[1993] FCA 589; (1993) 47 FCR 226

Corporations Law - notice of statutory demand - proof of insolvency of a debtor company in winding up proceedings - whether defect in notice of demand - interpretation and operation of new provisions of Part 5.4 Corporations Law.

Corporate Law Reform Act 1992.

1. The statutory demand of 1 September 1993 served on Topfelt Pty Limited by or at the request of State Bank of New South Wales Limited, be set aside.

2. State Bank of New South Wales Limited pay the costs of Topfelt Pty Limited of this proceeding including reserved costs, if any.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

This case raises questions concerning the interpretation and operation of the provisions of the Corporations Law which relate to the proof of the insolvency of a debtor company in winding up proceedings. The Corporate Law Reform Act 1992 (Cth) (No 210 of 1992) introduced the relevant sections into the Corporations Law in 1993 and they commenced on 23 June 1993.

2. First, I shall state the facts which give rise to the questions with which the case is concerned.

3. Topfelt Pty Limited, the applicant, mortgaged certain land in favour of State Bank of New South Wales Limited, the respondent, as security for a loan. After the loan was overdue for repayment the respondent took steps to sell the land as mortgagee. The applicant asserted that the respondent was not entitled to exercise its power of sale for various reasons. The respondent sued the applicant in the Supreme Court of New South Wales for possession of the land. Various matters were raised by the applicant as defences and cross-claims. In the result the Supreme Court of New South Wales at first instance gave judgment on 11 March 1993 against the applicant and in favour of the respondent; and ordered that the applicant give to the respondent possession of the mortgaged land and pay to the respondent the sum of $429,722.73, being the amount owing under the mortgage.

4. The applicant appealed from the decision at first instance to the Court of Appeal of New South Wales which found against the applicant and ordered that the appeal be dismissed with costs. The applicant then sought from the High Court special leave to appeal from the judgment of the Court of Appeal, but that application was refused by the High Court on 26 October 1993.

5. In the meantime, on 1 September 1993, the respondent served on the applicant a statutory demand pursuant to s. 459E(1)(a) of the Corporations Law which the respondent asserts is in the prescribed form (Form 509H) (see s. 459E(2)(e)).

6. As the form of the demand served on the applicant is central to this case, I shall recite its terms, namely:

PARAGRAPH 459e(2)(e)

CORPORATION LAW

CREDITOR'S STATUTORY DEMAND FOR PAYMENT OF DEBIT

TO: TOPFELT PTY LIMITED (A.C.N. 003 378 596)

of: 1st Floor

Evatt Chambers

19 Mitchell Drive

Greenhills NSW 2323

1. The company owes the State Bank of New South Wales

Limited (A.C.N. 003 963 228) of Level 35, State Bank

Centre, 52 Martin Place, Sydney, Australia ('the

creditor') the amount of One Hundred and Seventy Nine

Thousand Seven Hundred and Twenty Two Dollars and

Seventy Three Cents ($179,722.73) together with

interest from the 11th March, 1993 to date and

continuing being the amount of the debt described in

the Schedule.

2. The amount is due and payable by the company.

3. The creditor requires the company within twenty one

(21) days after service on the company of this demand:

a. to pay to the creditor the amount of the debt,

or;

b. to secure or compound for the amount of the debt

to the creditor's reasonable satisfaction.

4. The creditor may rely on a failure to comply with this

demand within the period for compliance set out in

sub-section 459F(2) as grounds for an application to a

court having jurisdiction under the Corporations Law

for the winding up of the company.

5. Section 459G of the Corporations Law provides that a

company served with a demand may apply to a court

having jurisdiction under the Corporations Law for an

order setting the demand aside. An application must

be made within twenty one (21) days after the demand

is served and, within the same period:

a. an affidavit supporting the application must be

filed with the court; and

b. a copy of the application and a copy of the

affidavit must be served on the person who

served the demand.

6. The address of the creditor for service of copies of

any application and affidavit is Messrs Emery

Partners, Solicitors, 138 Vincent Street, Cessnock.

2325. DX 7832 Newcastle.

Telephone (049) 90 2022 Facsimile (049) 90 3195 or by

their City Agent Messrs Slade Manwaring and Co,

Solicitor, 141 Elizabeth Street, Sydney 2000. DX 248

Sydney Telephone (02) 264 1063.

SCHEDULE

Description of debt: Amount of

debt:

To judgment made in Supreme

$179,722.73

Court of New South Wales together with interest

Registry Equity Division from 11th March, 1993

No S002657 and amounting to date and continuing

to $429,722.73 together

with interest thereon less

amount received on sale of

mortgaged property being

Folio Identifier 12/789884

Dated: 1 September 1993

Signed: Brad Hughes

Print Name:Charles Bradford Hughes

Capacity: Partner of Emery Partners,

Solicitors as Solicitor for Creditor

Corporation or

partnership name:As Partner on behalf of Emery

Partners, Solicitor

for

Creditor

NOTE:

1. THE FORM MUST BE SIGNED BY THE CREDITOR OR THE CREDITOR'S

SOLICITOR. IT MAY BE SIGNED ON BEHALF OF A PARTNERSHIP BY A

PARTNER, AND ON BEHALF OF A CORPORATION BY A DIRECTOR OR BY THE

SECRETARY OR AN EXECUTIVE OFFICER OF THE CORPORATION.

