The technical requirements of a statutory demand

A statutory demand is a formal demand for payment of a debt owed by a company. Creditors issue statutory demands to show the Court that the company is insolvent and apply for winding-up orders. Section 459E of the Corporations Act 2001 (Cth) [‘the Act’] clearly sets out the requirements of a statutory demand, which can be applied in the Federal Court or the Supreme Court of New South Wales. Although the list of requirements appears to be simple, in practice it is filled with pitfalls due to the technical nature of the requirements and the enforcement of strict procedural compliance by the Courts. Most requirements are tied to case law which go into further detail about the Court’s expectations. This article will share a case summary of Austech Institute for Further Education Pty Ltd v Britt [2010] NSWSC 56.

Presumption of insolvency

Under s459C(2) of the Act, the Court must presume that the company is insolvent if, during or after the three months ending on the day when the application was made, one of six situations arise. The most common situation is the company’s failure to comply with a statutory demand. However, this presumption can be rebutted if there is clear evidence of solvency. Even where insolvency is proven, the Court can still refuse a winding-up order on various grounds.

Requirements of a Statutory Demand

1. The debt is due and at least $4,000.00. If there are two or more debts due, the total of the debts must be at least $4,000.00. The Commonwealth Government raised the statutory minimum from $2,000.00 to $4,000.00 via the Corporations Amendment (Statutory Minimum) Regulations 2021, which came into effect on 1 July 2021. This change was the Government’s response to the economic impact of COVID-19 so that small businesses, their creditors and their employees are better served.

2. The demand must specify the debt and its amount.

3. The demand must require payment within twenty-one days, calculated from the date of effective service. It must be addressed to the correct company and correctly identify the corporate name of the creditor or the business name under which it is entitled to carry on business and to include the Australian Company Number.

4. The demand must be in writing.

5. The demand must be expressed in the prescribed form from the Corporate Regulations 2001 (Cth).

6. The demand must be signed by or on behalf of the creditor. If there are joint creditors, it should be signed by both creditors. If the creditor is a company, then it must be signed by an officer of the company. If a solicitor is signing on behalf of the creditor, the affidavit supporting the winding-up application should affirm the solicitor’s authority to sign the demand on behalf of the creditor.

7. Unless the debt(s) is a judgment debt, the demand must be accompanied by an affidavit that verifies that the debt(s) is due and payable by the company and complies with the Court rules. In other words, the affidavit must be sworn or affirmed by someone with direct knowledge of the debt and not on information and belief. The reason behind this strict requirement is to ensure that a company is not served with a demand that has not foundation. A defective affidavit accompanying the demand may result in the demand being set aside.

Case Summary

Austech turns to the issue of whether a statutory of demand is defective if the affidavit that verifies the debt is affirmed or sworn by the creditor’s solicitor.

Court:

New South Wales Supreme Court

Parties:

Plaintiff: Austech Institute for Further Education Pty Ltd

Defendant: Ms Britt

Facts:

The Plaintiff failed to pay rent from 1 March 2009 to 30 September 2009. Consequently, the Defendant served a statutory demand on the Plaintiff and claimed $260,901.62. However, the affidavit verifying the demand was not sworn by the defendant, but by the defendant’s solicitor. The Plaintiff lodged an application in the Supreme Court to set aside the demand.

Decision:

The statutory demand was set aside for two reasons:

Firstly, the affidavit verifying the demand was defective. Generally, demands ought not to be supported by an affidavit from the creditor’s solicitor. Failure to comply with the requirement to state in the affidavit supporting the Statutory Demand the source of knowledge or the basis of information for the belief that there is no genuine dispute as to the existence of the debt is fatal to the Statutory Demand. The Defendant’s solicitor did not investigate any records which could inform him as to whether a genuine dispute exists which arises outside the terms of the lease and by reason. Therefore, the solicitor’s affirmation that there is no genuine dispute as to the existence of the debt must be founded either on a complete absence of knowledge of the circumstances or must be based on hearsay from a source not identified.

Secondly, there were genuine disputes as to the existence of the debt under the lease and as to an offsetting claim.

