Impending Insurance Indemnity Ruled Not Enough to Set Aside a Statutory Demand

This update was co-authored by Jonathan O’Connor, Law Graduate

In Setting Aside Statutory Demands . . . on Conditions, we reported on a case which highlighted that just because an uncertain offsetting claim is enough to set aside a statutory demand, it does not necessarily mean that the debtor company will get entirely off the hook.

The recent case of Primestyle Pty Ltd v Fluhler (2017) WASC 296 showcases another scenario where the debtor company has loosened the creditor’s hook by reason of a subsequent agreement reached between the parties but was unable to defeat the demand entirely despite an impending insurance indemnity.

The Facts

By a statutory demand issued to Primestyle Pty Ltd (Primestyle), Mr Fluhler claimed that he was owed four separate amounts pursuant to orders made by the State Administrative Tribunal. The four amounts, $1,400, $8,281.28, $42,524 and $10,285, totaling $62,490.28, were registered as judgments debts in the Magistrates Court. Primestyle applied to set aside the demand pursuant to s 459G of the Corporations Act 2001 (Cth) (Corporations Act).

Primestyle claimed that the statutory demand should be varied or set aside on three grounds:

  1. there was a genuine dispute about the $42,524 judgment debt;
  2. there was a defect in the demand, referring to the $42,524 judgment debt, which would cause substantial injustice to it; or
  3. there was ‘some other reason’ by which the demand should be set aside pursuant to s 459(1)(b) of the Corporations Act.

The ‘other reason’ was because Mr Fluhler was on notice that Primestyle was seeking an indemnity from insurers for the four debts and so the issue of a statutory demand was an attempt to undermine the intended operation of Pt 5.4 of the Corporations Act, in that it was being used to recover a debt which should not properly be recovered by statutory demand.

The Decision

In relation to the genuine dispute ground, Primestyle alleged that a contract came about from an email exchange between the parties whereby Mr Fluhler had agreed to allow Primestyle’s indemnity claim to be finalised and would not enforce the $42,524 judgment debt in the meantime.

After analysis of the emails, the Court was satisfied that there was a genuine dispute in relation to the $42,524 judgment debt and varied the statutory demand accordingly, reducing it to a total of $19,966.28.

Despite some success on that point, Primestyle was unsuccessful on the two grounds to set aside the statutory demand.

In relation to the defect ground, the Court found that although a defect in the statutory demand existed as it included an amount which was not due because of the subsequent contract, any substantial injustice caused by the defect was cured by the variation of the demand.

In relation to the ‘other reason’ ground, the Court found that issuing a statutory demand when a debtor is asserting a right of indemnity under an insurance policy, but before the insurer has determined the claim for indemnity, is not an “attempted subversion” of Pt 5.4, nor is it open for the court to set aside the demand because it might be considered fair or reasonable to do so. Consequently, an undetermined claim for indemnity will not be sufficient to set aside a statutory demand.

The Lessons

For creditors: If you plan to issue a statutory demand for an amount comprised of various components, first consider whether there may be a genuine dispute in respect of any of those components. Failure to do so may result in the statutory demand being varied and put you at risk of a costs order.

For debtors: If you assert a right of indemnity under an insurance policy, but have not received confirmation of that indemnity, that alone is not enough to set aside a statutory demand.

For more information on this update or any other insolvency matters please contact us on (08) 9321 3755.

The information published in this paper is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.