2. THE AMOUNT OF THE DEBT OR, IF THERE IS MORE THAN ONE DEBT, THE

TOTAL OF THE AMOUNTS OF THE DEBTS, MUST EXCEED THE STATUTORY

MINIMUM $2,000.00

3. UNLESS THE DEBT, OR EACH OF THE DEBTS, IS A JUDGMENT DEBT, THE

DEMAND MUST BE ACCOMPANIED BY AN AFFIDAVIT THAT:

A. VERIFIES THAT THE DEBT, OR THE TOTAL OF THE AMOUNTS OF

THE DEBTS, IS DUE AND PAYABLE BY THE COMPANY; AND

B. COMPLIES WITH THE RULES.

4. A PERSON MAY MAKE A DEMAND RELATING TO A DEBT THAT IS OWED TO

THE PERSON AS ASSIGNEE."

7. The particular parts of the form of statutory demand with which this case is concerned are paragraphs 1 and 6 and the Schedule.

8. On 13 September 1993 the applicant commenced this proceeding pursuant to s. 459G(1) of the Corporations Law seeking an order that the statutory demand of 1 September 1993 be set aside. An amended application was filed by the applicant on 5 November 1993 seeking, either in the alternative or in addition, a declaration that the statutory demand did not constitute a statutory demand within the meaning of s. 459E of the Corporations Law.

9. It was argued by counsel for the applicant that:-

a) the form of statutory demand did not comply with conditions

essential to its validity and was therefore invalid, with the

consequence that the declaration sought in the amended application

should be made, namely, that it did not constitute a statutory

demand within the meaning of s. 459E of the Corporations Law; and

therefore the restriction imposed by s. 459J(2) of the

Corporations Law that, except as provided in s. 459J(1), the Court

must not set aside a statutory demand merely because of a defect,

could not apply; and

b) in the alternative, assuming the statutory demand served by the

respondent was a statutory demand within the meaning of s. 459E,

it should be set aside because the Court will be satisfied that

the alleged defects in the statutory demand will cause substantial

injustice unless the demand is set aside or there is some other

reason why it should be set aside (s. 459J(1)).

10. These arguments were based on the description of the debt and its amount as set out in paragraphs 1 and 6 of the statutory demand and the Schedule thereto.

11. It was not suggested by counsel for the applicant that it is not open to a creditor to claim in a statutory demand, in addition to the amount of a judgment debt, an amount of interest thereon. It was submitted that, although the demand in this case purported to claim interest, it failed to state the source of the respondent's right to it (either the judgment entered in the Supreme Court on 11 March 1993 or the mortgage), the amount or the rate and it claimed interest as a continuing liability which was said to be impermissible.

12. No evidence was led to suggest that the applicant was in fact misled by the terms of the statutory demand; but it was argued by counsel for the applicant that the deficiencies in the demand were of such a kind that they must mislead any debtor company to whom the demand is addressed because of the essential uncertainty of its terms.

c) no address for payment of the amount claimed in the statutory

demand was specified, so it must be a bad notice.

14. It was submitted by counsel for the respondent that:

(i) the applicant was not entitled to seek a declaration from

the Court that the statutory demand was not a statutory

demand within the meaning of s. 459E of the Corporations

Law. Reliance was placed upon s. 459G which requires a

company to apply to the Court for an order setting aside a

statutory demand served upon it within 21 days after a

demand is so served together with an affidavit supporting

the application. Reliance was also placed upon O.71 r.36B

of the Court's rules. It was argued that the combination of

these provisions led to the conclusion that the only grounds

upon which a company can rely to set aside a statutory

demand are those set out in the initial application.

(ii) there was no evidence of injustice adduced by the applicant

by reason of any of the alleged defects in the statutory

demand; and the amount of the debt due by the applicant to

the respondent was never disputed in the Supreme Court. All

that was involved in the litigation in that Court was the

question of whether or not the respondent had wrongfully

exercised its power of sale. Therefore there was no warrant

for the Court setting aside the statutory demand in this

case on the basis of substantial injustice, because there

was none.

15. Until the coming into operation of the relevant provisions Act No 210 of 1992 on 23 June 1993 there was no prescribed form of statutory demand with respect to prospective proceedings to wind up a company. The previous position was discussed in Occidental Life Insurance Company of Australia Limited v Life Style Planners Pty Limited [1992] FCA 549; (1992) 38 FCR 444 where the relevant authorities are collected.

16. Act No 210 of 1992 made substantial changes to Part 5.4 of the Corporations Law relating to statutory demands. It is clear from the Explanatory Memorandum which accompanied the Corporate Law Reform Bill 1992 that the new provisions of the Corporations Law relating to statutory demands were intended to introduce a new regime for proving insolvency of a debtor company in winding up proceedings, in particular where proof of insolvency is to be proved by the company's non-compliance with a statutory demand served on it, this being the method of proof in the majority of cases. The Bill implemented many of the recommendations of the Harmer Report (Australian Law Reform Commission Report on its "General Insolvency Inquiry" (Report No 45)). It is desirable to recite the following passages from the Explanatory Memorandum:

"Division 3 - Application to set aside statutory

demand

685. This Division will implement the Harmer

Report's recommendations in connection with the

setting aside of statutory demands. The Harmer

Report considered that the existing largely

unregulated, procedure in relation to notices of

demand too often produces disputes about the

debt at the hearing of a winding up application.

