Yesterday, the Supreme Court of New South Wales handed down a decision which highlights the importance of taking care in the preparation of winding-up documents.

The Plaintiff’s winding-up application failed solely because their solicitor had not sufficiently explained how their Statutory Demand had been served – his evidence was that it was “forwarded by mail”, but he did not explain what this entailed.

As a result of this shortcoming, the Plaintiffs not only failed to recover their debt – their proceedings were dismissed, and they were ordered to pay the Defendant’s legal costs.

Background

The majority of winding-up proceedings in the Supreme and Federal Courts share the following characteristics: –

1. They are commenced by an aggrieved creditor against a company that owes the creditor money;
2. The orders sought are that the debtor company be wound up and that a liquidator be appointed;
3. The basis upon which the orders are sought is that the debtor company is insolvent; and
4. In order to establish insolvency, the creditor relies on the fact that the company failed to comply with a Statutory Demand that was previously posted to the company’s registered office.

Section 459C(2)(a) of the Corporations Act 2001 (Cth.) (“the Act”) provides (in summary) that a company is deemed to be insolvent if it has failed to comply with a Statutory Demand. For the deeming provision to have effect, the Statutory Demand must comply with certain formal requirements (set out in section 459E), and it must have been “served” on the company (section 459E(1)).

“Serving” documents on a company is fairly straightforward – all you need to do is post the documents to the company’s registered office by ordinary pre-paid post (section 109X). The location of the registered office is a matter of public record, which can readily be ascertained from a company search.

For these reasons, the majority of creditors (including the Australian Taxation Office) set themselves up for winding-up proceedings by obtaining a company search, ascertaining the address of the debtor company’s registered office, and mailing out a Statutory Demand.

If the company does nothing about the demand (as frequently occurs), the 21-day compliance period expires without the debt being paid, and the creditor then commences winding-up proceedings on the basis of insolvency, relying on the deemed insolvency arising from non-compliance with the Statutory Demand.

Case summary

At first glance, the decision in Brown v. Bluestone Property Services Pty. Limited [2010] NSWSC 869 concerned a wholly unremarkable set of winding-up proceedings. The background to the proceedings was as follows: –

1. Bluestone Property Services Pty. Limited (“Bluestone”) owed money to the Plaintiffs.
2. The Plaintiffs engaged solicitors to pursue the debt.
3. The Plaintiffs’ solicitors sought to recover the debt by serving a Statutory Demand.
4. The Statutory Demand was duly posted to Bluestone’s registered office, and the 21-day compliance period was allowed to expire.
5. The Plaintiffs then commenced winding-up proceedings.

The genesis of the proceeding was entirely routine. Unfortunately for the Plaintiffs, things started to get a bit more interesting at the hearing.

When the matter came up for hearing, Bluestone announced its intention to defend the winding-up proceedings on the basis that there was insufficient evidence to establish that the Statutory Demand was served. Bluestone’s barrister pointed out that all the Plaintiffs’ Affidavit of Service said was that a letter enclosing a statutory demand was “forwarded by mail” to the Defendant – the Affidavit did not actually elaborate upon what “forwarded by mail” meant.

In those circumstances, said Bluestone’s barrister, the Court was not in a position to assess whether or not the Statutory Demand had actually been served, therefore the only proper course was for the Court to declare that service had not been proven (and the presumption of insolvency had consequently not arisen).

The decision

Justice Barrett heard the matter and, after reviewing the authorities, agreed that the Plaintiffs’ evidence about service of the Statutory Demand was insufficient, noting the following crucial points (formatting added): –

In order to prove service by post, it is necessary that the evidence of one or more witnesses establish a number of core and indispensable matters: –

1. that the document said to have been served by posting of it to a given address was placed inside an envelope;
2. that the envelope had that address written or typed on its face;
3. that a postage stamp or franking of the necessary amount was affixed to the envelope; and
4. that the envelope so addressed and stamped or franked was physically deposited in the post either at a post office or by being dropped into a post box for the reception of mail articles.

Because the Plaintiffs’ solicitor had not mentioned any envelope, stamp, or post box in his evidence, the Plaintiffs had not complied with these threshold requirements.

To make matters worse, Bluestone itself led evidence that the Statutory Demand was never received. Such evidence is usually regarded with scepticism, however in circumstances where the evidence about service was unsatisfactory, the Court was more receptive.

These matters led Justice Barrett to conclude that the Plaintiffs had failed to establish that the Statutory Demand had been served. It followed that the Plaintiffs had not established the presumption of insolvency.

Without any evidence of insolvency, the winding-up proceedings were doomed to failure. In light of this they were discontinued, and the Plaintiffs were ordered to pay Bluestone’s costs of the argument about service.

Relevance

This case is important for two reasons. First, it serves as a reminder of the importance of attention to detail in the preparation of court documents. Second, it highlights a potential “easy out” which may allow a distressed company further time to appoint an administrator or institute some other form of turnaround or restructuring process.