It is well known that a company served with a statutory demand has 21 days to comply. If the recipient fails to pay the amount of the demand (or obtain a court order extending the period for compliance) within the period of 21 days after the demand is served, the creditor may rely on the failure as a basis to apply for the company to be wound up in insolvency. But what if the company pays, or seeks to pay, the amount of the statutory demand after the 21 day period has expired? Can the creditor still apply to have the company wound up in insolvency, and if so, what are the prospects of the Court making such an order?
The above issues have been considered in two 2019 decisions of the Supreme Court of Victoria.
In the matter of HGC Properties Pty Ltd  VSC 202 (25 March 2019)
An Owners Corporation obtained judgment against HGC Properties Pty Ltd ("the Company") for a total $240,638.02 in respect of unpaid fees and levies. In the meantime another party had filed an application to wind up the Company in insolvency. At the first return of the matter, the plaintiff was given leave to withdraw from the proceeding on the basis it had been paid its underlying debt. The Owners Corporation then filed an interlocutory process to be substituted as applicant for the Company to be wound up.
At the next return of the matter, the Company’s counsel produced a bank cheque and sought to tender it as payment of the entire amount of the judgment debt. Payment was refused by the Owners Corporation. However, the Court ordered that the bank cheque be paid into Court pending the resolution of the proceeding. In addition, the defendant made payments to the Owners Corporation in respect of interest on the judgment debt.
One of the questions for the Court was whether in all the circumstances the Owners Corporation should be prevented from being substituted as plaintiff, in the exercise of the Court's discretion.
The Court observed as follows at : "The object of a tender is not to end all controversy between the parties but to “throw the risk of further controversy upon the other party”. So long as a defendant is able to show that he or she was willing to unconditionally pay the entirety of an amount falling due, then tender will be effective". Other relevant principles referred to by the Court included that:
- a valid tender and payment into Court does not eliminate the debt itself, that is, the creditor's status is preserved;
- a tender may be valid even if proffered “without admissions” or “under protest”, provided only it is unconditional; and
- the creditor's reasons for refusal of payment, and specifically whether the creditor has acted unreasonably in refusing payment, is a matter relevant to the exercise of the court's discretion.
Ultimately the Court concluded that even assuming the Owners Corporation had not acted unreasonably in refusing to accept the tender, as a matter of discretion and having regard to all of the surrounding circumstances, it should not be substituted as applicant for the Company to be wound up. In reaching this decision the Court accorded great weight to the Company's actual payment into Court.
In the matter of Vitamin Co Pty Ltd  VSC 540 (23 August 2019)
In this more recent case, the statutory demand issued by the plaintiff claimed the "relatively trivial" amount of $2,372.36 (being only slightly higher than the prescribed statutory minimum). The solicitors for the defendant wrote to the plaintiff’s solicitors confirming that they held an amount referable to the statutory demand in their trust account. They also stated that they were instructed to pay that amount to the plaintiff in satisfaction of the debt on the basis that: (a) the debt remained disputed; and (b) “[t]he payment is made under protest and will be the subject of recovery proceedings for damages in due course”.
The plaintiff declined to accept payment because of a concern that the defendant was insolvent. The defendant sought and was given leave to pay the relevant funds into Court. It then did so. The Company opposed the winding up application on various grounds including that it had sought to pay the debt.
In these circumstances the Court held that the tender was unconditional (whilst the solicitor's reference to the payment being the subject of separate proceedings for damages was "inelegantly worded", the Court accepted that it "simply evinced an attempt to reserve the defendant’s rights"). Further, the potential for the payment to constitute a voidable transaction was not a sufficient basis to refuse the tender. The Court held at :
"I am satisfied that the defendant has demonstrated valid tender in respect of the amount of the statutory demand. That amount has been paid into Court and the defendant remains willing to discharge the debt. These are matters which strongly weigh in favour of the Court exercising its discretion to refuse to make a winding up order".
The Court ultimately declined to make a winding up order against the defendant notwithstanding that it had tried, but failed to displace the statutory presumption of insolvency.
Points to take away
If a company fails to comply with a statutory demand within the 21 day period (thus giving rise to a presumption of insolvency) all is not lost, particularly if the company subsequently becomes able to pay the amount of the demand.
The company should attempt in the first instance to unconditionally tender the debt to the creditor which issued the demand.
If the creditor refuses to accept the tender, and subsequently applies to have the company wound up in insolvency, the company should seek leave to pay the relevant funds into Court then (assuming leave is granted) do so. It should also thereafter manifest a continued readiness and willingness to pay the same to the creditor, together with interest.
A valid tender and payment into Court will be a matter relevant to the exercise of the Court's discretion to substitute the applicant for a company to be wound up, and to make a winding up order.