A company in liquidation served a creditor’s statutory demand for debt where there was a genuine dispute about the existence of the alleged debt. The statutory demand was set aside by the Court and the liquidators were ordered to personally pay costs on an indemnity basis.
In SJG Developments Pty Limited v NT Two Nominees Pty Limited (in liquidation)  QSC 104:
- the liquidators of the company in liquidation caused a statutory demand to be issued
- the recipient of the statutory demand applied to the Court to set aside the statutory demand
- both before and after it made the application, the recipient wrote to the liquidators giving details of the dispute as to the existence of the alleged debt
- the Court found that there was a genuine dispute as to the existence of the debt and ordered that the statutory demand be set aside
- costs were personally sought against the liquidators on an indemnity basis.
Why the liquidators were personally liable
Although the liquidators were not technically a party to the court application, the Court said that it was appropriate to order that they be personally liable for the payment of the court costs because ‘considerations of justice’ supported the making of the order.
The Court observed:
- it was not necessary to form a view that the liquidators had acted unreasonably or in such a way as would affect their right of indemnity against the assets of the company in liquidation
- the applicant could not protect itself by obtaining a security for costs order
- rather, it was forced to protect itself by making a court application in response to the statutory demand
- even if an order was made affording the applicant priority in the winding up, above even the liquidator’s indemnity there may be a risk of shortfall and it should be the liquidators who bear that risk.
Costs on an indemnity basis
In considering whether the costs should be on an indemnity basis, the Court noted:
- it was obvious there was a genuine dispute as to the alleged debt
- the applicant provided fair warning of the grounds that it would seek to set aside the statutory demand
- the applicant foreshadowed it would seek indemnity costs
- the liquidators had ample opportunity to withdraw the statutory demand being on notice of the grounds of dispute but failed to do so.
A statutory demand should not be issued if there is a genuine dispute as to the existence of the debt.
Where there is a genuine dispute as to the existence or amount of an alleged debt or an off-setting claim is asserted by the ‘debtor company’, it is prudent to give early notice of the grounds of dispute to the ‘creditor’ to guard against the risk of a statutory demand being issued and to give protection in relation to costs.