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Can you see around corners? By Amy Hall | September 2008 Area of Expertise | Commercial Disputes & Insolvency

Summary Companies who receive s459E Demands must comply with them.

Who Does This Impact? Recipients of 459E Demands.

What Action Should Be Taken? Even if you ‘settle’ a debt the subject of a 459E Demand you must also comply with it because you never know what is around the corner.

National Australia Bank Limited v Onyx Group Pty Ltd [2008] NSWSC 973

The Facts An application was made by a substituted creditor to wind up a company in insolvency. The winding up application was opposed by the debtor company on the basis that the original creditor’s 459E Demand was defective.

Application Under s 459S of the Act for Leave to Raise New Grounds in Opposition to the Winding Up The debtor company sought leave under s 459S to raise new grounds in opposition to the winding up. At the heart of the debtor’s contention was that there existed a genuine dispute which it could have relied upon in an application to have the Statutory Demand set aside, but it did not. The debtor challenged the demand on the basis that the affidavit accompanying the demand was false. In particular, that an invoice was issued pursuant to an agreement but was not rendered until after the demand was served. In support of its application, the debtor sought to call the deponent of the affidavit accompanying the original creditor’s 459E Demand. The debtor company had attempted to serve a subpoena upon the deponent of the affidavit but had not done so by the time of the hearing. Section 459S of the Act is as follows: Company may not oppose an application on certain grounds: 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

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Can you see around corners? by Amy Hall

(b) 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.

Thus, the debtor could not oppose the winding up on a ground that was available to it within the 21 days after service of the 459E Demand without the leave of the Court. Associate Justice Macready observed that leaving the argument regarding the alleged falsity of the affidavit accompanying the demand to one side: the Court is not to grant leave under section 459S of unless it is satisfied that the ground is material to proving that the company is solvent.

The Court held that the dispute sought to be relied upon was not material to proving the company is solvent, and accordingly, the application for leave under s 459S was refused.

Solvency The usual affidavits were read on the winding up. There were admissions that the statutory demand had been served and that no action had been taken within 21 days to set that demand aside. The debtor sought to oppose the winding up on the basis of solvency. His Honour noted that: Nowhere in the evidence is there any expression as to the solvency of the company or as to whether in fact the company is able to pay its debts as and when they fall due.

Reference was made to the authorities which govern s 459S of the Act. It is established authority that the defendant is presumed to be insolvent and as such bears the onus of proving its solvency: s 459C(2) and (3): Elite Motor Campers Australia v Leisureport Pty Ltd (1996) 22 ACSR 235 per Spender J;; Commissioner of Taxation v Simionato Holdings Pty Ltd (1997) 15 ACLC 477 per Mansfield J. His Honour looked at the distinction between solvency and a surplus of assets. A company may be insolvent and ‘asset wealthy’ The nature of those assets and the ability of a company in the company’s circumstances to convert those assets into cash within a relatively short period of time must be considered when determining solvency. The question of solvency must be assessed at the date of the hearing. The defendant relied on draft accounts prepared by its accountant providing details of the company’s position as at 30 June 2008. His Honour acknowledged that whilst the position of the company may not have changed from that date until the hearing on 17 September 2008 there was no evidence of the current financial position of the company before the Court. No assertions of solvency and no evidence showing whether or not the company could pay its debts as and when they fell due.

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Can you see around corners? by Amy Hall

The Decision His Honour found that the debtor company was insolvent and accordingly made an order that the company be wound up and a Liquidator be appointed.

Application for a Stay An application was made by the defendant for a stay pending an appeal. His Honour noted that a company has a right always to apply for a stay or termination of a winding up order. Such an application can be made at any time if it is to be made on the basis of solvency. His Honour had found that the company was insolvent and declined to make an order staying the winding up orders.

Conclusion This case further reinforces the importance of dealing with a 459E Demand when it is served. The threshold for establishing a ‘genuine dispute’ is significantly lower if one acts swiftly when receiving the demand. This decision shows that a statutory demand that is not complied with is available for use by any creditor. Regardless of whether a debtor company ‘settles’ a claim with the original creditor who served the demand, prudence dictates, the debtor must still comply with the demand because you can’t see around corners.

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Can you see around corners? by Amy Hall

For more information, please contact:

Amy Hall Senior Associate T: 02 8257 5716 amy.hall@turkslegal.com.au

Sydney | Level 29, Angel Place, 123 Pitt Street, Sydney, NSW 2000 | T: 02 8257 5700 | F: 02 9239 0922 Melbourne | Level 10 (North Tower) 459 Collins Street , Melbourne, VIC 3000 | T: 03 8600 5000 | F: 03 8600 5099 Insurance & Financial Services | Commercial Disputes | Workers Compensation | Business & Property

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Can you see around corners?  

Companies who receive s459E Demands must comply with them.

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