Companies often issue statutory demands to creditors in an attempt to collect a debt quickly and cheaply, and commercial lawyers are often asked to advise companies issued with demands. But what happens when there is a dispute about the debt?
A party is entitled to issue a statutory demand on a creditor only in relation to debts which are due and payable, meaning that the debt is ascertainable, immediately payable and presently recoverable or enforceable by action (see s 459E(1) of the Corporations Act).
A common ground on which parties seek to set aside statutory demands is that there is a genuine dispute about the existence of the debt to which the demand relates, pursuant to s 459H(1) of the Corporations Act.
The threshold to establish a genuine dispute within the meaning of s 459H(1)(a) of the Corporations Act is not high. A genuine dispute requires that the dispute be bona fide and truly exist in fact and that the grounds for alleging the existence of a dispute are real and not spurious, hypothetical, illusory or misconceived.
In other words, the company applying to set aside the statutory demand must demonstrate that there is “a plausible contention requiring investigation”. The Court is concerned only with the existence of a genuine dispute, and not with the parties’ relative prospects of success in relation to the dispute.
A finding of genuine dispute will be made if the applicant shows that even one issue has a sufficient degree of cogency to be arguable, even where the case to be advanced against the applicant appears to be stronger. The Court does not engage in any form of balancing exercise between the strengths of the parties’ competing contentions.
In a recent decision of the Supreme Court of New South Wales, the presiding judge, Williams J, put the test more simply by stating that the case before him was not as “plain as a pikestaff” (see In the matter of Jana Pty Ltd  NSWSC 112).
Unconscionable conduct by the creditor?
It is also possible to set aside a demand pursuant to s 459J(1)(b) of the Corporations Act where the creditor has engaged in conduct that is unconscionable, an abuse of process or has given rise to substantial injustice by issuing the demand for the improper purpose of applying pressure to the debtor.
Where a party is seeking to set aside a demand on the basis of there being a genuine dispute about the existence of debt, it is also worth considering whether the creditor has acted unconscionably in issuing the demand.