The Report further noted that companies

presently often need to bring injunction

proceedings where a debt claimed in a demand is

disputed. The Report took the view that the

legislation should specifically provide for the

determination of disputed debt issues and other

disputes in respect of a statutory demand.

686. The Harmer Report proposed that a demand

may be set aside if the Court is satisfied that:

. there is a substantial dispute

as to whether the debt is

owing;

. the company appears to have a

counter claim which may exceed the

amount of the debt; or

. the demand ought to be set aside on

other grounds.

687. This last general power would enable the

Court to take account of matters such as

improper or invalid service and mistakes or

misstatements in the notice of demand, in

circumstances where this would significantly

prejudice any party.

688. The provisions in relation to the setting

aside of a statutory demand are intended to be a

complete code for the resolution of disputes

involving statutory demands, and to do so on the

basis of the commercial justice of the matter,

rather than on the basis of technical

deficiencies. In particular it is intended to

remove the present difficulties which are

experienced where difficulties in estimating the

extent of the debt may lead to an invalidating

of the statutory demand on the basis of a minor

overstatement of the amount due. This issue has

been highlighted in recent cases (Ataxtin Pty

Ltd v Gordon Pacific Developments Pty Ltd (1991)

5 ACSR 10; Hassgill Investments Pty Ltd v Newman

Air Charter Pty Ltd (1991) 5 ACSR 321).

689. This proposed Division, together with

proposed Division 4, also provides a means of

dealing with statutory demand disputes in such a

way that an alleged defect in the statutory

demand does not have the effect of prolonging

proceedings leading to the commencement of a

winding up, by requiring debtor companies to

raise genuine disputes (about, for example,

whether a debt is owed) at an early stage,

rather than after winding up proceedings have

commenced."

17. The Second Reading Speech by the then Attorney-General of the Commonwealth in the House of Representatives on 3 November 1992 states as follows:

"The Bill also makes it clear that it is not

good enough to provide for corporate law by

making obscure and difficult cross references to

the Bankruptcy Act and substitutes clear

provisions adapted specifically for companies.

Companies will no longer be able to resist

statutory demands on purely technical grounds

such as a minor misstatement of the quantity of

a debt. Demands will be able to be set aside

only where injustice would otherwise be caused."

18. Certain of the changes made to Part 5.4 relating to statutory demands were considered by Hayne J in Mibor Investments Pty Ltd v Commonwealth Bank of Australia [1994] VicRp 61; (1993) 11 ACSR 362 at 365-6, but the questions which arose before Hayne J were different from those in the present case.

19. I shall mention the major changes made to Part 5.4 that affect the issues in this case.

20. Where an application is made to the Court for a company to be wound up in insolvency (s. 459P), the Court may order that an insolvent company be wound up in insolvency (s. 459A).

21. The court to which application is made to wind up a company on the ground of insolvency must presume that the company is insolvent if, during or after the 3 months ending on the day when the application was made the company failed to comply with a statutory demand (s. 459C(2)(a)). Other events are specified in paras. (b) to (f) of s. 459C(2) which also lead to the presumption of insolvency; but they are not relevant to this case.

22. A creditor may serve on a company a demand relating to a debt which the company owes the creditor that is due and payable and the amount of which is at least the statutory minimum: s. 459E(1). The statutory minimum is presently $2,000 (s. 9).

23. The statutory demand "must specify the debt and its amount" (s. 459E(2)(a)); "must require the company to pay the amount of the debt ... or to secure or compound for that amount ... to the creditor's reasonable satisfaction, within 21 days after the demand is served on the company" (s. 459E(2)(c)); "must be in writing" (s. 459E(2)(d)); "must be in the prescribed form (if any)" (s. 459E(2)(e)); and "must be signed by or on behalf of the creditor" (s. 459E(2)(f)). The prescribed form is form 509H.

24. Unless the debt is a judgment debt the demand must be accompanied by an affidavit that verifies that the debt is due and payable by the company and complies with the rules: s. 459E(3).

25. If, at the end of the period for compliance with the statutory demand, the demand is still in effect and the company has not complied with it, the company is taken to fail to comply with the demand at the end of that period (s. 459F(1)).

26. Section 459F(2) specifies the period for compliance with a statutory demand in the following terms:

"The period for compliance with a statutory

demand is:

(a) if the company applies in accordance with

section 459G for an order setting aside

the demand:

(i) if, on hearing the application under

section 459G, or on an application

by the company under this paragraph,

the Court makes an order that

extends the period for compliance

with the demand - the period

specified in the order or in the

last such order, as the case

requires, as the period for such

compliance; or

(ii) otherwise - the period beginning on

the day when the demand is served

and ending 7 days after the

application under section 459G is

finally determined or otherwise

disposed of; or

(b) otherwise - 21 days after the demand is served."

In the circumstances of this case, the period for compliance with the statutory demand began on 1 September 1993 and will end 7 days after this application is finally determined or otherwise disposed of: s. 459F(2)(a)(ii).