The Defendant was to pay the Plaintiff’s costs of proceedings.

Service of a statutory demand

A demand can be served by post to the registered address of the company. Alternatively, it can be personally served on the company’s director. Section 109X of the Act outlines further details on how a document can be served on a company. However, service by post has been subject of many disputes, therefore this method should be avoided if possible.

Conclusion

Winding up a company by way of statutory demand is far from easy from a creditor’s standpoint. The Act and surrounding case law share a significant amount of detail that is required to be inputted in a demand. If the demand is not drafted correctly, the creditor could face indemnity costs like the Defendant in Austech. Therefore, if a company owes you money and you want to issue a statutory demand, you should seek legal advice. Our commercial law team at Legal Point Lawyers have many years of experience in preparing statutory demands and winding up companies.

Disclaimer: This publication is general information only and does not purport to provide legal advice. We do not accept responsibility for any losses for reliance upon this publication.

Ge Wu is the solicitor director of Legal Point Lawyers & Attorneys.  He has been admitted to practise law since 2005.  Throughout his practice, Ge Wu predominantly practises in the areas of Property Law, Immigration Law, Commercial Law, Civil Litigation and Family Law.

His experience covers all aspects of property law, commercial/retail lease, immigration law and civil litigation, while at the same time, he also has experience in family law, criminal law and other areas such as will-drafting and general advice.

He has frequently been instructed by corporate clients in pre-acquisition due diligence reports, structuring property development, land/shopping centre acquisitions, G.S.T. and stamp duty advice for buying/selling businesses, as well as share transfers and company re-structures.

Ge Wu has been appointed as Notary Public since 2011 and started to provide Notary Public service to clients from different cultural backgrounds.

Mobile: 0433539869

Email: ge.wu@legalpointlawyers.com.au

Daniel’s expertise spans civil litigation, criminal law and real property matters.

Daniel is noted for his experience in settling a complex family law matter concerning the division of matrimonial property. Furthermore, he has appeared in Courts across New South Wales for criminal matters ranging from traffic offences to assault charges to bail applications. Daniel also has extensive knowledge and experience to prepare and advise on commercial leases and contracts for the sale of land.

He has a keen interest in obtaining the best possible outcome for his clients in the most cost-efficient way. Clients appreciate Daniel’s responsiveness, business acumen and ability to deliver advice that is easy to understand.

Daniel holds a Bachelor of Laws and Bachelor of Commerce from the University of Sydney. He is a solicitor of the Supreme Court of New South Wales.

He is proficient in English and Cantonese.

Email: daniel.wong@legalpointlawyers.com.au

Family Trusts in a nutshell

We often associate family trusts with high income earners and their children who attend private schools, but that is not always the case. If you want to protect your hard-earned assets from creditors and stream the income earned from the trust assets to beneficiaries in the most tax-efficient way possible, then a family trust is for you. This article will briefly explain to you the essential elements of a family trust and how it works.

What is a trust?

A trust is an arrangement where a trustee, being a person or company, holds assets as the legal owner for the ‘benefit’ of one or more beneficiaries. Types of assets that you can put in the name of a trust include shares, real property and cash. Income earned from the assets is passed to the beneficiaries.

A trust is recorded in the form of a deed, which contains many rules including how the trust must be run, what the trustee can do and lists who the beneficiaries are. In New South Wales, a trust can last for up to 80 years and can also be varied from time to time. The laws around trusts can be very complicated therefore it is essential that you appoint a solicitor to draft the trust deed.

What is a family trust?

A family trust is a popular type of trust, where the beneficiaries have no fixed interest in the assets. Every family trust has four roles that need to be filled before it can begin operation.

1. The trustee plays a significant role in the trust and has a few powers and obligations. The trustee chooses the beneficiaries and decides the amount that each beneficiary receives every year. Moreover, the trustee carries out all transactions for the trust. In terms of obligations, the trustee is responsible for the tax obligations of the trust including the lodgment of income tax returns. Furthermore, the trustee owes a fiduciary duty to the beneficiaries and must always act in their best interest.

