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Time is of the essence

Feature Articles

Cite as: Douglas James

Dealing with creditors’ statutory demands for payment of debt cannot be delayed, as no extension of compliance time will be granted.

The regime set out in Part 5.4 of the Corporations Act 2001 (the Act) has been in place in one form or another since its introduction in the Corporations Law in 19921 following the Harmer Report.2 It provides for applications to the courts to have a company wound up in insolvency, that is, where it is unable to pay its debts as and when they fall due.

There is no denying that the over-arching premise for this part of the Act is to provide the mechanism for a prompt and definitive resolution of debts owed by companies, and to have them cease trading where there is a failure by the directors to either recognise or to act appropriately on the insolvency of their companies.

Part 5.4 of the Act is comprised of four

divisions:

  • Division 1 (ss459A to 459D) provides the power to the courts to wind up a company on the ground of insolvency;
  • Division 2 (ss459E and 459F) provides for creditors’ statutory demands and when failure to comply is deemed to occur;
  • Division 3 (ss459G to 459N) provides for applications to set aside statutory demands; and
  • Division 4 (ss459P to 459T) deals with applications to wind up a company in insolvency.

The scheme envisages that a demand is made and if admitted and paid, this ends the matter. If the debt is denied, then the alleged debtor should apply to set aside the demand to avoid the presumption of insolvency. Such an application must be made within 21 days of service of the demand. This application is akin to a summary dismissal application in that it is not intended to be a full examination of the issues between the parties, but merely requires the alleged debtor to raise a genuine dispute or a defect in the demand or in the creditor’s compliance with the law in serving it.

If an application is successful, then the

statutory demand is set aside and the matter ends, although further proceedings may address the substantive issue of the debt between the parties. If unsuccessful, in order to pursue the debt further a creditor alleging a debt, in the absence of a cooperative debtor, must make an application to have the company wound up in insolvency and so achieve the ultimate aim of recovering the debt owed to it.

There is, of course, the possibility of an application to extend the time for compliance with a demand. It was this issue which gave rise to the appeal in Aussie Vic Plant Hire Pty Ltd v Esanda Finance Corporation Ltd (Aussie Vic),3 namely, whether or not an extension of time for compliance can be granted once it has already expired.

Part 5.4 in practice

The procedure created by Part 5.4 provides a very useful and practical legal tool which can be used by lawyers as part of common debt recovery practice. Although there are often disputes as to the debts, the strict timeframes and presumptions built into Part 5.4, together with the increasing costs of even short-lived litigation, create a powerful incentive for a speedy resolution. Often a dispute is resolved through some form of compromise and the matter never sees the inside of a courtroom.

Practitioners should remember, however, that there is a serious consequence for failing to deal adequately with a demand received by a client. In the event that the client does not comply with the demand or apply to have it set aside within 21 days,4 then a presumption that the company is insolvent will arise pursuant to s459C(2). Although this presumption may be rebutted later, it should be avoided if possible. The presumption of insolvency may be displaced by clear evidence of the solvency of the company.5 Although it is trite to say, as with most things in litigation, dealing with the demand at an early stage can spare the client much in the way of cost and inconvenience

Earlier statutory demand cases

In 2003, the Court of Appeal of the Supreme Court of Victoria decided the case of Buckland Products Pty Ltd v Deputy Commissioner of Taxation6 (Buckland). The case stands for the proposition that when a court delivers a decision dismissing an application to set aside a statutory demand under s459G or varies a demand, then that application has been “finally determined”. This brings into operation s459F(2)(a) and carries with it the consequences set out in that section, namely, the presumption of insolvency. Buckland makes it clear that this is the case notwithstanding the possibility for an appeal from that decision.7 A successful appeal of that decision is the only remaining outcome that can relieve the alleged debtor of the presumption of insolvency and the failure to comply.

