A letter of demand is usually issued in relation to an outstanding debt and will often warn of legal action unless the debt is paid by a date.

However, the humble letter of demand can also sometimes give rise to unintended consequences for the party issuing the demand. An example is in the context of unfair preference claims in insolvency law.

In simple terms, an unfair preference occurs when a creditor receives a payment (for a debt) from a company who subsequently goes into liquidation giving them an unfair preference over other creditors. If a liquidator of the company who made the payment can prove that the creditor obtained an unfair preference, then it can recover the payment. A relevant factor in such proceedings is whether the party receiving the payment had no reasonable grounds to suspect the insolvency of the company who made the payment.  

In a recent Queensland case of Trenfield letters of demand (emails) from a creditor were evidence that the creditor had the requisite suspicion.

One email from the creditor referred to the company’s non-payment of its account, saying “…this raises the issue of your trading position with regard to the corporations law”. Another stated unequivocally that “…the inescapable consequence” was that the debtor was “actually trading whilst insolvent”.

The judge found this was evidence of the creditor’s suspicion, saying “it is obvious that the insolvency of the company at the relevant times would have come as no surprise to the defendant”.

The Trenfield case shows that caution should be exercised when drafting letters of demand. While it may seem like a straight-forward exercise, unintended consequences may result, so legal advice should be sought.

Dean Frith is a lawyer and partner at Baker Love Lawyers.