2. A beneficiary can be a person or a company. Beneficiaries can be divided into two categories: primary beneficiaries, who are specified in the trust deed, and general beneficiaries, who are usually relatives of the primary beneficiaries.

3. The appointor has the power to appoint and remove the trustee. However, they do not have the power to operate the trust. If a sole appointor dies or goes bankrupt, a majority of the primary beneficiaries can appoint a new appointor.

4. Finally, the settlor is the person who creates the trust and identifies the beneficiaries, the trustee(s) and appointor. The settlor should not be a beneficiary or a trustee for tax reasons. After the trust deed has been signed, the settlor will no longer be involved with the trust.

If you set up a trust in New South Wales, the state government will charge you $500.00 for stamp duty, which must be paid within three months.

Conclusion

Trusts should not be an arrangement that is tied to the wealthy only because it has considerable value in the long-term for any individual. A family trust may help protect your assets and minimise the impact of tax. However, a family trust deed is a sophisticated document which is normally drafted by a lawyer. If you are interested in setting up a family trust today, please do not hesitate to contact our office for a free initial consultation.

Disclaimer: This publication is general information only and does not purport to provide legal advice. We do not accept responsibility for any losses for reliance upon this publication.

A Liquidator’s Rights to the Books of a Subject Company under External Administration

Undoubtedly, recent news about big company entering into external administration attracts a lot of public attention. As part of the winding up process of a subject company placed under external administration, an appointed liquidator (or a “provisional liquidator”) may serve a formal Notice pursuant to s530B of the Corporations Act 2001 (Cth) upon a person who is in control of the subject company’s books, requiring that person to deliver such “books of the company” to the liquidator within a limited timeframe.

Unlike other rights conferred upon the liquidator by other parts of the Corporations Act 2001, s530B imposes an obligation on persons generally, rather than just upon officers of the subject company, and may include or third parties / unrelated entities of the subject company, or various professional groups such as accountants, financial advisers or solicitors that may have previously acted for, or given advice to the officers of the subject company.

As a person who is served with a Notice is not entitled, as against the liquidator, to retain possession of the “books of the company” or claim or enforce a lien on such books, they must give careful consideration to their response, as a failure to comply with a Notice is a strict liability offence.

How to respond to a Notice issued pursuant to s530B of the Corporations Act 2001?

Firstly, ensure that the Notice complies with the formal requirements of s530B, including that the Notice must:

  1. be in writing;
  2. specify the “books of the company” that are in the person’s possession; and
  3. specify a period of at least 3 days as the period in which the Notice must be complied with.

Secondly, carefully review the specified list of “books of the company” requested to determine what books have been correctly captured by the Notice.

What documents and/or records constitute “books of the company”?

Although s9 of the Corporations Act 2001 broadly defines the term “books” to include a register, any other record of information, financial reports or financial records (however complied, recorded or stored), and a document, the Courts have narrowly interpreted the meaning of “books of the company”. The Courts have limited the scope of what “books” can be captured under a Notice issued pursuant to s530B, and interpreted the expression “books of the company” to refer to books which are owned or belong to subject company under external administration, or those books which it can claim a proprietary interest in.

In the matter of Cromwell Corporation Limited [2019] NSWSC 1608, Her Honour, Lees J set out the relevant authorities at [20] to [33] in relation to the interpretation of “books of the company”. In particular, at [23], Her Honour stated:

His Honour referred to consideration of the expression “books of company” in different sections of the Corporations Act in Hall v Sherman (2001) 40 ACSR 40; [2001] NSWSC 810 and Caratti v Harris & Kirman as Joint Liquidators of GH1 Pty Ltd [2019] FCAFC 124. Pausing to examine those authorities, in Hall v Sherman, Austin J considered the meaning of “books of the corporation” under section 431 (rights of a controller of property of a corporation to inspect books of the corporation that relate to that property) and “books of the company” under section 530B  (the liquidator’s entitlement to the books of the company). In respect of  section 530B , his Honour held at [47]: (emphasis added)

… The liquidator’s right to obtain or retain possession of books, as against other persons, is confined to “books of the company”. As a matter of natural meaning, those words refer to books which belong to the company, and may extend to books to which the company has some lesser but proprietary interest. …

Given the narrow interpretation of “books of the company” by the Courts, a person is therefore only obligated to deliver to the liquidator books which can be identified as belonging to, or which the subject company can claim a proprietary interest.

