In a recent case, the Victorian Supreme Court said that an accountant ‘would know well that a statutory demand involves strict time frames for response and potentially very significant consequences for a company’. The accountant failed to take appropriate steps to inform the company of the statutory demand.
The statutory demand process
If a company does not comply with a statutory demand within 21 days of service, it is deemed to be insolvent and the creditor may proceed to wind up the company.
A court application to set aside the statutory demand (because, for example, the debt is disputed) must be filed and served within 21 days of service of the statutory demand.
Where a company’s registered office is an accountant’s office, a statutory demand may be served by leaving it at or by posting it to the accountant’s office.
In West Homes Australia  VSC 732, a statutory demand was delivered by post to the company’s registered office, which was the company’s accountant’s office. Upon receiving the statutory demand, the accountants posted it to the company. The accountants did not take any other steps to bring the statutory demand to their client’s attention.
Unfortunately, the company did not receive the statutory demand that the accountants had posted. The director only became aware of the statutory demand when it was served with the court application for the winding up of the company.
The section 459S discretion and the Masri principle
On the winding up application, the company in West Homes Australia sought to dispute the debt by seeking the exercise of the court’s discretion under section 459S of the Corporations Act 2001 (Cth).
Relevantly, under section 459S:
- where a company has failed to comply with a statutory demand, the company may not, without leave of the court, oppose the winding up application on a ground that could have been relied upon on an application to set aside the statutory demand
- the court will examine why the issue of the indebtedness was not raised in an application to set aside the statutory demand and the reasonableness of the company’s conduct at that time
- the court is not to grant leave unless it is satisfied the disputed debt is material to the company proving it is solvent.
The company in West Homes Australia also sought to rely on the Masri principle.
Briefly, the principle is that where the directors of a company do not become aware of the existence of the statutory demand until after the expiry of the 21-day period and they have acted reasonably in respect to the superintendence of collection of mail within the registered office, fairness requires the company be permitted to raise a ground to challenge the statutory demand.
There are cases that have said the Masri principle should not be followed because it is inconsistent with the High Court decision in Lanepoint Enterprises.
In West Homes Australia, the Court agreed that the Masri principle was not good law and said, even if it were, on the facts of this particular case, the mail collection system at the registered office (the accountant’s office) was not reasonable.
The Court observed:
… in deciding to forward the statutory demand to the company by post only, the accountants had not acted reasonably. An accountant would know well that a statutory demand involves strict time frames for response and potentially very significant consequences for a company. It is simply not credible to suggest that an accountant would not have used some other means, perhaps in addition to post, to alert the sole director of a company to the existence of a statutory demand, or having sent it by post, followed up with the sole director to ensure it was received.
The company was not given leave to contest the debt under section 459S, leaving it with the onus of establishing it was solvent to avoid being wound up.
It is clear that, if there is any delay in informing a company that a statutory demand has been received, its ability to obtain legal advice and to respond to the statutory demand within the 21-day time period could be severely prejudiced.
Accountants who act as the registered office for a company must have appropriate protocols in place to ensure the company is urgently notified if a statutory demand is received.
It is recommended that the statutory demand be emailed to the appropriate persons at the company and that they also be telephoned to inform them of the statutory demand. There should also be internal procedures for recording the date, time and method of delivery of the statutory demand at the registered office. It is critical to know the date the statutory demand was delivered because the 21-day time period runs from the date of delivery.
If you would like more information about these issues, please contact partner Graham Roberts on +61 7 3231 2404 or Nicholas Conomos, Lawyer on +61 7 3231 2478.