Following some level of controversy and difference of opinion between the respective appellate courts of the eastern states,8 the High Court in David Grant & Co Pty Ltd (recapptd) v Westpac Banking Corporation9 determined unanimously that the time to make an application pursuant to s459G could not be extended once it had expired. The Victorian Court of Appeal determined in its decision in Aussie Vic that the power to make an order for extension can be exercised by an appellate court.10

The issue in Aussie Vic

The factual background to the dispute

between Aussie Vic Plant Hire Pty Ltd and Esanda Finance was set out by the majority in the High Court, and can be summarised as follows:

  • Esanda is a finance company. It served a statutory demand on Aussie Vic demanding payment of over $400,000;
  • ?Aussie Vic applied to set aside the statutory demand. This application was dismissed at first instance by Master Efthim, however, the time for compliance was extended; and
  • Aussie Vic appealed to a single judge of the Supreme Court and the appeal was heard as a hearing de novo. After the time for compliance had passed, but before the appeal was heard, Aussie Vic applied for an order further extending the time for compliance. As the High Court majority noted, Whelan J, in deciding the appeal, stated that “[t]he point is not whether an extension of time can or should be granted, the point is that the consequence provided for by s459F(1) has already attached... and no order which I make can or should purport to undo that”.11

The issue to be determined by the Court of Appeal, and then ultimately by the High Court, was whether or not the time for compliance could be extended once it had expired. As the issue in question was seen as a challenge to the propositions expressed in Buckland, the Court of Appeal was convened as a five-member Bench.

The Court of Appeal decision

Maxwell P and Neave JA considered themselves free from any constraining precedent and determined that once an order is made under s459F(2)(a)(i) extending time for compliance, notwithstanding the expiry of that extension a court still has the power to extend the time. This is consistent with the application of s70 of the Act to the relevant provision. The logic expounded by their joint judgment is that “the proposition that the power to extend the time for compliance is not exercisable once the period for compliance has expired... is incompatible with the words of the statute” and that it “(a) requires the court to read into paragraph (a)(i) words of limitation which Parliament did not use; (b) ignores s70 of the Act, which when read with paragraph (a)(i) produces the opposite result; and (c) misapplies the High Court’s decision in David Grant”.12

Chernov JA appears to have focused primarily on the “mischief” which his Honour saw as being addressed by the regime, namely, that insolvent companies were able to continue to trade while insolvent by delaying wind-up through late challenges to a statutory demand. The modern statutory interpretation approach adopted in his judgment reflects the need to address this delay by bringing a close to any challenge to the presumption of insolvency once time first expires. Therefore, once expired, the time for compliance cannot be extended.

Nettle JA dismissed the appeal only on the reasoning that decisions of intermediate courts have now stood for several years13 and those decisions cannot be said to be positively wrong or productive of inconvenience. Therefore, by applying the decision in Australian Securities Commission v Marlborough Gold Mines Limited,14 his Honour found himself bound to follow decisions that he believed were not correct or preferable in their interpretation of s459F(2)(a)(i).

Although his Honour stated leave should not have been granted, in respect of the proper construction of the relevant provisions Ashley JA expressed quite firmly an opinion that a proper interpretation “should yield the result that a court has power under s459F(2)(a)(i), in conjunction with s70, to extend time for compliance, despite the last date for compliance having passed, in order that a right of appeal not be rendered nugatory”.

Accordingly, there is a strong argument to be made that four of the five judges of appeal believed that the correct interpretation to be placed on the provision was that an extension could be granted to the time for compliance, notwithstanding its earlier expiry.

The High Court decision

The High Court’s decision consisted of two judgments. Gleeson CJ, Hayne, Crennan and Kiefel JJ delivered a joint judgment, with Kirby J delivering a separate dissenting judgment.

Kirby J’s dissenting judgment reflects the sentiments expressed by Maxwell P, Neave, Nettle and Ashley JJA, that the preferable or correct interpretation to be given to s459F(2)(a)(i) is that it permits a court to extend the time for compliance with a statutory demand, notwithstanding that the time for compliance has already expired, and that in so doing the court would undo the effect of the presumption of insolvency, provided that the debtor company then complied with the new deadline.

