I don’t dispute that I didn’t dispute this debt earlier – but I wish to dispute it now!

Litigation: 01 June 2025

Author: Caroline Skeoch - Our People

We are often approached by clients in receipt of a winding up application in which a creditor relies upon the failure by the client to comply with the earlier creditor’s statutory demand; only to be told the client has a genuine dispute about the debt which underlies the creditors statutory demand.

The Supreme Court of New South Wales has recently reaffirmed the strict approach which is adopted by courts when considering applications to oppose winding-up applications, after the expiry of the 21-day statutory timeframe to respond to the earlier Creditors Statutory Demand (CSD).

The Law

In the matter of Kong & Kong Property Investment Pty Limited [2025] NSWSC 290 (Kong) the defendant company, Kong, filed an interlocutory application seeking leave of the court under s 459S(1) of the Corporations Act 2001 (Act) to oppose a winding-up application on grounds which it could have relied on for the purpose of an application to set aside the plaintiff’s earlier CSD.

Pursuant to s 459S(1), a company may not oppose a winding-up application on the same grounds that it could have relied on to set aside a CSD, unless the court grants leave. Importantly, under s 459S(2) of the Act, the court must not grant leave unless satisfied that the ground is material to proving the company’s solvency.

The Facts

In Kong, the plaintiffs, trustees of the S & S Superannuation Fund, served a CSD on Kong & Kong Property Investment Pty Ltd in July 2024 for $188,481.18. The CSD was supported by a default judgment obtained by the plaintiffs in the New South Wales District Court, based on a breach of a loan agreement which was allegedly entered by the parties in 2019.  The defendant took no steps to set aside the demand within the 21-day statutory timeframe under section 459G of the Act. As such, the defendant was presumed insolvent by operation of section 459P of the Act.

The plaintiff’s winding-up application was based on the defendant’s failure to comply with the CSD.  However, the underlying default judgment was later set aside, by consent, and the District Court proceedings were reopened, requiring pleadings to be filed in respect of the plaintiff’s claim in respect of the alleged breach of loan agreement.  That District Court proceeding was stayed pending the outcome of the defendants interlocutory application, which was brought under s 459S of the Act.

The Outcome

In dismissing the defendant’s interlocutory application under section 459S(1), Justice Nixon concluded that:

1. The defendant has not provided any sufficient explanation for its failure to make an application to set aside the CSD within the 21-day statutory timeframe.   This is despite the evidence of the defendant’s director that he had misunderstood that the defendant was being asked to pay the default judgment supporting the CSD, the fact that the defendant’s director had received multiple communications outlining the basis of the debt and the defendant had legal representation in other matters at the relevant time.
2. Even if the court were to accept there was a genuine dispute about the debt, the defendant failed to show that the genuine dispute was material to proving solvency of the defendant. The defendant claimed to be solvent regardless of whether the debt was owed, relying on property assets, rental income, and financial support from its director. However, the defendant didn’t file any expert evidence as to solvency, relied upon incorrect financial statements of the defendant and the defendant relied solely on affidavit evidence of its director with regard it’s financial position. Justice Nixon held that the existence or non-existence of the debt was not determinative of the company’s financial position; and
3. Granting leave under s 459S is a discretion which is to be exercised cautiously and sparingly and that permitting companies to raise solvency-based defences at the winding-up stage (after effectively ignoring the prior CSD) would undermine the purpose of Part 5.4 of the Act.

The Key Takeaways

1. Obtain legal advice and act quickly within the 21-day statutory timeframe if you believe you have a genuine dispute about a debt and wish to apply under s 459G of the Act to set aside the CSD.
2. The courts have no discretion to extend the 21-day statutory timeframe and you should place no reliance upon leave being granted under s 459S(1) of the Act.
3. The bar for obtaining leave under s 459S(1) is high. The disputed debt must be material to proving solvency of the company, and a credible explanation must be given for failing to respond to or apply to set aside the earlier CSD.
4. If the 21-day statutory timeframe passes, the presumption of insolvency automatically arises.  Action taken after winding up applications have been issued to set aside the earlier, underlying judgment debt (or disputing the debt in separate proceedings), won’t necessarily displace that presumption.
5. If a defendant in a winding up proceeding wishes to assert it is solvent due to asset backing or director support, those assertions must be fully and clearly documented and supported by credible evidence to support those assertions (assisted by expert evidence where possible), especially if relied up to set aside a winding up application at the later hearing.

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