By Jacob Reardon a Solicitor of Matthews Folbigg, in our Insolvency, Restructuring and Debt Recovery Group.
Section 459G(1) of the Corporations Act 2001 (Cth) (“the Act”) allows a debtor company served with a statutory demand to apply to the Court to have it set aside. Under s 459G(2) any such application must be filed within the 21 day statutory limitation period. This is a strict 21 days and generally cannot be extended.
The operation of s 459G and the strict 21 days limit has led to some controversy in situations where a debtor company has been served with a statutory demand, but does not become aware of the service until after the expiry of the 21 day period. How could it file an application to set aside a demand it did not know about?
Section 459J(1)(b) of the Act provides that on an application under s 459G, the Court may set aside a statutory demand if it is satisfied that there is some other reason why it should be set aside.
Until fairly recently, the position in the New South Wales Supreme Court suggested that in a limited set of circumstances a debtor company could apply to have a statutory demand set aside under s 459J of the Act even where the statutory time limit had expired.
Service under the Act
Section 109X(1)(a) of the Act provides that a document may be served on a company by leaving it at, or posting it to, the registered office.
The Doctrine of Fair Notice
In FP Leonard Advertising Pty Ltd v KD Travel Service Pty Ltd (1993) 12 ACSR 136, the creditor had validly served a statutory demand by posting it to the debtor company’s registered office. However, it transpired that the Statutory Demand had not come to the attention of the debtor company. Santow J said (at [5]) that:
…where there is knowledge that the address is “false” or “non-existent” then service will not be effective…
In Re Future Life Enterprises Pty Ltd (1994) 33 NSWLR 559 McClelland CJ found that the absence of fair notice constituted “…an overriding ground for refusing relief notwithstanding that there has been effective service.”
In In the matter of Intercorp Estate Pty Ltd [2016] NSWSC 1953, Brereton J at [15] succinctly summarised the effect of the fair notice doctrine:
…the fair notice doctrine only arises if there has been effective service. Its operation is that, notwithstanding that there was effective service of a creditor’s statutory demand, a winding up summons may be dismissed if there was no fair notice, on the basis that the proceedings are an abuse of process.
Naturally, the issue of whether there has been fair notice of service arises not infrequently in the context of applications to set aside statutory demands or to resist applications to wind up a debtor company.
Faji (Australia) Constructions Pty Ltd v AC Professional Accounting Pty Ltd [2009] NSWSC 180 (“Faji”)
In Faji the debtor company sought to set aside a statutory demand within the 21 day statutory limitation period. Despite the Court finding that there was no ‘genuine dispute’ as to the debt owing, the Court nevertheless found that the statutory demand could still be set aside under s 459J(1)(b) having regard to the deficiencies in the supporting affidavit to the statutory demand.
The supporting affidavit was deposed to by the solicitor who acted for the creditor who had issued the statutory demand and stated that the solicitor only believed that the amount stated in the statutory demand to be due and payable. The Court said at [30] that “If important elements of that information are of a hearsay nature, without any assurance of their having been inquired into and verified by someone with actual knowledge” then that is sufficient to make good the relevant ground to set aside the statutory demand under s 459J(1)(b).
Thus, Barrett J found that the grounds for setting aside a statutory demand under s 459J of the Act are independent of whether there was a genuine dispute regarding the debt the subject of the statutory demand.
Joe Mangraviti Pty Ltd v Lumley Finance Ltd [2010] NSWSC 61 (“Mangraviti”)
In Mangraviti Palmer J considered an application to set aside a statutory demand. The statutory demand was served by a process server who became aware that the registered office of the debtor company was (at the time service was affected) a vacant block. The debtor company had attempted to update its registered office details on the ASIC record but due to an administrative error had failed to do so.
The Court relevantly found that:
· The process server knew that the registered office was vacant;
· The debtor company’s failure to update its Registered Office details was a result of an administrative error, not motivated by a desire to defeat creditors; and
· The statutory demand only came to the attention of the debtor company after the 21 day statutory period had elapsed.
The Court found that that the plaintiff had validly effected service on the Company’s registered office. However, the Court noted that the debtor company obviously had no knowledge of the service of the Statutory Demand. Accordingly, it failed to apply to have it set aside under s 459G(1) of the Act within the 21 day statutory period imposed by s 459G(2).
