Insolvency - the Statutory Demand – What’s New? 

August, 2009 - Mr. Thierry Koenig

The “statutory demand procedure” is designed to provide a fast-track method of proceeding to the winding up of a company. It creates a presumption of insolvency. The Statutory Demand is still a basis to issue a winding petition on the ground of “inability to pay debts” as was the case under the 1984 Companies Act. However, the Statutory Demand under new Insolvency Act (the Act) has a somewhat different approach than under the 1984 Companies Act. The fundamental and welcomed change in the legislation is that the debtor company must now apply to the Court to have the Statutory Demand set aside. Under the 1984 Companies Act it was a matter of some frustration to creditors when debtor companies would simply refuse to pay their debts, relying on their solvency as the basis for resisting any attempt to enforce the debt by means of a Statutory Demand. Such defences were very often successful and the Court would dismiss the winding up petition and refer the parties to the competent court.



In New Zealand this approach, where the Courts were reluctant to allow liquidation proceedings to continue where a defendant company demonstrates solvency, had drawn increased criticism, with commentators noting that it effectively entitles a company to simply refuse to pay, in defiance of a statutory demand. These criticism lead to a change in the regime in New Zealand which has now been followed in the Mauritius legislation.



Issuing the Statutory Demand



Section 180 of the Act provides that the Statutory Demand must


(i)                 be made in respect of a debt that is due and is not less Rs 100,000;


(ii)               be served on the company; and


(iii)             require the company to pay the debt, or enter into a compromise under Part XV or Part XVIII of the 2001 Companies Act, or otherwise compound with the creditor, or give a charge over its property to secure payment of the debt (to the reasonable satisfaction of the creditor) within one month of the date of service, or such longer period as the Court may order.


The wording of section 180 now specifically requires that the alternatives available to the debtor company be spelled out. The debt must be "due" that is to say that the debt must has fallen due for payment at the date of the demand. The statutory demand must be “served” on the company, which means that the winding up order and appointment of a liquidator may be set aside if the Statutory Demand was not properly served on the company.



Upon a Statutory Demand remaining unsatisfied for one month after service, a creditor may present a winding up petition under section 102(5)(b)  under the ground of “inability to pay its debts”. In determining whether a company is unable to pay its debts, its contingent and prospective liabilities may be taken into account.



Pursuant to section 102(4)(b) of the Act a contingent or prospective creditor may, with the leave of the Court, apply for the liquidation of a company on the ground that a company is unable to pay its debts. The Court may only give such leave if security for costs is provided and if the Court is satisfied that a prima facie case has been made out that the company is unable to pay its debts.


Setting aside the Statutory Demand


The burden is for the debtor company to apply to the Court to have the Statutory Demand set aside. The application must be made and served on the creditor within 14 days of the date of service of the Statutory Demand. The Act expressly forbids the extension of the 14 days time period for serving an application to have a Statutory Demand set aside, but, it provides that at the hearing of the application, the Court may extend the time for compliance with the Statutory Demand.



The debtor company must show a fairly arguable basis for setting aside the Statutory Demand. A demand will not be set aside by reason only of some defect or irregularity unless the Court considers that substantial injustice would be caused if the demand were not set aside. For this purpose, "defect" includes a material misstatement of the amount due to the creditor and a material mis-description of the debt referred to in the demand.



The Court may impose conditions in setting aside a statutory demand. For instance, if the Court is satisfied that there is a debt due that is not the subject of a substantial dispute or is not subject to a counter-claim, set-off or cross-demand, the Court may either order the company to pay the debt within a specified period, specifying that in default of payment the creditor may lodge a petition for a winding up; or may dismiss the application and make an order for liquidation on the grounds that the company is unable to pay its debts. If the Court imposes a requirement to pay the debt within a specified period, and that requirement is not complied with, that failure will be prima facie evidence that the company is unable to pay its debts.




In New Zealand


 


In the case of Spencer v Jed Rice Building Contractors Limited[1], a Statutory Demand had expired, but the debtor company sought to stay the liquidation proceedings, arguing that it was both solvent and had the debt set aside in its solicitor’s trust account. The High Court on New Zealand noted that where a debt is undisputed something more than proof of solvency would be required to stay a liquidation proceeding. The Court also indicated that there were some debts that simply had to be paid (the case concerned unpaid costs order) and in spite of the fact that the debtor company was solvent and had made provision for sum due, the Court ordered the liquidation of the company.


The case provides comfort to both litigants and creditors. It imparts a welcome degree of certainty to litigants, in confirming that the court will recognise that they are entitled to be paid certain undisputed debts. It also offers comfort to creditors, who can invoke this debt recovery procedure with increased confidence.


In the case of AMC Construction Ltd v Frews Contracting Ltd[2], the High Court had dismissed the application to set aside the Statutory Demand and stated (i) that the debtor company was required to show a fairly arguable case for saying the debt was not due; (ii) that it was not sufficient to merely assert the existence of a cross-claim; (iii) that the debtor company must be able to point to evidence to show that it has a real basis for its application, and that it is bona fide arguable; and (iv) it was also incumbent upon the debtor company to satisfy the Court as to its solvency. The debtor company appealed on several grounds. The Court of Appeal held that the solvency of a company might constitute a stand-alone ground for setting aside a Statutory Demand. The appeal was dismissed.


In Australia


In the case of Jahe Pty Ltd v Aquatic Leisure Technologies Pty Ltd[3], the Supreme Court of Western Australia, concerned the courts' ability to set aside a Statutory Demand where there is either a defect in the demand, the demand would cause substantial injustice, or there is some other reason. The court was satisfied that the errors were genuine and that the errors did not amount to a defect and that the court had a discretion to correct the defect in the statutory demand. The court held that a claim based on "some other reason" for setting aside the Statutory Demand must differ from a defect in the demand. A minor overstatement of the debt was not done willfully and was not frivolous or vexatious. It therefore could not support the argument that the demand should be set aside on the grounds of "some other reason".


The court considered that the applicant's contention that in making the demand, the respondent's conduct was unconscionable or an abuse of process or gave rise to a substantial injustice. The Court considered that the discretion conferred on the court was a wide one and allowed the court to consider the conduct of the parties. The Supreme Court of Western Australia held that there was nothing in the conduct of the creditor that was oppressive, an abuse of process or otherwise unfair to the debtor company applicant.



[1] High Court of Auckland CIV 2007-404-007539 (21 February 2008)


[2] Court of Appeal, CA 145/2008, 25 September 2008, Glazebrook, Fogarty, MacKenzie JJ


[3] [2008] WASC 176


 

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