27. A company may apply to the Court for an order setting aside the statutory demand served on it, but the application may only be made within 21 days after the demand is so served (s. 459G(1) and (2)). Sections 459F and 459G are critical provisions because of the serious consequences to a company if it does not, within the period of 21 days after service of the demand, either comply with the demand or apply to a court for an order under s. 459G: see Texel Pty Limited v Commonwealth Bank of Australia [1994] VicRp 62; (1993) 11 ACSR 535, a judgment of Hayne J. An application is made in accordance with s. 459G only if within those 21 days an affidavit supporting the application is filed with the Court and a copy of the application and a copy of the supporting affidavit are served on the person who served the demand on the company (s. 459G(3)).

28. Section 459H deals with an application by a company under s. 459G where there is a dispute about the existence or amount of the debt to which the demand relates or the company has an "offsetting" claim. This section is not relevant for present purposes.

29. On application under s. 459G the Court may by order set aside the demand if it is satisfied that, because of a defect in the demand, substantial injustice will be caused unless the demand is set aside; or there is some other reason why the demand should be set aside" (s. 459J(1)).

30. Section 459J(2) provides that, except as provided in sub-section (1), the Court must not set aside a statutory demand merely because of a defect; and that a statutory demand has no effect while there is in force under section 459H or 459J an order setting aside the demand (s. 459K).

31. Section 459L states that unless the Court makes, on an application under section 459J, an order under section 459H or 459J, the Court is to dismiss the application.

32. Section 459M provides that orders under ss. 459H or 459J may be made subject to conditions.

33. Section 459N states that where, on an application under section 459G, the Court sets aside the demand, it may order the person who served the demand to pay the company's costs in relation to the application.

34. Section 459S is an important provision. It provides:

"459S(1) In so far as an application for a

company to be wound up in insolvency relies on a

failure by the company to comply with a

statutory demand, the company may not, without

the leave of the Court, oppose the application

on a ground:

(a) that the company relied on for the

purposes of an application by it for the

demand to be set aside; or

(b) that the company could have so relied on,

but did not so rely on (whether it made

such an application or not).

(2) The Court is not to grant leave under

subsection (1) unless it is satisfied that the

ground is material to proving that the company

is solvent."

"An application under Part 5.4 or 5.4A must not

be dismissed merely because of one or more of

the following:

(a) in any case - a defect or irregularity in

connection with the application;

(b) in the case of an application for a

company to be wound up in insolvency - a

defect in a statutory demand;

unless the Court is satisfied that substantial

injustice has been caused that cannot otherwise

be remedied (for example, by an adjournment or

an order for costs)."

36. The prescribed form of statutory demand is, as mentioned earlier, Form 509H. I shall not set out the contents of the prescribed form because the form used in the present case by the respondent follows the prescribed form except, so it was argued by the applicant, with respect to the contents of the Schedule and the statement of the debt in paragraph 1 of the form.

37. As the contents of the Schedule to the form of demand served by the respondent on the applicant are important to this case, and so that the prescribed form may be compared with the form actually used, I shall recite the form of the Schedule to the prescribed form (Form 509H) (the words of the Schedule to the form in fact used by the respondent were previously set out), namely:

" Schedule

Description of the debt

(indicate if it is a

judgment debt, giving the Amount of the debt

name of the court and

the date of the order)

*Total Amount "

38. The statutory demand served on a company must require it to specify the debt "that is due and payable" to the creditor "and its amount". This is the language of s. 459E. In my opinion the amount for which demand is made must be the amount that is in fact due by the company to the creditor at the date of the demand: c.f. with respect to statutory demands under the Corporations Law before the amendments made by Act No. 210 of 1992 and under the earlier Corporations Codes, Re Elgar Heights Pty Limited [1985] VicRp 67; (1985) 9 ACLR 846 per Ormiston J at 851; Deputy Commissioner of Taxation v CYE International Pty Ltd (No 2) (1986) 10 ACLR 305 per Young J; ANZ Banking Group Limited v Kamlock Pty Ltd [1993] FCA 186; (1993) 10 ACSR 458 per Heerey J at 459-460.

39. In the present case, the date which the demand bears on its face and the date on which it was served are the same; so it is not necessary to decide whether the form of demand must state the amount which is actually due at the date borne by the demand or the date of service of the demand, if those dates differ; or whether it matters whichever date is stated. However, the prudent course for creditors to take is to state the amount due at the date borne by the demand because it will happen, not infrequently, that the date of service of the demand will be uncertain when viewed prospectively from the time the notice is prepared and signed (any difference in the amount due between those dates generally will occur when interest on a judgment debt is claimed).

40. It is undoubted that a creditor may claim in a statutory demand the payment of interest upon a judgment debt. Statutes and rules of court frequently provide for payment of interest upon the amounts of judgment debts. But, if a creditor claims the payment of interest upon his judgment he must specify the amount of interest in the statutory demand (it may be sufficient if he states as one figure the amount of the judgment debt and the interest due thereon). It is not sufficient compliance with this requirement for a creditor to claim interest on the amount of a judgment debt by specifying either a rate of interest or a daily or other periodic figure representing the interest component, without stating the precise amount of it, and leaving it for the debtor to make the precise calculation of the interest. It is not the debtor's obligation to calculate the interest which the creditor calls upon him to pay: see Re O'Keefe; Ex parte Australian Factors Limited (1963) 19 ABC 101 with respect to bankruptcy notices.