If you have been issued with a Notice pursuant to s530B of the Corporations Act 2001 by a liquidator or via its solicitor, you should seek legal advice about your obligations on an urgent basis and before delivering any documents and/or records to the liquidator and/or its solicitor.

Disclaimer

This publication is general information only and does not purport to provide legal advice. We do not accept responsibility for any losses for reliance upon this publication.

External Administration: A Way out Australian Businesses in Financial Distress?

On 21 April 2020, Virgin Australia, Australia’s second largest airline, went into ‘voluntary administration’ due to financial distress, marking the most prominent victim of the COVID-19 pandemic. In Virgin’s own words, the voluntary administration will recapitalise Virgin’s business and help it emerge in a stronger position after the pandemic.

What is voluntary administration? How does it work? Is it an effective way out for Australian businesses in financial distress? This article will briefly outline the answers to these questions.

What is administration?

Under the Australian Corporations Act 2001 (‘the Act’), what Virgin refers to as ‘voluntary administration’ is a procedure undertaken by a company when it is or likely to be insolvent. An administrator, who is external to and independent of the company, will be appointed to administer the company’s affairs to achieve specific outcomes. The process is also termed ‘external administration’ or simply ‘administration’ under the Act.

Under the Act, the purpose of administration is two-fold. It is either:

  1. to maximise the chances for the company and its business to survive; or
  2. if survival is impossible, to have the company wound up immediately for the benefit of its creditors and shareholders.

Procedure of administration

External administration of company usually consists of the following steps:

  1. the company’s directors resolve that in their opinion, the company is insolvent or is likely to become insolvent in the near future, and an administration should be appointed
  2. appointing an administrator
  3. first directors’ meeting with the administrator
  4. administrating the company affairs by administrator
  5. meeting with the company’s creditors to decide the company’s future
  6. outcome of administration – normally one of the following:                                                                             (1) the company executes a deed of company arrangement with the administrator;                             (2) the company creditors resolve that the administration should end;                                           (3) the company creditors resolve that the company should be wound up.

Who can be an administrator?

An administrator must be a registered liquidator free of connections to the company. The following types of persons or body corporates are excluded by the Act from being an administrator except with leave of the court:

  1. a debtor to the company or its related companies indebted for more than $5,000;
  2. a creditor of the company or its related companies for a debt more than $5,000;
  3. directors, secretaries, senior managers, employees and auditors of the company and their partners, employers or employees etc; and
  4. directors, secretaries, senior managers and employees of a secured party in relation to the company’s property.

How does the administrator work?

The administrator assumes control over the company with a broad range of powers in order to achieve the purpose of administration. Such powers include:

  1. control of the company’s business, property and affairs;
  2. access to the company’s books;
  3. appointment and removal of directors;
  4. execution of documents; and
  5. bringing or defending legal proceeding in the company’s name.

The administrator has two fundamental tasks, namely:

  1. investigate the company’s business, property, affairs and financial circumstances to determine which outcome of administration is suitable in the interest of the its creditors; and
  2. report to the Australian Securities and Investments Commission (ASIC) about offences or misconducts of the company’s officers, employees or shareholders.

The company’s directors must assist the administrator by providing the administrator with:

  1. access to and information of the company’s books;
  2. information of the company’s position; and
  3. information of the company reasonably required by the administrator.

Protection of the company during administration

In order to maintain the company’s property during administration, a range or actions against the company are either restricted or suspended, including:

  1. winding up;
  2. exercise of third party property rights such as charges;
  3. proceedings against the company; and
  4. enforcement processes.

Outcome of administration

Approaching the end of the administration, a meeting will be held with the company’s creditors to decide the company’s future where the creditors may resolve on the outcome of administration.

If the creditors resolve that a deed of company arrangement be executed, the executed deed will bind all the company’s creditors and deal with the company’s debts in accordance with its terms. The administrator will administrate the deed unless otherwise resolved by the creditors.

