Genuine steps statements and statutory demands

As featured in Lavan Legal's last insolvency update, the Law Council of Australia (Law Council) published submissions on 26 July 2014 on proposed reforms relating to the Corporations Act 2001 (Cth) (Corporations Act).  The last update concerned Law Council’s first submission on the operation of the automatic stay provisions under the Corporations Act. 

This publication now considers the second of the Law Council’s submissions concerning the interplay between the Civil Dispute Resolution Act 2011 (Cth) (CDR Act) and statutory demands under the Corporations Act, particularly in light of the recent decision of Superior IP International Pty Ltd v Ahearn Fox Patent and Trade Mark Attorneys (No 2) [2012] FCA 977 (Decision).

Issue

In the Decision, Justice Reeves relevantly held that:

• For the purposes of the CDR Act, proceedings are commenced at the time that a statutory demand is issued.
• Prior to making an application to set aside a statutory demand under section 459G of the Corporations Act, genuine steps to resolve the dispute ought be taken.

The Law Council considers that the Decision and the application of the CDR Act to the statutory demand process potentially gives rise to a number of practical and legal difficulties.

• While the Decision found that the issuing of a statutory demand may involve the commencement of proceedings under the CDR Act, the Act only applies to proceedings in the Federal Court.  Accordingly, pending the recipient of the demand determining whether to seek to set aside the demand and, if so, whether to do so in the Federal or Supreme Court, it is impossible for the party issuing the demand to know whether the CDR Act will ultimately have application.
• From a conflict of laws perspective it is far from clear that there is scope for the CDR Act to seek to fetter the express right under section 459G for a party to apply to set aside a statutory demand.
• Assuming that the application to set aside is commenced in the Federal Court, the issuer of the demand cannot comply with section 6 of the CDR Act to file a genuine steps statement as there are no extant proceedings in which such a statement could be filed.

Submission

In response to the issues raised by the Decision, the Law Council proposes that regulation 4 of the Civil Dispute Resolution Regulations 2011 (Cth) (CDR Regs) be amended so that the issuing of a statutory demand and any application to set aside are defined to be an “excluded proceeding” for the purposes of section 17 of the CDR Act.  The Law Council also proposes that analogous procedures under the Bankruptcy Act 1966 (Cth) be made “excluded proceedings”.

The Law Council submits that a variety of considerations support such an amendment.

• The present uncertainty concerning the interplay between the CDR Act and the statutory demand process is entirely inconsistent with the intention of the statutory demand process, namely to facilitate a quick resolution of the issue of insolvency. 
• As Justice Reeves observed at paragraph 10 of the Decision “it seems to me to be somewhat unrealistic and incongruous” to expect that the recipient of a statutory demand can take genuine steps under the CDR Act in light of the tight 21 day timeframe imposed by the Corporations Act.
• Finally, the amendment would be consistent with the fact that an application to wind up under section 459A of the Corporations Act (which is the ultimate objective of the statutory demand process) is already an “excluded proceeding” for the purposes of the CDR Regs.

Lavan Legal comment

In our review, the Law Council’s submissions in relation to this issue clearly have merit. 

We consider there to be a range of practical and legal considerations, including those identified in the Law Council’s submissions, which support the statutory demand procedure operating unfettered by the requirements of the CDR Act.