The majority in the High Court took a different view based on s70 of the Act (one of the interpretive provisions). Section 70 provides that a right to apply for an extension of time in the Act is applicable whether or not the time has already expired, importantly, unless a contrary intention appears.

The majority held that the purpose and intent of the overall regime created by Part 5.4 constitutes a “contrary intention” within the meaning of that expression in s70. That is, that the expediency and certainty, which are clear objectives of the part, constitute an intention expressed by Parliament against the extension of deadlines once they have already expired.

In support of this conclusion, the majority also referred to the exclusion of issues relating to any defect in the statutory demand (or service thereof) from contention in the application to wind up a company in insolvency pursuant to s459P. The major issue of concern at that time is the solvency of the company against which the application is made. This primacy was asserted by the majority as arising from s459S in particular, which clearly limits the matters which may be brought to the court’s attention in such an application.

Reliance was also placed by the majority on the decision in David Grant & Co Pty Ltd v Westpac Banking Corporation,15 which stands for the proposition that any application to set aside a statutory demand must be made within 21 days of its service.

Conclusion

It is interesting, but academic, to note that following the High Court’s decision, this appeal has now been decided by ten judges, of whom five preferred an interpretation which opposed the law as it now stands. Nettle JA closed his judgment with the words “if the interpretation of the section is to be revisited, it is a matter for the High Court or Parliament”. It is now the case that if the interpretation which was favoured by the Victorian judges is to be implemented (which is unlikely), then the intervention of Parliament is the only remaining possibility.

There are lessons to be learned from the plight of Aussie Vic Plant Hire Pty Ltd and its trudge through the court hierarchy of Australia. Not the least of these is the amount of uncertainty, delay, cost and inconvenience which can be avoided by promptly applying to set aside a statutory demand when it is to be challenged. Immediate steps should be taken to set aside the demand and to avoid the unfavourable consequences of a presumption of insolvency.

It is now the clear and unequivocal position that once the time for compliance with a demand has expired, no application can be made to extend that time. The only recourse left to a litigant is to defend itself by proving its solvency. This can involve significant costs over and above the direct court costs involved. It may require the engagement of professional expertise to assess and testify to the solvency of the company. Clients could arguably be better served by using those costs to assist a negotiated settlement, even where a genuine dispute as to the amount of the debt exists.

DOUGLAS J JAMES is a Victorian barrister, practising in commercial and civil law, with a particular interest in

corporations and insolvency law.
1. [2008] HCA 9 at [14].
2. Australian Law Reform Commission, General Insolvency Inquiry (ALRC 45): see http://www.austlii.edu.au/au/other/alrc/publications/reports/45/.
3. In the Victorian Court of Appeal: [2007] VSCA 121. In the High Court of Australia: per note 1 above.
4. The application requires both filing and service of both the application and affidavit in support of the alleging creditor. For further reading in relation to this process see Kylie Downes, “Applying to set aside a statutory demand” (2001) 5(3) IHC 53.
5. A leading case on the evidence required to establish solvency is Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075.
6. [2003] VSCA 85.
7. Ford’s Principles of Corporation Law (looseleaf edn), para 27.060.
8. Mark Mullins, Case Note: David Grant & Co: One step closer to a truly national corporate law (1996) 6 AJCL 139.
9. (1995) 184 CLR 265.
10. Aussie Vic Plant Hire Pty Ltd v Esanda Finance Corporation Ltd [2007] VSCA 121 at [31].
11. Aussie Vic Plant Hire Pty Ltd v Esanda Finance Corporation Ltd [2006] VSC 306 (28 July 2006).
12. Note 10 above.
13. Since Livestock Traders International Pty Ltd v Thi Lam Bui & Van Quang Bui (1996) 22 ACSR 51.
14. [1993] HCA 15; (1993) 177 CLR 485.
15. [1995] HCA 43; (1995) 184 CLR 265.

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