Winding up and out: the risks of ignoring a statutory demand
A company may be wound up by Court order if it is found to be insolvent.
The finding of insolvency may be based on section 459C(2) of the Corporations Act 2001. This section requires a court to presume that a company is insolvent if a winding up application is filed within three months after the occurrence of any one of six events. Failure to comply with a statutory demand is the most common of these events.
A statutory demand requires a company within 21 days to pay a debt or to come to an arrangement with the creditor. Otherwise the company is presumed to be insolvent.
The company may apply to set aside the demand provided that such an application is made within 21 days1. If the application is unsuccessful, then to avoid the presumption of insolvency the company must comply with the demand within seven days after the application to set aside the demand is finally determined or within such further period as ordered by the court.
Aussie Vic Plant Hire Pty Ltd v Esanda Finance Corporation Limited2
On 26 March 2008, the High Court handed down its decision in Aussie Vic Plant Hire Pty Ltd v Esanda Finance Corporation Limited, that once the period for compliance with a statutory demand has expired, the courts cannot extend time for compliance.
The facts
Esanda Finance Corporation Limited (Esanda) served a statutory demand on Aussie Vic Plant Hire Pty Ltd (Aussie) claiming over $400,000 under several hiring and chattel mortgage contracts. Aussie applied to the Victorian Supreme Court to set aside the statutory demand. Master Efthim dismissed the application but extended the time for compliance. Aussie appealed the Master’s decision to a single judge of the Supreme Court.
After the time for compliance as fixed by Master Efthim had expired but before the appeal hearing before Justice Whelan, Aussie applied for another extension of time. Justice Whelan heard the application to extend time and the appeal of the Master’s decision and dismissed both.
Aussie appealed to the Court of Appeal, which by a majority of 3:2, upheld Justice Whelan’s decision. Aussie then sought and obtained leave to appeal to the High Court.
The High Court decision
The High Court was asked to consider whether a court has the power to extend time for compliance with a statutory demand when it has already expired. By a 4:1 majority, the High Court held that an order could not be made to extend the period of compliance after it had already expired.
Out of the 3 majority judges in the Victorian Court of Appeal, only Chernov JA concluded that the “in construing s459F(2)(a)(i), in order to determine if it empowers the court to extend the period of compliance of a statutory demand after the time of its expiration, it is necessary to have regard to the policy of Part 5.4 of the Act …and… the mischief which that it seeks to abrogate3".
The High Court approved this line of thinking and considered the policy intentions of Part 5.4 of the Act in its reasons and stated that the underlying intention of Part 5.4 of the Act is for the speedy resolution of applications for debtor companies to be wound up in insolvency. This is further supported by the recommendations in the Law Reform Commission’s Harmer Report on insolvency.
While section 70 of the Corporations Act provides that the court may extend time even if time allowed in the Act has already expired, this section only applies if there was no contrary intention otherwise provided by the Act. The majority judges considered relevant the following provisions of Part 5.4:
The intent of these sections was considered to be ‘sharply at odds with the purposes revealed by the provisions of Part 5.4 to read the power to extend time for compliance with a statutory demand as capable of exercise after the time has expired’4.
The High Court also found that denying the power of the courts to extend time for compliance after time already expired does not affect the determination of the rights or liabilities of the debtor company or of the petitioning creditor. It merely creates a rebuttable presumption of insolvency.
Ultimately, the High Court’s decision was that Esanda’s statutory demand was still in force and the time for compliance had expired. Therefore Aussie had not complied with the statutory demand and was presumed to be insolvent.
The impact
If a statutory demand is served on a company, it has a strict time limit of 21 days to apply to the Court to set aside the demand. Otherwise the company is presumed insolvent, despite what its financial records indicate.
When an application for winding up is made against a company, the burden of proof then shifts to the company to prove that it is solvent, that is, to rebut the presumption of insolvency that is cast upon it as a result of non-compliance with the demand. It is an unnecessary burden for a company to bear if it is solvent.
When filing an application for winding up, the petitioning creditor will also file a Form 519 with the Australian Securities and Investments Commission (ASIC), which has the effect of listing the application on the public record. Once on the record, the company will run the risk of other creditors joining the application to substitute after the company has settled with the petitioning creditor, a process which may continue until all creditors have been paid.
Other than a potential string of creditors chasing the company, there is also the inconvenience of a winding up application which involves considerable and unavoidable legal costs as well as the adverse effect of the advertisement that is posted in the local newspaper as a part of the winding up proceeding.
In summary, it is critical to act quickly when served with a statutory demand. Many companies have their accountant’s office as their registered office and it is important for accountants also to realise the importance of quick action in response to a statutory demand. As always, if in doubt, seek prompt legal advice.
Chris Fenwick |
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Amanda Lee |
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