Can a creditor issue a statutory demand for part of a debt? Is it a strategic option?

A debtor company can seek to have a statutory demand set aside if there is a genuine dispute as to the existence or amount of the debt, or the company has an offsetting claim.

Because the threshold for contesting a statutory demand is relatively low, a creditor may decide it is better to issue the statutory demand for the undisputed portion of the total debt after making an appropriate allowance for the amount of the total debt in dispute or the amount of the alleged offsetting claim.

Taking this approach should reduce the potential grounds for contesting the statutory demand and also reduce the risk of an adverse costs order being made against the creditor on an application to set aside the statutory demand.

Relevant principles

In Commonwealth Bank of Australia v Garuda Aviation Pty Ltd [2013] WASCA 61, the bank issued a statutory demand against its borrower for the undisputed portion of a much larger debt claimed by the bank. The statutory demand was for the sum of $2 million, the undisputed portion of a total debt in excess of $6 million. The full amount of the total debt was the subject of court proceedings between the bank and a guarantor.

The debtor sought to set aside the statutory demand on the basis that a statutory demand could only be issued for the whole of the debt.

The Court of Appeal said that a statutory demand could be issued for an undisputed portion of a debt, so long as the undisputed portion exceeds the statutory minimum of $2,000 for issuing a statutory demand.

It is clear from Garuda Aviation that a statutory demand can be issued for the undisputed portion of a larger debt.

The undisputed portion of the debt demanded in the statutory demand must be described in clear and unambiguous terms in the statutory demand and supporting affidavit.

In Garuda Aviation:

• the schedule to the statutory demand describing the debt identified the undisputed portion of the total debt and detailed how it was made up and calculated;
• the creditor’s supporting affidavit was appropriately amended, providing details of how the undisputed portion of the debt was made up and calculated; and
• the creditor’s supporting affidavit expressly reserved the creditor’s rights to recover the full amount of the total debt.

The Court of Appeal did however caution that 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.

In Garuda Aviation, only one statutory demand was issued in relation to the undisputed portion of the total debt.

Summary

Where appropriate, a creditor should consider issuing a statutory demand for the undisputed portion of a larger debt where there is a dispute as to the existence or amount of the debt or there is an alleged offsetting claim.

The undisputed portion of the debt demanded in the statutory demand must be described in clear and unambiguous terms in the statutory demand and supporting affidavit.

This approach could remove potential grounds for contesting the statutory demand and improve the creditor’s position on costs if the debtor makes application to set aside the statutory demand.

Issues relating to issuing statutory demands were discussed in our legal bulletin published on 19 December 2014. If you would like more information about these issues, please contact Graham Roberts on +61 7 3231 2404 or Sarah Dewar on +61 7 3231 2976.