The Court of Appeal decision of Commonwealth Bank of Australia v Garuda Aviation Pty Ltd  WASCA 61 has confirmed, regardless of the decision in Candetti Constructions Pty Ltd v M & I Samaras (No 1) Pty Ltd  SASC 165 (Candetti), that a statutory demand can be made for a portion of a debt due and owing. This decision applies to demands issued under section 459E(1) of the Corporations Act 2001 (Cth) (Corporations Act).
In the primary decision Master Sanderson set aside the statutory demand issued by the Commonwealth Bank of Australia (CBA) on Garuda Aviation Pty Ltd (Garuda) on the basis that a demand for part of a debt was not permitted under section 459E of the Corporations Act. The demand had been accompanied by an affidavit of an officer of CBA verifying, as required by section 459E(3) of the Corporations Act, that there was no genuine dispute as to the amount of the debt. The officer, Mr Ficko, had said that the sum of $2,099,047.13 was the undisputed portion of a debt in excess of $6,896,535.05 owing by Garuda under a loan agreement.
Master Sanderson followed the South Australian decision of Candetti which found that a statutory demand could not be issued for a portion of a debt. The CBA then appealed this decision on the grounds of whether,
“…the master erred in finding that div 2 of pt 5.4 of the Corporations Act did not permit a statutory demand to be served for an 'undissected portion', or a part only, of a debt”. This appeal was allowed.
Key Legal Principles
The Court found:
- The failure of a company to comply with a statutory demand creates a rebuttable presumption of insolvency pursuant to section 459C(2)(a) of the Corporations Act.
- A company served with a statutory demand may apply to the Court for an order setting aside the statutory demand within 21 days of being served under section 459G of the Corporations Act.
- If an application is made under section 459G of the Corporations Act and the Court is satisfied that there is a genuine dispute between the parties the Court may by order vary the demand, provided that the undisputed amount is greater than the statutory minimum pursuant to section 459H(4)(a) of the Corporations Act.
Therefore the Court said the Corporations Act does recognise that non-payment of an undisputed portion of a larger debt may be a sufficient basis for a presumption of insolvency under section 459C of the Corporations Act. However Garuda contended that a demand for part of a debt is only effective if ordered by the Court.
Garuda also submitted that if it was intended that a statutory demand could be served for part of a debt the legislation would have expressly provided for this.
The Court of Appeal disagreed with Garuda’s submissions and referred to the decision of Hawkins v Bank of China (1992) 26 NSWLR 562 where it was
“…observed that the word 'debt' is not a word of precise and inflexible denotation and wherever it appeared…it ought to be applied in a practical and commonsense fashion, consistent with the context and the statutory purpose”.
The Court stated that the statutory demand procedure should be a convenient and efficient tool in resolving when a company is insolvent and that the presumption of insolvency may be established by the non-payment of an undisputed portion of a debt that exceeds the statutory maximum.
It was mentioned however that it is necessary that the portion of the debt set out in the demand be described in clear and unambiguous terms, so that the recipient of the demand can assess whether there is a genuine dispute to the amount claimed.
This case confirms that a statutory demand can be issued for a portion of a debt provided that it is clearly articulated and meets the statutory minimum.