Creditor’s statutory demands: A valid demand for ‘debt due and payable’ or an abuse of process?

The recent decision of the Supreme Court of New South Wales In the matter of Huizhong Investment Group Pty Ltd [2018] NSWSC 390 considered the meaning of a debt ‘due and payable’ in the context of a creditor’s statutory demand, and the circumstances in which such a demand will constitute an abuse of process.

Huizhong Investment Group Pty Ltd (the Lender) provided a loan facility (the Loan Agreement) to a property developer, Geitonia Pty Ltd (the Developer), on the terms that it was obliged to repay the principal amount of $4 million plus ‘consideration’ of $1.4 million, on maturity on 6 November 2012, and that interest would accumulate from that date at a rate of 2.5% per month (the Default Rate).

A dispute arose in relation to the development and the Developer failed to repay the principal amount due to the Lender on 6 November 2012, or thereafter. The Developer issued a creditor’s statutory demand (the Demand) on the Lender, and brought an application seeking to wind up the Lender. The Developer alleged a ‘debt’ in the amount of $1,654,031.64, being the difference between the amount of interest paid to the Lender at the Default Rate and the amount which would be payable at a ‘reasonable rate’, for the period from 6 September 2011 to 1 July 2016. In these circumstances, the ‘debt’ the subject of the Demand was said to be money ‘due and payable’ to the Developer on the basis that the Default Rate under the Loan Agreement was not a genuine pre-estimate of damage, and as such, constituted an unenforceable ‘penalty’.

The Lender commenced proceedings seeking a declaration that the Demand, and any reliance upon it, constituted an abuse of process, and sought an injunction preventing the Developer from issuing any further creditor’s statutory demands relating to any debt allegedly owed by the Lender.

In finding that the Demand constituted an abuse of process, Black J held that:

•   a creditor’s statutory demand may only be served in relation to a debt that is ‘due and payable’;
•   a debt ‘due and payable’ does not include a contingent or prospective liability, such as an assertion that a contractual provision constitutes a ‘penalty’;
•   it may constitute an abuse of process to serve a creditor’s statutory demand in respect of a debt that is plainly known to be disputed; and
•   in circumstances where a more suitable remedy was available, such as the commencement of proceedings to enforce a debt, the issuing of a creditor’s statutory demand (and subsequent winding up application) constituted an abuse of process.

Creditor’s statutory demands are not uncommon in the construction industry. This decision confirms that such demands may only be served in circumstances where a debt is truly ‘due and payable’, and any other application of such a demand may be liable to be set aside on the basis that it constitutes an abuse of process.

The full decision can be found here.