However, if a deed of company arrangement is impractical, the creditors may also resolve that the administration should end or the company be wound up.

Conclusion

To conclude, when the company is insolvent or likely to become insolvent, external administration could be a way of achieving a better outcome of the company. However, administration may also lead the company to winding up if the circumstances of the company are so grim that a company arrangement with its creditors is impracticable. Thus, external administration must be choice carefully made by the company in the light of its circumstances, such as its assets and debts, potential of restructuring and so on.

For more information relating to company insolvency, please refer to our article Risk and Avoidance of Insolvent Trading During COVID-19 Pandemic.

Please contact our firm for advice specific to your circumstances.

Disclaimer

This publication is general information only and does not purport to provide legal advice. We do not accept responsibility for any losses for reliance upon this publication.

Risk and Avoidance of Insolvent Trading during COVID-19 Pandemic

The COVID-19 pandemic has brought financial difficulties to Australian business due to reduced customers, reduced trade, and hence reduced income. In this context, it is imperative for company directors to keep track of the company’s balance sheet and business activities to avoid ‘insolvent trading’, for which they may be personally liable under the Australian Corporations Act 2001 (‘the Act’).

In this article, we will give you an outline of what ‘insolvent trading’ is, its consequences, avoidance, defences and special relief provisions during the pandemic.

What is insolvent trading?

A company is ‘solvent’ if it is able to pay all its debts when they become due and payable. Otherwise, the company is ‘insolvent’.

‘Insolvent trading’ occurs in either circumstance below:

  1. a company incurs a debt when the company is insolvent; or
  2. a company becomes insolvent by incurring debt.

A company may incur debt in various ways in the sense of insolvent trading. Apart from incurring debts in the usual sense, it also includes paying a dividend, buying back shares, issuing redeemable preference shares, financially assisting a person to acquire shares etc.

Director has a duty to prevent insolvent trading

A director of a company contravenes the Act if the director fails to prevent the company from insolvent trading when he or she is a director (‘contravening director’). Depending on the circumstances, the contravening director may incur civil or criminal liability.

A director may incur civil liability if the director fails to prevent the company from incurring debt in either of the following circumstances:

  1. the director is aware that there are grounds for suspecting that the company is insolvent when incurring the debt, or would become insolvent by incurring that debt; or
  2. a reasonable person in a like position, given the company’s circumstances, would be aware of such grounds for suspecting.

A director may incur criminal liability if:

  1. the company is insolvent when incurring the debt, or would become insolvent by incurring that debt;
  2. the director suspects the above, but nonetheless fails to prevent the company from incurring that debt; and
  3. the director’s failure of prevention was dishonest.

Director’s liability of insolvent trading

A contravening director may face legal actions by the Australian Securities and Investments Commission, the company, liquidators or creditors. The court may make various orders against the contravening director including:

  1. a compensation order, to compensate the company or the creditor;
  2. a relinquishment order, for the contravening director to pay to the federal government the benefit obtained by the director by contravening the Act (‘benefits by contravention’); and
  3. a pecuniary penalty order, for the contravening director to pay a monetary penalty up to 5,000 penalty units (currently $1.05 million) or 3 times the benefits by contravention, whichever is greater.

Where criminal liability is involved, a contravening director may incur up to 5 years of imprisonment to addition to monetary penalties.

Further consequences for the contravening director include:

  1. if the director is unable to pay for the compensation order, relinquishment order or monetary penalties, the director may be bankrupted; and
  2. the director’s bankruptcy or criminal conviction may disqualify the director from managing a company.

How to avoid liability of insolvent trading?

A director may avoid liability of insolvent trading if, after starting to suspect that the company is insolvent or may become so, the director starts developing a course of action reasonably likely to give the company a better outcome. A debt incurred when such a course of action is in place might not be taken as a debt leading to insolvent trading (‘contravening debt’).

In this regard, what the director must do include:

  1. understand the company’s financial position;
  2. take appropriate steps to prevent misconduct by company officers or employees what could compromise the company’s solvency;
  3. take appropriate steps to ensure that the company keeps proper financial records;
  4. take professional advice (by giving the professional sufficient information); and
  5. develop or implement plans to improve the company’s financial position, such as restructuring.

