Time is of the essence: Creditor’s Statutory Demands

A recent decision of the Supreme Court of NSW (In the matter of Wetherill Park Holdings Pty Ltd [2021] NSWSC 282), handed down on 25 March 2021, serves as an important reminder of the importance of acting quickly when served with a Creditor's Statutory Demand (CSD) and the potentially disastrous consequences of ignoring a CSD, even where the underlying judgment is set aside.

 

What is a CSD?

A CSD is a legal document by which a creditor is able to demand payment from a debtor company in circumstances where there is no genuine dispute about the existence or the amount of the debt. Its overriding purpose is not to act as a debt collection mechanism but to provide a quick means to wind up insolvent companies. It is an alternative to the traditional legal proceedings path, which can be costly and time consuming.

A CSD can be served in reliance upon a judgment debt or, in the absence of a judgment, with a supporting affidavit setting out the nature of the debt.

The effect of serving a CSD is that, if the debtor company fails to comply with the demand, or apply to set it aside, within 21 days then the debtor company is presumed to be insolvent. This allows the creditor to apply to wind up the debtor company and appoint a liquidator.

The facts

In the matter of Wetherill Park Holdings Pty Ltd, the debtor company was served with a CSD for a judgment debt of approximately $150,000. The debtor company did not comply with the demand and did not apply to set aside the CSD within the 21-day period. As such, a presumption of insolvency arose.

The creditor applied to wind up the debtor company. Whilst the winding up proceedings were on foot in the Supreme Court of NSW and before those proceedings were listed for hearing, the debtor company brought an application in the District Court of NSW (where the underlying judgment was made) to set aside the judgment. The debtor company was successful in setting aside the judgment.

The debtor company then argued, in the winding up proceedings, that it was an abuse of process for the creditor to maintain the winding up proceedings in circumstances where the underlying judgment had been set aside.

The decision

The Court found that, once the presumption of insolvency had arisen, it did not matter that the judgment was later set aside. The creditor was still entitled to proceed with the winding up proceedings.

The situation would have been different had the debtor company filed an application to set aside the CSD within the 21-day period, on the basis that there was a pending challenge to the underlying judgment. However, that did not take place.

Once the presumption of insolvency had arisen, and in deciding whether to wind up the debtor company, the Court must only consider whether the debtor company has discharged its onus to rebut the presumption of insolvency by reference to reliable evidence.

Rebutting the presumption of insolvency

It is settled law that, in order to demonstrate that it is solvent, a debtor company would need to show reliable evidence that it can pay its debts as and when they fall due. This requires an analysis of what is known as the cashflow test of insolvency, which focuses on liquidity by reference to current assets, income and current liabilities. However, the Court will also have regard to the commercial realities such as a company's ability to secure funds in the immediate future and any special arrangements in place with creditors.

In the matter of Wetherill Park Holdings Pty Ltd, the debtor company argued that, while it was in default of its loan obligations to secured creditors of more than $30 million, it had the support of those secured creditors as they were willing to defer payment for the purposes of allowing the debtor to complete a large-scale property development, and were also willing to fund the construction costs of the development.

After considering the financial evidence available to it and applying the cashflow test of insolvency, the Court found that the debtor company was "woefully insolvent" and that the secured creditors did not necessarily have the financial resources required to support the property development.

The debtor company was wound up and a liquidator was appointed.

Takeaways

This case highlights the importance of seeking prompt advice when served with legal documents. Some deadlines simply cannot be extended and, if missed, can have serious ramifications.  It also demonstrates the importance of knowing what evidence a Court will consider to be sufficient when seeking to prove certain matters, such as solvency.

Get in touch

If you are either a creditor or a debtor and are looking for advice, please get in touch with our Litigation and Dispute Resolution team today. We have extensive experience in advising large to small companies as well as directors, liquidators, creditors and other stakeholders of companies in an insolvency context and would be more than happy to assist.

Contributors

Danyal Ibrahim Senior Associate
Monique Messenger Law Graduate