Debts claimed in statutory demands must be due and payable to the creditor named in the statutory demand.

When disputing statutory demands it is common for debtor companies to argue an offsetting claim, so as to reduce or extinguish the amount claimed in the statutory demand.

For there to be a valid offsetting claim there must be ‘mutuality’, meaning that the legal capacities in which both the offsetting claim and the statutory demand debt are each claimed and owed must align.

In a recent Victorian case, In2Ply Pty Ltd v Amerind Pty Limited (in liq) (receivers and managers appointed) [2014] VSC 603, the receivers of Amerind (the purported creditor) issued a statutory demand on behalf of Amerind for payment of a post-receivership debt of $20,000 claimed to be owing to the company in receivership.

The debtor company, In2Ply, brought an application to set aside the statutory demand claiming that the statutory demand was invalid because the debt was not owed to the creditor named in it.

In2Ply also argued that if the debt claimed in the statutory demand was owing to Amerind, then In2Ply had an offsetting claim of $48,000 for a pre-receivership debt owed to it by Amerind.

Was the statutory demand debt owed to Amerind?

Amerind had entered into a debtor finance agreement with its bank where the statutory demand debt had been factored to the bank.

A notice of assignment in relation to the debt had been given to In2Ply requiring payment to be made to the bank. There had been a legal assignment of the debt to the bank.

The following observations were made by the Court in relation to the the debtor finance agreement:

  • Amerind had specifically agreed it would not require payment of any factored debt to be paid to it by any debtor.
  • If a debtor defaulted in payment, Amerind was required to indemnify the bank but this did not mean that the particular debt would be assigned back to Amerind.
  • The power of attorney provisions may have authorised the bank to bring legal proceedings against a debtor; however, the authorisation does not reinstate Amerind as the creditor.
  • The debt claimed in the statutory demand was not due and payable to Amerind and accordingly the statutory demand was invalid.

Principle of mutuality and offsetting claims

The Court also considered (in case it was wrong about the identity of the creditor) whether the pre-receivership debt owed to In2Ply could be set-off against the post-receivership debt claimed in the statutory demand.

The credit application provided that In2Ply was not entitled to set-off against or deduct from the amount payable to Amerind any sums owed or claimed to be owed to the applicant by Amerind.

Such a clause does not prevent an offsetting claim being made in respect of a statutory demand.

An offsetting claim in respect of a statutory demand means a genuine claim that the company has against the creditor by way of counterclaim, set-off or cross-demand (even if it does not arise out of the same transaction or circumstances as a debt to which the demand relates).

Amerind argued that the $48,000 pre-receivership liability of Amerind could not be set-off against the $20,000 post-receivership debt claimed in the statutory demand because of a lack of mutuality.

Examples of a lack of mutuality include, where:

  • your claim against an entity is in its personal capacity and the debt you owe to that entity is in the capacity as trustee of a trust;
  • your claim is against an entity as trustee of trust A and the debt you owe to that entity is in the capacity as trustee of trust B.

Amerind relied upon the case of Leichhardt Emporium Pty Ltd v AGC (Household Finance) Ltd [1979] NSWLR 701 where it was decided:

… a debt to a company under receivership, whether it was incurred before or after the date of the appointment of the receiver, cannot be set off against a debt owing by the company to the debtor prior to the appointment of the receiver, because the liabilities are not in the same right.

Leichhardt Emporium was a debt recovery action where the creditor was seeking a judgment for the payment of the debt. It was not a decision relating to a statutory demand.

Applying earlier authorities

The Court in Amerind identified the following principles relating to mutuality and offsetting claims:

  • Although there is legal authority requiring mutuality, that authority may be confined to ‘mutuality’ in the context of the identity or capacity of the creditor or debtor.
  • The term ‘cross-demand’ in a statutory demand context is not a technical term. It is not limited to a counterclaim or set-off that can be brought in a debt recovery court action. It is something that lies outside a counterclaim.

The Court agreed that, upon the appointment of the receivers to Amerind, the requirement of mutuality prevented the cross-claim from being relied upon as a set-off in a recovery proceeding. That cross-claim, however, was a valid offsetting claim for the purposes of seeking to set aside a statutory demand.

Comments

Whether a statutory demand can be challenged will depend on the facts of the case.

Amerind highlights the threshold requirement of any statutory demand: that the debt claimed in the statutory demand must be a debt due and payable to the creditor named in the statutory demand.

The case also provides helpful guidance as to what constitutes an offsetting claim to reduce or to set aside a statutory demand.

If you receive a statutory demand do not delay in obtaining legal advice. A company served with a statutory demand has only 21 days from the date of service of the statutory demand to comply. Failure to comply with the statutory demand could result in the company being wound up.