Furthermore, the director must ensure that the company continues to pay its employees’ entitlements and file tax returns.

Relief of liability of insolvent trading during COVID-19 pandemic

Section 588GAAA of the Act in relation to insolvent trading during COVID-19 took effect from 25 March 2020 for 6 months subject to any regulations. When Section 588GAAA is in effect, a company’s debt is not taken as a contravening debt if it is incurred in the ordinary course of the company’s business.

What defences are available in the event of insolvent trading?

If insolvent trading occurs, a director might rely on the following defences:

  1. the director had reasonable grounds to expect, and did expect that the company was solvent and would remain solvent by incurring the contravening debt; Please note that such a reasonable ground may include the director’s reasonable belief in another person who is competent and reliable in providing information of the company’s solvency;
  2. the director did not participate in the management of the company when the contravening debt was incurred, because the direct was ill or for some other good reason; or
  3. the director took all reasonable steps to prevent the company from incurring the contravening debt.

Please contact our firm for advice specific to your circumstances.

Disclaimer

This publication is general information only and does not purport to provide legal advice. We do not accept responsibility for any losses for reliance upon this publication.

Statutory Remedies for Oppression of Minority Shareholder

In companies controlled by a share structure, minority shareholders, who do not have a controlling stake in the Company, are often to a large degree at the mercy of the majority shareholders who hold a controlling stake. Often, special protections for minority shareholders can be found within the Company Constitution or a Shareholders Agreement.

However, there are also legal protections for shareholders are also built into Australian statute law, in particular, the provisions governing ‘oppressive conduct’ in Part 2F.1 of the Corporations Act 2001 (Cth) (‘The Corporations Act’). These provisions set out the grounds on which a shareholder may make an application for a court order, who may make a court order, and what remedies are available. As Commonwealth law, these protections apply to all companies subject to an Australian jurisdiction.

Standing

In order to apply for a court order, a person must have standing to apply. Typically, a person applying for a court order must be a member of the Company, or a person who has been removed as a member who is applying for a court order in respect of his removal, or any other person which ASIC (the regulatory authority for companies in Australia) deems appropriate. The full list of possible applicants can be found in Section 234 of the Corporations Act.

Grounds

A person who meets the requirements above can apply on grounds in section 232 of the Corporations Act for a court order on the grounds that the conduct of the company’s affairs, or any actual or proposed omission by or on behalf of the company, or any resolution or proposed resolution, is either:

  • contrary to the interests of the members as a whole; or
  • oppressive to, or unfairly prejudicial to, or unfairly discriminatory against, other members of the company, whether in capacity as a member or in any other capacity.

The case law has further developed tests for when conduct is ‘unfair.’ The test for unfairness is whether the ‘reasonable person’ would consider it unfair.The criteria for what a reasonable person might think are not clear cut, and each case must be considered on the individual merits.It is not enough for unfairness that one party is disadvantaged by an action; there must be an element of ‘unfairness’in the act which is more than the mere disadvantage.

Examples of unfair conduct can include but are not limited to:

  • Excluding minority shareholders
  • Redirecting business opportunities to oneself or one’s associates
  • Failure to consider minority shareholders’ requests and provide information due to them.

Unfair or oppressive conduct can include conduct technically permitted under the constitution of the company, so if you feel that you have been treated unfairly by a company of which you are a member, even if it is technically within the company constitution, it is still prudent to seek legal advice.

Available Remedies

The remedies available to a court under section 233 of the Corporations Act to assist oppressed parties are varied to address a variety of circumstances, and include but are not limited to:

  • that the company be wound up;
  • that the company’s existing constitution be modified or repealed;
  • for the purchase of shares with an appropriate reduction of the company’s share capital;
  • restraining or requiring a person to do a specific act

 

Please contact our firm for advice specific to your circumstances.

Disclaimer: This publication is general information only and does not purport to provide legal advice. We do not accept responsibility for any losses for reliance upon this publication.