41. When a creditor, who wishes to claim interest on a judgment debt, when issuing a statutory demand under the Corporations Law, specifies, in addition to the amount of the outstanding judgment debt, the precise amount of interest which is claimed to be due thereon, it would be prudent to state that the amount of interest is calculated from the date of judgment (or other relevant date) to the date of the demand, so that the debtor company knows exactly what is claimed against it and does not have to calculate any figure at all. The reference to "a single debt" in s. 459E(1)(a) and 2(a) in my opinion encompasses, in the case of a judgment debt, the sum for which judgment was entered together with interest thereon.

42. Although bankruptcy notices under bankruptcy legislation and statutory demands under legislation relating to the winding up of corporations differ from each other in many respects and serve separate purposes, it is necessary to understand the law and its development concerning the two classes of documents in order to comprehend the provisions of the Corporations Law with which this case is concerned. Differences are many, but there are similarities. For example, O'Keefe, a decision of Clyne J, concerned a bankruptcy notice; but the following observations of his Honour at 103 are relevant to a statutory demand under the Corporations Law, namely, that:

"In my opinion, when a judgment creditor seeks

the issue of a bankruptcy notice, he must state

specifically therein the amount which the debtor

is required to pay to the creditor. If he

claims the payment of interest upon his judgment

he must specify the amount of such interest. It

is not the obligation of the debtor to calculate

the interest which the judgment creditor calls

upon him to pay: to make specific something

unspecified."

43. There is high authority for the proposition that if interest is included in a bankruptcy notice it must be calculated by the creditor: Kleinwort Benson Australia Limited v Crowl [1988] HCA 34; (1988) 165 CLR 71 at 78.

44. In Occidental I discussed certain of the similarities and differences between statutory demands under the Corporations Law and bankruptcy notices. I shall not recite everything I said there on this matter; but it is useful to cite the following observations which I made at 446 to 447:

"Although there are definite similarities

between a bankruptcy notice and a statutory

demand under the Companies Act 1981 (Cth), there

are obvious differences. Unlike a bankruptcy

notice, a statutory demand under the

Corporations Law need not be preceded by a final

(or any other) judgment. Non-compliance with a

bankruptcy notice has what has been referred to

in many cases as quasi penal consequences. It

constitutes an act of bankruptcy which has a

number of repercussions under the law of

bankruptcy. It is an essential condition of a

court having jurisdiction under the federal law

of bankruptcy to make a sequestration order

against the estate of a debtor, that he has

committed an act of bankruptcy (s. 43). The

bankruptcy relates back to and commences at the

time of the commission of the earliest act of

bankruptcy committed by the bankrupt within the

period of six months immediately preceding the

day on which the creditor's or debtor's petition

is presented (s. 115). The effect of relation

back is to treat all dealings with a person's

property within six months after he has

committed an act of bankruptcy as if his

bankruptcy had taken place at the time of

commission of such act of bankruptcy. One

difference between a bankruptcy notice under the

bankruptcy legislation and a statutory demand

under the Corporations Law is that a creditor

must have obtained a judgment under the law of

bankruptcy, though not under the Corporations

Law. Also, the period for compliance with the

requirements of the notice is determined by the

Registrar, and the parties can by search

ascertain what bankruptcy notices have been

issued in relation to a particular debtor.

Provision is made by s. 40(1)(g) of the

Bankruptcy Act 1966 (Cth) for a debtor, who has

been served with a bankruptcy notice, to assert

a counter-claim, set-off or cross-demand against

the creditor equal to or exceeding the amount of

the judgment debt and which he could not have

set up in the action or proceeding in which the

judgment was obtained against him. There is no

counterpart in winding-up law (but as to

offsetting claims in relation to companies, see

now s. 459H of the Corporations Law).

A statutory demand under the Corporations Law is

essentially a method by which a creditor to whom

the company is indebted in a sum that exceeds

the statutory minimum can establish that the

company is unable to pay its debts and therefore

establish a ground for the winding up of the

company.

It is an essential function of the statutory

demand that it gives the company the opportunity

of paying the sum which it is required to pay or

to secure or compound for it to the reasonable

satisfaction of the creditor. If the company

fails to comply with the demand it will be

deemed to be unable to pay its debts and thus

establish a ground for the winding up of the

company. ...

As Professor H.A.J. Ford recognises in

Principles of Company Law (5th ed., 1990) p 759,

para. 2203, note 5, p 759: the failure of a

company to comply with a statutory demand has

'serious consequences'. ...

There may be severe commercial repercussions.

On the filing of an application to wind up a

company news spreads quickly and the company's

reputation may suffer. There may also be

repercussions at that stage against a company

with its bankers and mortgagees under the terms

of security documents."

45. It is helpful to have regard to the decided cases concerning the validity of bankruptcy notices when considering statutory demands under the Corporations Law; but it is important to keep in mind that the two classes of documents are different and relate to different insolvency regimes.

