In the recent case of Rite Flow Pty Limited v Nahas Constructions (NSW) Pty Limited  NSWSC 553 Black J reconfirmed that the statutory demand process must be used correctly and accurately.
The statutory demand process is a specified form of demand under the Corporations Act 2001 which simplifies insolvency proceedings if a debt is not paid within 21 days, even though it is commonly perceived to help creditors recover debts.
The Defendant (Nahas Constructions) served a statutory demand on the Plaintiff (Rite Flow) for an amount Nahas described as a cost incurred as a result of damage caused by the Plaintiff. The evidence provided to support the debt was “notably silent” in demonstrating whether Rite Flow actually caused the alleged damage. Rite Flow claimed they did not cause the damage and also argued there was a genuine dispute about the amount claimed. Their defense stated that the subcontractor who was alleged to have carried out the rectification had denied any involvement in the rectification.
Black J set aside the statutory demand on the basis that the evidence submitted by Rite Flow satisfied him that Rite Flow did not cause the damage and that there was a genuine dispute about the amount claimed, pointing out mathematical and other errors in the invoice that Nahas used in the case. However, Black J also highlighted other grounds on which a statutory demand could be set aside.
First, in light of the Court’s discretion and its duty to maintain the integrity of the process under Pt 5.4 of the Corporations Act 2001, the Court has the power when faced with “attempted subversion” of the provisions to set aside a statutory demand. Black J believed the use of a statutory demand in these circumstances was an abuse of process.
Second, the evidence the Defendant relied on “failed to verify a critical component of the claimed debt” and therefore the affidavit was deemed defective. Furthermore, Black J was of the opinion that the claim did not relate to unchallenged debt but to an unliquidated claim for damages.
However, issuing a statutory demand solely as a debt recovery mechanism may be an abuse of the process, as the procedure is established to enable insolvency proceedings to be quicker and more streamlined, rather than a procedure designed for debt collection.
Nahas appeared clearly disadvantaged in this case because it had failed to attend three previous hearings and was unprepared in the fourth and final appearance. Additionally, the lack of detail in Nahas’ affidavit and errors in their invoices demonstrated a lack of credibility in their demand. It may be not surprising that the Court set aside the demand.
The case should demonstrate to those who wish to use the statutory demand process that care must be taken to ensure that all requirements of the Act are met with accuracy or the Court may set aside the demand and order the defendant to pay the other side’s costs including, as in this case, on an indemnity basis.