issue of a statutory demand, part of the winding up procedure, did not itself constitute a dispute. This decision can be contrasted with the decision in National Telecoms Group Ltd v Bulldogs Rugby League Club Ltd. 45 In that case, Justice Gzell held that there was a "genuine dispute" under s459j(1)(a) as there was a question as to whether the failure of the parties to mediate, as required by the agreement under which the relevant debt arose, prevented that debt from being the subject of a statutory demand. 13. Effect of succeeding or failing in a setting aside application Where a demand is set aside in its entirety, the Court will generally order the creditor who served the demand to pay the company's costs pursuant to s459n. Where a demand is merely varied (i.e. the amount of it is reduced), the company will not generally be awarded its costs. Where the setting aside application fails, the company will have an additional seven days to pay the debt under s459f(2), unless the Court extends the time for compliance with the demand. If the company intends to appeal the Court's decision, it is prudent to apply for additional time for compliance before the time for compliance has expired. Once the time for compliance has expired, the creditor will be entitled to petition for the company to be wound up. NOTE: This document is intended only to provide a general review on matters of concern or interest to readers. The text of this document should not be relied upon as legal advice. Matters differ according to their facts. The law changes. You should seek legal advice on specific fact situations as they arise. Visit our website, for: An electronic, fully-searchable version of this paper; Past papers presented at Allens Arthur Robinson Corporate Insolvency & Restructuring Forums and Insurance & Reinsurance Forums; The 1999, 2000, 2001, 2002, 2003, 2004, 2005 and 2006 Annual Reviews of Insolvency & Restructuring Law 45 [2003] NSWSC 654 cvps A v Page 14