46. The Parliament, when enacting the amendments to Part 5.4 of the Corporations Law, sought to avoid introducing the technicalities that have developed over many years in decisions of the courts with respect to bankruptcy notices, in particular the distinction between formal and substantial defects. A clear example of this is s. 459J which provide that, on an application under s. 459G, the Court may set aside the demand if it is satisfied that because of a defect in the demand, substantial injustice will be caused unless the demand is set aside; or there is some other reason why the demand should be set aside (s. 459J(1)). But s. 459J(2) provides that except as provided in sub-s. (1) the Court "must not set aside a statutory demand merely because of a defect". A "defect" is defined by s. 9 of the Corporations Law in the following terms:-

" 'Defect', in relation to a statutory demand,

includes:

(a) an irregularity; and

(b) a misstatement of an amount or total; and

(c) a misdescription of a debt or other

matter; and

(d) a misdescription of a person or entity."

47. The definition of "defect" is an inclusive definition, so one must construe the term initially according to its ordinary meaning and then introduce into it, if it is otherwise not included, the deemed statutory connotations. According to its ordinary usage a "defect" means a lack or absence of something necessary or essential for completeness; a shortcoming or deficiency; an imperfection. A defect according to ordinary understanding is not necessarily something which is of a minor nature, it may be either major or minor. The word "defect" has been considered by judgments of courts in a variety of contexts: see, for example, Tate v Latham and Son (1897) 1 QB 502 per Bruce J at 506-7 ("defect in the condition"); Dawson v African Consolidated Land and Trading Company (1898) 1 Ch 6 ("defect in appointment"); Sanderson v National Coal Board (1961) 2 QB 244 ("patent defect"); Metcalf v Great Boulder Proprietary Gold Mines Ltd [1905] HCA 49; (1906) 3 CLR 543 ("defect in condition"); Hampson v Clyne (1967) 86 WN (Pt 1) (NSW) 321; Re Gagliardi; Ex parte Mount [1984] FCA 394; (1984) 57 ALR 718 ("defect" as failure to sign and file a certificate).

48. The reference in the inclusive definition of "defect" in s. 9 to include, not only an irregularity, but a misstatement of an amount or total and a misdescription of a debt or other matter and a misdescription of a person or entity, is plainly designed to ensure that the interpretation of s. 459J (and other sections) is not to be susceptible of rigorous or narrow reading down of the word "defect" to exclude major defects and confine its meaning to minor defects or irregularities. The notion of a "defect" is not to be confined to a misstatement of an amount of a debt to a small or minor misstatement or to an immaterial or minor misdescription of a debt or a person or entity. Misdescriptions of debts, persons, entities or amounts all fall within the statutory definition of "defect", whether large or small: cf. s. 1322 of the Corporations Law concerning procedural irregularities and s. 306 of the Bankruptcy Act which provides that proceedings under the Bankruptcy Act are not invalidated by a "formal defect or an irregularity" unless the Court is of the opinion that substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by an order of the Court.

49. For example, if a creditor requires by service of a demand upon the debtor company that it pay the debt of say $150,000 due under a judgment, but in truth the amount under the judgment is $100,000 so that there has been a large misstatement of the amount due, an argument that the demand does not answer the description of a statutory demand for the purposes of the Corporations Law could not succeed. It is plainly a case of a misstatement of the amount of the debt, albeit a substantial one. If a demand requires payment of the amount of a judgment debt (which is stated in the demand) and proceeds to claim an amount for interest on the judgment debt in a particular sum due at the date of the demand, but in fact the amount of interest so stated is wrong because the creditor has added, say, two months interest beyond the date of the demand itself, then there has been a misstatement of the amount of the debt; but the demand is nevertheless a statutory demand for the purposes of the Corporations Law.

50. It is important to note also that the expression "statutory demand" is defined in s. 9 of the Corporations Law as meaning a document that is "or purports to be" a demand served under s. 459E of the Corporations Law.

51. The new Part 5.4 of the Corporations Law does not recognize two regimes: one dealing with documents that suffer from major defects such that they cannot be described as statutory demands for the purposes of Part 5.4 of the Corporations Law; and another dealing with documents that suffer only from minor defects and are capable of being saved from invalidity by the operation of s. 459J(2). This is a distinction which the Parliament has sought to avoid and which for many years bedevilled the law and practice relating to bankruptcy notices.

52. There may, however, be cases where deficiencies in the form of demands are so fundamental that the demands are incapable of assuming the description of statutory demands within the meaning of the Corporations Law. This is a question to be decided in future cases. The demand in the present case is not, for reasons mentioned later, a demand of this kind.

53. The regime which Act No 210 of 1992 has put in place permits objections to defects in statutory demands to be taken by debtor companies; but the time to do this is primarily before any application to wind up the company is made by a creditor. Application should be made under s. 459G within 21 days after service of the statutory demand. Points as to the validity of such demands may be raised at the hearing of that application by the Court; but the Court must not set aside statutory demands unless substantial injustice will be caused if it does not do so, or there is some other reason why the demands should be set aside (s. 459J(1)). If a debtor company, having been validly served with a statutory demand which tells it, as the prescribed form does, of its right to apply to set aside a demand, but the company fails to so apply, it may challenge the demand on the ground of some defect in it upon the hearing of the application to wind it up, but only with the leave of the Court; and that leave cannot be given unless the Court is satisfied that the ground is material to proving that the company is solvent (s. 459S).

