Sneaky attempt to undo our good work - setting aside a default judgment after the expiry of a statutory demand : does it work?

Shine often acts for creditors who have obtained a default judgment against a debtor company. To recover our client’s money we attach that judgment to a statutory demand and serve it on the debtor. Sometimes a debtor will try to short circuit the operation of a statutory demand by seeking to set aside the default judgment on which it is based and doing so even after the statutory demand has expired. Is this an effective tactic?

The rules around statutory demands are fairly clear. Inside 21 days of being served the debtor either pays the debt or files and serves an application to set aside the statutory demand. If the debtor does neither it is presumed insolvent and can be subject to a winding up application. In these circumstances, there’s very limited grounds to oppose the winding up application. These limited grounds largely focus on the debtor proving that it is solvent.

However, there have been instances where a Court will refuse to wind up a company on the grounds that an alleged debt was clearly not due and payable. In Hardel Property Holdings Pty Ltd v Allmark Property Management Pty Ltd [2008] FCA 22 (Hardel) the Court stopped winding up proceedings on the grounds that the debt sought to be recovered was known to be spurious and was therefore a misuse or "abuse" of the Court’s winding up process. So what happens if, after the expiry of the statutory demand the debtor has the default judgment set aside?

The onus of proving an abuse of process is on the debtor and it is a heavy one and is in addition to a requirement to show that it is actually solvent. An allegation of abuse cannot be used as a collateral method of disputing the existence of a debt: Hardel. Accordingly, the debtor must show by clear evidence that it is entitled to a dispensation from the rigours of the statutory scheme that deals with statutory demands and winding up applications to the Court.

As a result, the mere setting aside of a default judgment is unlikely to be considered by the Court to be sufficient to prevent a debtor being wound up after the expiry of the statutory demand, as the operation of the statutory scheme that deals with statutory demands and winding up applications to the Court (Part 5.4 of the Corporations Act 2001 (Cth)) would be undermined. The debtor would have to go a great deal further, proving that the debt was known to be spurious, for example.

So, in short, will setting aside a default judgment stop a statutory demand after the 21 day period? Probably not, unless a debtor shows fairly conclusively that the debt is spurious or otherwise would lead to an abuse of the Court’s winding up process.