COVID-19 CRISIS: CREDITOR’S STATUTORY DEMANDS – COURT DECISION POTENTIALLY CATASTROPHIC FOR CREDITORS.

COVID-19 CRISIS: CREDITOR’S STATUTORY DEMANDS – COURT DECISION POTENTIALLY CATASTROPHIC FOR CREDITORS.

In the current COVID-19 climate, with so many businesses facing hardship and insolvency, many businesses and individuals are looking for ways to recoup monies owed and keep their own businesses afloat despite the downturn in their debtor’s sectors. Most creditors (and practitioners for that matter) would assume that the interest and costs components of a final order of the Court would comprise part of the judgment debt. Many creditors would undoubtedly have issued Creditor’s Statutory Demands to debtors, including a claim for interest and costs, without a verifying affidavit, which would have gone unchallenged. However, a recent NSW Supreme Court decision that changes the landscape in respect of enforcing judgment debts in a way which could have catastrophic and seemingly “harsh” consequences for creditors.

This is particularly relevant in the current climate following the temporary changes to insolvency laws imposed by the Federal Government as a way to limit the impact of the COVID-19 pandemic on trade. Creditors seeking to enforce a judgment debt by way of issuing a Creditor’s Statutory Demand must wait six (6) months to be paid before instituting wind up proceedings. These changes have no impact on the rights of the debtor, meaning that if the Creditor’s Statutory Demand is defective, or is not accompanied by a verifying affidavit when it should have been, the debtor can wait the six months and apply to set the demand aside.

Please contact one of our commercial litigation or insolvency experts today for further advice.

Summary

Section 459E(3) of the Corporations Act 2001 (Cth) (the Act) imposes an obligation on a creditor issuing a Creditor’s Statutory Demand to accompany the demand with an affidavit that verifies that the debt, or the total amount of debts, is due and payable to the creditor. Without the affidavit, the Demand is liable to be set aside upon application to the Court.

There is however an exception to the rule, which is also prescribed under Section 459E(3) of the Act; that is, Creditor’s Statutory Demand need not be accompanied by a verifying affidavit if the underlying debt, or each of the debts, is a judgment debt.

There are a number of state and commonwealth authorities which deal with the question of what constitutes a judgment for the purposes of Section 459E(3). In the Supreme Court of NSW decision of Cooperbrown Pty Ltd [2019] NSWSC 1341, his Honour Justice Black answered that question in a way which may have harsh consequences for creditors who are unaware of its implications.

Given the temporary changes to insolvency laws imposed by the Federal Government as a measure to limit the impact of the COVID-19 pandemic on businesses, it is critical that creditors seeking to enforce a Court judgment are aware of the implications of Black J’s judgment before issuing a Creditor’s Statutory Demand.

The Facts

The plaintiff, Cooperbrown Pty Ltd (Cooperbrown) is a builder and the defendant, Finestyle Kitchens Pty Ltd (Finestyle) a joinery contractor. Cooperbrown retained Finestyle to carry out certain “fit out” works in relation to a refurbishment project.

On 12 November 2018, Finestyle served a payment claim under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA). A dispute arose in respect of that payment claim. Accordingly, on 6 December 2018, Finestyle lodged an application for adjudication under the SOPA.

On 2 January 2019, the adjudicator issued a determination, requiring Cooperbrown to pay Finestyle $89,038.59 (incl. GST), together with interest at 7.5% per annum.

Finestyle subsequently registered the determination, together with interest and a filing fee, as a judgment with the Local Court.

Finestyle subsequently served a Creditor’s Statutory Demand on Cooperbrown on 12 April 2019 (Demand), claiming that Cooperbrown owed it $96,698.58, described as “Judgment debt issued by Fairfield Local Court dated 2 April 2019” which, pursuant to the Notice of Orders Made issued by the Court, comprised of the following: claim amount – $95,650.69; interest – $859.89; and filing fee – $188.

The Demand was not accompanied by an affidavit verifying the debt, presumably because the quantum of the debt all formed part of an order made by the Local Court of NSW.

On 2 May 2019, the Plaintiff, by way of originating process applied to the Supreme Court of NSW to set aside the Demand pursuant to Section 459H and Section 459J of theAct, on multiple grounds.

For the purpose of this explanatory article, we have focused on only one ground – the fact that the Demand was not accompanied by an affidavit. In any event, Cooperbrown was unsuccessful on all other grounds.

Cooperbrown argued that the Demand must be set aside pursuant to Section 459J(1)(b) of the Act because the Demand was not accompanied by an affidavit verifying the debt, and part of the debt (i.e. the interest and filing fee) did not form part of the judgment.

Finestyle argued that the judgment included the provision for interest and the filing fee, because those amounts were also included in the Notice of Orders Made, issued by the Local Court.

However, notwithstanding the fact that the interest and filing fee components were incorporated in the Notice of Orders Made, issued by the Local Court (which also included the judgment amount) his Honour determined that the interest and filing fee claimed by Finestyle did not  constitute part of the judgment.

His Honour subsequently determined that the Demand should have been accompanied by an affidavit verifying the interest and filing fee component of the debt (i.e. the portion of the debt that was not the subject of a judgment) and because it wasn’t, his Honour set the Demand aside pursuant to the relevant section

In making the determination, his Honour said at

“It seems to me that the failure to verify the Demand in this case, where it included claims for additional interest and a filing fee, requires that the Demand be set aside under s 459J(1)(b) of the Corporations Act and for the reasons noted in Anderson Formrite Pty Ltd above and the several cases that have applied that decision, including Re SBC Construction Pty Ltd above in this context. I am conscious that that may appear a harsh result, where the amounts and the filing fee are a relatively small part of the debt claimed.”

Conclusion

Most creditors (and practitioners for that matter) would assume that the interest and costs components of a final order of the Court would comprise part of the judgment debt. Many creditors would undoubtedly have issued Creditor’s Statutory Demands to debtors, including a claim for interest and costs, without a verifying affidavit, which would have gone unchallenged.

Black J’s decision in Cooperbrown Pty Ltd [2019] NSWSC 1341, which follows a line of authorities which also deal with the issue, change the landscape in respect of enforcing judgment debts in a way which, as was the case for Finestyle, could have catastrophic and seemingly “harsh” consequences for the creditor.

This is particularly relevant in the current climate following the temporary changes to insolvency laws imposed by the Federal Government as a way to limit the impact of the COVID-19 pandemic on trade. Creditors seeking to enforce a judgment debt by way of issuing a Creditor’s Statutory Demand must wait six (6) months to be paid before instituting wind up proceedings. These changes have no impact on the rights of the debtor, meaning that if the Creditor’s Statutory Demand is defective, or is not accompanied by a verifying affidavit when it should have been, the debtor can wait the six months and apply to set the demand aside.

Please contact one of our commercial litigation or insolvency experts at Madison Marcus today for further advice.

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