54. Although the Court's power under s. 467A to dismiss an application to wind up order may be exercised because of a defect in a statutory demand, the Court must not make such an order unless it is satisfied that substantial injustice has been caused that cannot otherwise be remedied. There is at first glance an apparent tension between s. 467A and s. 459S in that the debtor company cannot attack the demand on the ground of a defect in it on the hearing of the winding up application without the leave of the Court, which can be given only if the Court is satisfied that the ground is material to proof of solvency; yet the Court may decline to wind up the company because of a defect in the demand, though only if satisfied that substantial injustice has been caused that cannot otherwise be remedied. A question arises whether this power of the Court may be exercised under s. 467A in a case where the defect in the demand does not relate to the solvency of the company. The ambit of this power of the Court is not a matter that arises for consideration in this case, so I shall not discuss it except to say two things. First, the new regime which Act No 210 of 1992 has brought into being will, I think, give rise to a fair number of questions of interpretation in future cases. Secondly, there may be sound reasons why courts should, in the interests of justice, be entitled to decide, on the hearing of applications to wind up, whether a particular statutory demand is defective or not, notwithstanding that no prior application was made under s. 459G to set it aside. The Court may for instance, on the hearing of the application to wind up, have before it a statutory demand which is so defective that it would be unjust to allow it to be the vehicle for the presumption of insolvency, notwithstanding that the company did not make application under s. 459G to set it aside. Is the company or the Court precluded by s. 459S from raising the defect?

55. Assume, for example, a statutory demand that fails to follow critical parts of the prescribed form by not informing the company that the consequence of failing to comply with the demand is that the creditor may rely upon that failure as a ground for an application to wind up the company; or a demand may fail to inform the company that it may apply under s. 459G to set the demand aside. The company may wish to lead evidence before the Court, that it assumed the document was simply a demand for payment, but it had no idea of the consequences under the Corporations Law of failure to comply with it. It would be odd indeed if the Court could not take this evidence into account in deciding whether to exercise its discretion to order the winding up of the company. That may be a case (I do not say that it is or is not) of a demand that is so deficient as to be incapable of answering the description of a statutory demand within the meaning of the Corporations Law. But if it does answer that description the Court would not set it aside at that stage because that is a function to be performed at the earlier time when application is made under s. 459G. However, in exercising its general discretion, it may be relevant for the Court to take into account the facts that surround the service of the demand and the form of the demand itself that was in fact served in exercising the Court's powers to decide whether or not to make a winding up order (as distinct from the s. 459J power to set the demand aside). It may also be a matter relevant to costs of the application to wind up. The company may establish that it is solvent and that, had it realized what the consequences could be of failing to comply with the demand, it would have immediately applied to set it aside; and it was misled by the form of the demand which contained material omissions.

56. Various situations may arise which would lead a judge on hearing an application to wind up to seek to have regard to the form of statutory demand and the extent of any defect from which it may suffer. Ultimately it is for the Court to determine whether a company should be wound up in the exercise of its discretion. But whether or not s. 459S prevents the Court from dismissing an application to wind up the company unless the defect in the statutory demand relates to the actual solvency of the company is a question to be decided in another case. Minor defects in statutory demands cannot, of course, lead to the setting aside of demands.

57. The test applied by the courts in determining the validity of bankruptcy notices traditionally has been to consider validity primarily from an objective viewpoint and ask the question whether a debtor could be misled by a defect in the notice; but this approach has been modified in recent years by examining the question of validity from the position of the particular debtor to whom the notice is addressed: see Re Wimborne; Ex parte The Debtor (1979) 24 ALR 494; Re Gray; Ex parte Person to Person Financial Services Pty Limited [1980] FCA 127; (1980) 48 FLR 379; Re Thomson; Ex parte Associated Midland Corporation Ltd [1981] FCA 34; (1981) 53 FLR 97. This modification is central to the regime of Part 5.4 of the Corporations Law because the emphasis is there placed upon substantial injustice being done to a particular debtor company if the demand is not set aside where the question arises on the hearing of the company's application to set it aside. Nevertheless, the courts will be confronted at times with cases, sometimes undefended, where there are glaring and substantial defects in the form of statutory demand. Is the Court to ignore them? The answer may be that defects of this kind may be considered by the Court and relied on to dismiss the application to wind up, but only in cases where the defects are of such a kind that the Court is satisfied that substantial injustice has been caused that cannot be remedied otherwise than by dismissing the application (s. 467A).

58. But what of the undefended case where there is no evidence from the debtor company? In the absence of such evidence it must be in a comparatively rare case that the Court can be satisfied that substantial injustice of this kind has been caused. Of course, if the defects are so fundamental that the demand fails to answer the description of a statutory demand under the Corporations Law, the Court would not be satisfied (in the absence of other evidence) of the debtor company's insolvency and dismiss the application.

59. These questions are for other cases and other days.

60. The new regime may have the consequence of not discouraging sloppy drafting of statutory demands, which is regrettable; but the public benefit that is gained by discouraging the taking of points about minor defects in statutory demands doubtless outweighs the former. The Court may in other ways, including its powers in relation to costs, visit poor drafting of statutory demands upon those responsible for it.