However, Palmer J found (at [19]-[20]) that the statutory demand could be set aside even where the 21 day statutory period had expired:
In my view, it is far too high a price to pay for an innocent, if neglectful, failure to notify a change of registered office promptly that the Plaintiff be precluded from opposing the Statutory Demand pursuant to s 459G by reason of the expiry of the s 459G(2) limitation period.
I take all those circumstances into account in arriving at the conclusion that there is “some other reason” to set aside the Demand under s 459J(1)(b). I order that the Statutory Demand be set aside.
The effect of Palmer J’s decision in Mangraviti appears to significantly expand Barret J’s consideration of this issue in Faji because in Mangaviti (unlike Faji) the application to set aside the statutory demand had been filed outside the limitation period.
Current position
The position formulated by Palmer J in Mangraviti regarding the operation of ss 459G and 459J has not subsequently been endorsed by Black J in LDW Constructions Pty Ltd v Dane Construction Pty Ltd [2019] NSWSC 1159 (“LDW Constructions”).
In LDW Constructions the debtor company attempted to challenge the service of a statutory demand outside of the 21 day statutory period on the basis that that it had no fair notice of the statutory demand.
The defendant suggested that the Court had a freestanding jurisdiction under s 459G of the Act to set aside the statutory demand where the application was not made within 21 days, on the basis of the decision in Faji. However Black J observed [7] that:
That case is not, however, authority that s 459J is available when an application is outside time under s 459G of the Act because… that was not the position in Faji. His Honour was doing no more than observing that, where an application to set aside a creditor’s statutory demand was filed within time, and jurisdiction was established under s 459G of the Act, s 459J could be relied on although a genuine dispute was not established.
In relation to Mangraviti, Black J further observes that the decision of Palmer J appears to have expanded the proposition in Faji such that (at [8]):
…an application to set aside a creditor’s statutory demand to be brought under s 459J of the Act, where there was lack of “fair notice” of the demand, even in circumstances that the application to set aside the demand was out of time.
Black J reflected on some authorities which had commented on the statutory demand regime and noted that the effect of those authorities suggested that:
· The statutory demand provisions are an interlocked series of steps which are designed to have substantial consequences and require precise compliance for their attainment;
· The provisions of the creditor’s statutory demand scheme are for the quick resolution of issues as to solvency and the determination of whether a company should be wound up.
Black J also said that a party who has been unable to raise a matter in an application to set aside a statutory demand, may raise it with leave of the Court under s 459S of the Act at any application to oppose the winding up of the company. Accordingly, Black J was satisfied that he was justified in not following Mangraviti and that Palmer J’s decision was not supported by Faji because that was a not a situation where the application to set aside the statutory demand was served out of time
Finally, Black J did not agree with the reasoning in Mangraviti as it was inconsistent with the wording in s 459J at [13]:
It also seems to me that that reasoning is inconsistent with the terms of the relevant statutory provisions. Section 459G of the Act specifies when a company may apply to the Court for an order setting aside a creditor’s statutory demand, and provides that application may only be made within 21 days after the demand is so served. Section 459J in turn provides that, on an application under s 459G, the Court may only set aside the demand if it is satisfied of the matters set out in that section (emphasis added).
Black J’s decision was subsequently re-articulated by him in Hengji Development Pty Ltd [2019] NSWSC 1515.
LDW Constructions was recently followed (and extensively quoted) by Meek J in In the matter of Black Tie Holdings Pty Ltd [2022] NSWSC 781 at [312]:
I accept the analysis of Black J above and I am not satisfied that there is any argument that fair notice of the demand had not come to the attention of the company.
At least for now, it appears that the question as to whether a winding up application can be challenged outside the statutory limitation period on the basis of lack of fair notice under s 459J of the Act has been settled in the New South Wales Supreme Court. However, creditors should continue to exercise caution when issuing statutory demands by exercising all reasonable steps to bring the statutory demand to the attention of the debtor.
If you would like more information or advice in relation to Insolvency, Restructuring or Debt Recovery law, please contact a Principal of the Matthews Folbigg Insolvency, Restructuring & Debt Recovery Group:
Jeffrey Brown on (02) 9806 7446 or jeffreyb@matthewsfolbigg.com.au
Stephen Mullette on (02) 9806 7459 or stephenm@matthewsfolbigg.com.au.
