Creditors Must Have Complied With COVID-19 Statutory Regime Before Commencing Winding Up Applications - Insolvency/Bankruptcy

This week's TGIF considers the decision of Re GT's Cooking Oils Pty Ltd [2021] NSWSC 93 in which the court refused a winding up application based on a statutory demand which failed to provide the extended demand period of six months as required under the Coronavirus Economic Response Package Omnibus Act 2020 (Cth).

Key takeaways

A court may refuse to make a winding up order if the application is based on a statutory demand which was issued between 25 March 2020 and 31 December 2020 and which fails to provide the requisite demand period of six months.
If a statutory demand issued during that period did not allow the debtor six months to satisfy the demand, then waiting for more than six months from the date of issue of the statutory demand to commence winding up proceedings will not cure the defect.
If a creditor is considering making an application to wind up a debtor company, but has issued a statutory demand which did not provide the statutory demand period under the Omnibus Act, a fresh demand should be issued or risk having its winding up application dismissed.

Background

In May 2020, Goodman Fielder Consumer Goods Pty Ltd (Creditor) obtained judgment against GT's Cooking Oils Pty Ltd (Company) for a debt owing of $41,471.99 and on 18 May 2020, the Creditor served a creditor's statutory demand (Demand) on the Company.

The Demand stated that the Company had 21 days to pay the debt or to secure or compound it to the Creditor's reasonable satisfaction.

It further provided that Section 459G of the Corporations Act 2001 (Cth) (Corporations Act) allowed an application to set aside a creditor's statutory demand to be made within 21 days of service of the Demand.

The Company failed to pay the debt or make any application to set aside the Demand and on 26 November 2020 the Creditor applied to the Supreme Court of New South Wales to have the Company wound up.

The Creditor's application was based on the presumption of insolvency said to arise from the Company's non-compliance with the Demand.

The Company did not file an appearance to oppose the Creditor's winding up application.

Coronavirus support measures

From 25 March 2020, the provisions of the Corporations Act dealing with creditor's statutory demands were amended by the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (Omnibus Act).

The amendments under the Omnibus Act extended the period for compliance with a creditor's statutory demand from 21 days to six months and that statutory extension remained in place until 31 December 2020.

Issue

The Court considered whether the misstatement in the Demand of the demand period of 21 days, instead of six months as required under the Omnibus Act, prevented the Creditor from relying on the presumption of insolvency which would otherwise follow from the Company's non-compliance with the Demand.

Decision

The Court held this was an appropriate case to exercise its discretion and refused the application to wind up the Company because the Demand had failed to comply with the Omnibus Act and supporting regulations.

The Court's reasoning

The Creditor accepted that the Demand did not comply with the statutory regime, that those changes were in place when the Demand was issued and the effect of the changes was to extend the statutory period of compliance from 21 days to six months.

Having made that concession, the Creditor sought to characterise its failure to specify the correct demand period as a ‘typographical error'. This argument was dismissed as unrealistic, especially as there was no evidence to suggest that the drafter of the Demand accidently typed 21 days instead of six months.

In coming to the decision not to allow the Creditor's winding up application, the Court observed that compliance with the requirements of the Omnibus Act was an essential element of the statutory regime. That regime sought to draw a balance between the interests of debtors and creditors with the consequence that a longer period must be allowed for payments of debts which would otherwise be properly the subject of a statutory demand, given the increased difficulties faced by debtors during the relevant period of the pandemic.

In this matter there was no evidence that the Company would have done anything different had the Demand specified a period of six months rather than 21 days. Although it wasn't necessary for the court to reach a final decision on whether the Company had actually suffered a substantial injustice, his Honour observed that the Court might reasonably infer a demand to pay an amount of $41,471.99 in 21 days in the midst of a global pandemic and economic recession, likely had a significantly different character to a demand to pay that amount in six months.

Because the Company did not seek to set aside the Demand or put on any evidence to oppose the winding up application, it was impossible to know if it had been adversely affected by the pandemic. Even without that evidence, the Court concluded that the difference between 21 days and six months to pay the debt claimed under the Demand was likely to have a substantial effect on the Company.

Comment

It is likely the Court will take a harsh view of an application to wind up a company where a creditor has failed to comply with the elements of the statutory regime intended to protect corporate debtors during the pandemic.

If a statutory demand has been issued between 25 March 2020 and 31 December 2020 which does not provide the requisite demand period, waiting six months to commence winding up proceedings will not cure that inherent defect. This case makes it clear that the better option is to issue a fresh demand.

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