Supreme Court clarifies requirements for interstate service of statutory demands - Insolvency/Bankruptcy

This week's TGIF examines the risks of not complying with the strict rules for serving an application to set aside a statutory demand interstate, and whether a demand that mis-states the extended six-month period to comply will be set aside.

Key takeaways

A plaintiff will not effectively serve an application to set aside a statutory demand interstate merely by serving it at the address nominated in the demand, unless doing so complies with the Service and Execution of Process Act 1992 (Cth) (SEPA).
Where interstate service has not been properly effected, an unconditional appearance by the defendant does not allow the Court to consider the application, at least in Victoria. Nor does a claim that informal service has been effected by email.
A statutory demand which mis-states the current six-month period for compliance, as extended under the Coronavirus Economic Response Package Omnibus Act 2020 (Cth), is a defect under Corporations Act s 459J, but the demand will not be set aside unless substantial injustice is proved.

The application

MHC Pathology Pty Ltd (MHC) operated a business of breeding, raising and selling horses. MHC kept a number of horses at a property owned by Midvale Trial Pty Ltd (Midvale). In June 2020, Midvale served a statutory demand on MHC in Victoria, seeking payment for agistment fees and feed it claimed MHC owed to it (Demand).

MHC applied to set aside the Demand on the basis that it was defective because it required MHC to comply within 21 days, instead of the extended six-month period temporarily introduced by the Coronavirus Economic Response Package Omnibus Act 2020 (Cth).

MHC had served its application to set aside by email and at the address specified by Midvale in the Demand, i.e. Midvale's lawyers' office in NSW. MHC argued that despite its non-compliance with SEPA, it had properly served Midvale either informally or because Midvale had filed its unconditional appearance with the Court on 7 July 2020.

Failure to properly serve

Hetyey AsJ made clear that unless the requirements of SEPA are met — that an application be served interstate on a company's registered office or personally on its director, accompanied by the relevant form — it will not have been properly served.

His Honour summarised the relevant principles about serving an application to set aside a statutory demand, including:

where a corporate creditor stipulates an interstate address for service, unless it is also its registered office, or a place where its director may be personally served, any purported service will not comply with SEPA and will not be effective;
the principle of effective informal service — a method that actually brings the application to the company's attention — does not apply to interstate service because of the operation of SEPA;
it is doubtful that the parties can agree to waive SEPA, or allow for a different method of service interstate; and
because effective service is necessary for the Court to deal with the application, an unconditional appearance will not fix a failure to properly serve an application interstate, at least in Victoria.

Because MHC's application was not served at Midvale's registered office nor on any of its directors personally, it did not comply with SEPA.

Given the strictures of the statutory demand regime, Hetyey AsJ rejected the argument that Midvale's unconditional appearance could allow the Court to determine the application. His Honour confirmed that informal service by email could not circumvent the requirements of SEPA.

However, after becoming aware of the issues with service, MHC re-served its application within the extended six-month statutory period. This allowed the Court to consider whether the mis-statement of that period in the Demand meant it should be set aside.

The effect of mis-stating the extended period

The Demand incorrectly stated MHC was required to comply or apply to set it aside within 21 days after service, instead of the extended six-month statutory period. MHC submitted this was a relevant defect under Corporations Act s 459J(1)(a), or some other reason to set the Demand aside under s 459J(1)(b).

His Honour found that although the error did constitute a defect, MHC had not suffered substantial injustice, i.e there was no evidence to suggest MHC would have acted differently had the six-month period been stated in the Demand.

However, while the plaintiff's arguments under s 459J did not succeed, his Honour ultimately set aside the Demand on the basis that there was a genuine dispute about the debt claimed.

Comment

The Court's decision highlights the importance of strictly complying with the requirements to serve applications to set aside statutory demands, particularly interstate. Simply relying on the address supplied by the person making the demand is not enough.

It also confirms the importance of identifying with specificity the injustice said to be caused by a defect in a statutory demand; even mis-stating the time period does not automatically mean there has been a substantial injustice.

Finally, to avoid the risk of a statutory demand being set aside as defective, companies and their solicitors must be well aware of the changing insolvency landscape.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.