A company in liquidation served a creditor’s statutory demand for debt where there was a genuine dispute about the existence of the alleged debt. The statutory demand was set aside by the Court and the liquidators were ordered to personally pay costs on an indemnity basis.

What happened

In SJG Developments Pty Limited v NT Two Nominees Pty Limited (in liquidation) [2020] QSC 104:

The Australian Parliament has passed legislation granting temporary relief for businesses from statutory demands and liability for insolvent trading. Individuals will also be granted temporary relief in relation to bankruptcy notices.

Introduction

The Australian Parliament has passed a suite of temporary insolvency measures to combat the economic impacts of coronavirus. The changes, which are expected to come into effect shortly, will provide temporary relief from statutory demands and liability for insolvent trading.

On December 19, 2019, the Second Circuit held that appellants’ state law constructive fraudulent transfer claims were preempted by virtue of the Bankruptcy Code’s safe harbors that exempt transfers made in connection with a contract for the purchase, sale or loan of a security from being clawed back into the bankruptcy estate for

On January 14, 2020, the Supreme Court of the United States issued a decision resolving the question of whether a motion for relief from the automatic stay constitutes a discrete dispute within the bankruptcy that creates a basis for a final appealable ruling, or whether it simply is a controversy that is part of the broader Chapter 11 case, such that appeals would not need to be taken until the conclusion of the Chapter 11 case.

The oil and gas industry in the United States is highly dependent upon an intricate set of agreements that allow oil and gas to be gathered from privately owned land. Historically, the dedication language in oil and gas gathering agreements — through which the rights to the oil or gas in specified land are dedicated — was viewed as being a covenant that ran with the land. That view was put to the test during the wave of oil and gas exploration company bankruptcies that began in 2014.

It is a defence to an unfair preference claim to show there were no reasonable grounds to suspect the insolvency of the debtor company.

Referred to as the ‘good faith defence’, the creditor has the onus of establishing the defence contained in section 588FG(2) of the Corporations Act 2001 (Cth).

Suspicion of insolvency

The courts have identified the following principles with respect to the good faith defence:

On February 25, 2019, the United States Court of Appeals for the Second Circuit issued a decision holding that a trustee is not barred by either the presumption against extraterritoriality or by international comity principles from recovering property from a foreign subsequent transferee that received the property from a foreign initial transferee.

In the recent case of 1st Fleet Pty Ltd (in liquidation), the Court clarified the information disclosure obligations of external administrators in the Insolvency Practice Schedule (Corporations) (IPSC) and Insolvency Practice Rules (Corporations) 2016 (Rules).

There is only a short time period for compliance, and there can be cost consequences for non compliance.

In business it is not uncommon for a director of a company to be owed money by that company.

If the commercial relationship breaks down, the director may think it is an option to serve a creditor’s statutory demand on the debtor company.

However, recent court decisions demonstrate that issuing a creditor’s statutory demand is not a sure fire method of obtaining payment where the director is owed the debt personally or is a director of both the creditor and debtor companies.

Cases where statutory demands have been successfully challenged

On January 17, 2019, the United States Court of Appeals for the Fifth Circuit issued a decision holding that “impairment” under a plan of reorganization does not arise even if a creditor is paid less than it would be entitled to under its contract, so long as the reduced recovery is due to the plan’s incorporation of the Bankruptcy Code’s disallowance provisions.