Setting aside a statutory demand on conditions: a double-edged sword?

A debtor company will often seek to set aside a creditor’s statutory demand on the basis that there is a genuine dispute as to the existence or amount of the alleged debt claimed by the creditor, the debtor company has an off-setting claim against the creditor (or both), that reduces or cancels out the amount claimed in the statutory demand.

Sometimes overlooked by both the creditor and the debtor company is that, on the hearing of an application to set aside a statutory demand, the court has the power to set aside the statutory demand on conditions.

Depending on the circumstances of the case, the court could order, for example, that the debtor company:

• commence its proceedings in relation to the disputed debt or off-setting claim within a specified period; or
• pay into court the amount of the alleged debt or provide a bank guarantee.

Recently, in In the matter of Wabbits Pty Ltd [2018] NSWSC 2018, the debtor company disputed the amount claimed in the statutory demand. No off-setting claim was asserted. The Court set aside the statutory demand on the conditions that the debtor company serve court proceedings on the creditor in respect of the disputed debt and that the debtor pay an amount into court.

In Wabbits, the Court referred to the long-standing decision of Asia Pacific Glass Pty Ltd v Sindea Trading Co Pty Ltd (No 2) [2003] NSWSC 845.

Asia Pacific Glass: a double-edged sword

In the Asia Pacific Glass court applications, the writer acted for the creditor. The statutory demand was initially set aside on the condition that the debtor company file and serve its court proceedings by no later than a specified date.

The debtor company:

• asserted it had a substantial claim for damages that greatly exceeded the amount of the statutory demand;
• failed to file and serve its court proceedings by the date specified in the condition; and
• then sought leave of the Court to extend the time period for compliance with the condition.

Although the debtor company was initially successful in having the statutory demand set aside on conditions it was a hollow victory for the debtor company.

Justice Barrett of the New South Wales Supreme Court ordered that the time period for complying with the condition could not be extended or varied.

As a consequence:

• the condition imposed for setting aside the statutory demand was never fulfilled and the statutory demand was deemed to have never been set aside; and
• a presumption of insolvency arose because the debtor company had failed to comply with the statutory demand.

To complete the story, the debtor company was unable to prove its solvency and was wound up on the application of the creditor.

Comments

In Wabbits, the Court observed that the concept underlying a conditional order setting aside a statutory demand is that the Court, by the condition, specifies what the debtor company must do in order to have the benefit of the order, and that it is then for that party to decide whether it will take the specified steps and obtain the benefit of the order.

However, as demonstrated in the Asia Pacific Glass decisions, failing to comply with the condition for setting aside the statutory demand can have dire consequences, potentially resulting in the debtor company being wound up.

From a creditor’s perspective, depending on the circumstances, it may be appropriate to submit on a statutory demand application by a debtor company that, if the statutory demand is to be set aside, that the court consider exercising its discretion to impose conditions for the setting aside of the statutory demand.

If you would like more information about these issues, please contact Graham Roberts on +61 7 3231 2404.