61. It is plain that the intent of the Parliament, when enacting the amendments to Part 5.4, was to permit objections to statutory demands to be taken at the preliminary stage of an application to set them aside under s. 459G before the application to wind up is lodged; but thereafter to permit objections of this kind to be taken only in the circumstances previously mentioned. After all, the whole purpose of a statutory demand is that non compliance with it constitutes evidence of insolvency, thereby enabling a creditor to have a debtor company wound up without going to the trouble and expense (which sometimes would be considerable) of proving that the company is in fact insolvent. As to the general operation of Division 3 of Part 5.4 see Re Morris Catering (Australia) Pty Limited (1993) ACSR 601, a judgment of Thomas J.

62. This case turns on its facts. The statutory demand served by the respondent on the applicant states that the judgment in the Supreme Court amounted to $429,722.73 together with interest thereon, less amount received on sale of the mortgaged property; that the claim is made for $179,722.73 together with interest from 11 March 1993 "to date and continuing". The demand does not specify the rate at which interest had been calculated or a daily figure calculated with reference to the rate. Also, it claims interest that is "continuing". In particular, the demand fails to specify the amount of the interest claimed to the date of the demand. Nor does the demand state whether the source of the respondents' entitlement to it is the Supreme Court judgment or the mortgage. However, in my view the fact that interest is claimed from the date of the judgment suggests that its source is the judgment and not the mortgage.

63. Rules of courts which provide for the payment of interest on judgments change not infrequently. Why should the applicant have to consult its solicitor or otherwise gain access to the Supreme Court Act 1970 or the rules of the Supreme Court or speak to the respondent in order to determine the amount of interest which is claimed from it?

64. Nor is it entirely clear as to what is the base figure from which the interest calculation is made, though on balance in my view a fair reading of the demand establishes that the base figure is $179,922.73.

65. The statutory demand served by the respondent upon the applicant is plainly defective.

66. A creditor who issues a statutory demand under the Corporations Law gains the benefit of the presumption of insolvency if the notice is not complied with; and the additional benefit that the company may not oppose the application to wind it up on a ground relating to a defect in the statutory demand, without the leave of the Court, because of the provisions of s. 459S of the Corporations Law.

67. It is not asking too much that creditors who issue statutory demands under the Corporations Law should ensure that the demands are expressed in clear, correct and unambiguous terms. If the creditors wish to have the benefit of the presumption of insolvency, the least they can do is to tell the debtor companies in clear terms what amounts are due, whether they include interest or not, and, if so, the amount.

68. I do not accept, however, the argument of counsel for the applicant that, because of the nature and extent of its defects, the demand does not answer the description of a statutory demand for the purposes of Part 5.4 of the Corporations Law. The demand purports to follow the prescribed form of statutory demand, but falls into error in its description of the monies claimed to be due by the applicant. Nevertheless, it purports to be a statutory demand.

69. The demand is erroneous because it cannot be complied with on its face even allowing for misstatements. The applicant must make enquiries of one kind or another in order to ascertain the amount of interest that is said to be payable, whether he makes the enquiries from his solicitor or from the Supreme Court or others.

70. I take into account the fact that the service of the demand comes at a late stage in the curial conflict between the parties, and the sufficiency of the demand must be examined in the setting of contested litigation in the Supreme Court to which reference was made earlier.

71. There is no evidence before the Court from the applicant of any specific injustice that it has suffered or may suffer because of the defects in the statutory demand. Indeed, it vigorously contested the proceedings in the Supreme Court relating to the exercise by the respondent of its power of sale, both at the trial and appellate level.

72. Nevertheless, it is not the obligation of a debtor company to calculate the interest which the creditor calls upon him to pay; to make certain and specific something which the creditor has left uncertain and unspecified. Also, in winding up proceedings the Court acts not merely inter partes, but in the public interest. An order for winding up operates in rem. It is in the public interest that provisions of the Corporations Law which require a statutory demand to state the amount of a debt that is due and payable, should be observed.

73. In all the circumstances I am satisfied that the defects in the statutory demand in this case are of such a kind and magnitude that they constitute good reasons why the demand should be set aside under s. 459J(1)(b).

74. I shall deal briefly with the argument of counsel for the respondent that it is not open to the applicant to obtain the declaration which it seeks in the amended application. Section 459G provides the procedure whereby a court may set aside a statutory demand. There must be an application to the Court for an order setting it aside; it must be made within 21 days after the demand is served and be accompanied by an appropriate affidavit which has been filed with the Court; and copies of the relevant documents must be served upon the debtor company. But I see nothing in the terms or spirit of s. 459G which would lend support to the view that a party may not amend its application under s. 459G to add further grounds. Nor is the argument strengthened by resort to O. 71 r. 36B of this Court's Rules.

75. Counsel for the applicant argued that the statutory demand is defective on the ground that it fails to state the address of the respondent at which payment of the debt may be made. The address of the respondent is stated in the body of the statutory demand, but not in terms as an address for payment of the debt. The short answer to the applicant's argument is that the prescribed form does not require statement of the creditor's address for payment. Also, if this were a defect (and, I do not think it is), there is no evidence of substantial or any injustice being suffered or likely to be suffered by the applicant by reason of the omission.

1 That the statutory demand of 1 September 1993 served on the

applicant by or at the request of the respondent, be set aside;

2 The respondent shall pay the costs of the appellant of this

proceeding including reserved costs, if any.