A creditor’s statutory demand is an effective and compelling method to recover debts owed by a company. Most compelling is the presumption by the Courts of the insolvency of a company if it fails to comply with a statutory demand. This presumption extends for 3 months following the failure by a company to comply with the statutory demand.
As a statutory demand is a creature of legislation, there are some crucial elements that must be complied with. The Courts have found that there should be no defects in the demand that give rise to substantial injustice.
In summary, the Corporations Act 2001 (Cth) provides that:
- The debt must be over $2000.00
- The demand must be in the prescribed form
- If the debt is not a judgment debt, the demand must be accompanied by an affidavit in support which must verify that the debt is due and payable
- There must be no genuine dispute about the debt
Common defects in statutory demands include the failure to properly serve the demand and any accompanying affidavit on the debtor company. The Corporations Act 2001 (Cth) provides for the service on a company at its registered office by ordinary mail. If the matter proceeds to Court, sometimes the simplest of errors (e.g. incorrect spelling of the debtor’s name and address) may defeat the validity of the statutory demand which could result in the Court application being dismissed with costs payable by the creditor.
Timeline for statutory demands
The swiftness and timely effect of a statutory demand is evident in the following timeline:
- Debt arises and any terms are not complied with (no genuine dispute about the debt)
- Statutory demand and any affidavit is served on the debtor company
- The debtor company is given 21 days from service to either:
- Pay the debt or reach agreement to pay the debt on terms; or
- Make application to the Supreme Court or the Federal Court to set aside the statutory demand
- 21 days pass and there is no payment or agreement to pay and no application is made to the Court à the debtor company is presumed insolvent for the next 3 months
- Within the 3 month period the creditor can make application to the Court to wind up the debtor company on the basis that it is presumed insolvent
Within the 21 day period –
- The debtor pays the debt or enters into an arrangement with the creditor to make payment of the debt
- The debtor disputes the debt and requests that the creditor withdraw the statutory demand failing which it makes application to the Court to have the demand set aside:
Setting aside statutory demands
Should the debtor put before the Court sufficient evidence that there is a genuine dispute about the debt, the demand can be set aside by the Court and the creditor may be liable to pay the debtor’s legal costs for having to make application to the Court.
The Courts have held that a genuine dispute need not mean that the debtor prove that it might have a successful defence, only that it can point to facts or circumstances that might give rise to a defence.
This is a low threshold and a genuine dispute can include an off-setting claim by the debtor in respect of monies the creditor may owe it.
After the 21 day period –
- The creditor issues Court proceedings to have the debtor company wound up and a liquidator is appointed
Winding up a debtor company
The creditor has the ability to apply to the Court to wind up the debtor company and get a Court appointed liquidator to distribute any of the debtor’s assets. Usually, the costs of this will be a priority in the distribution of the debtor company’s assets.
- Noting – the creditor is not required to act on the non-compliance with the statutory demand and issue costly Court proceedings, it can simply do nothing
Involvement of the Courts
The Courts can become easily involved in the use of statutory demands and therefore the use of them should not be taken lightly. Statutory demands are given effect pursuant to Commonwealth Legislation and therefore only the superior Courts have jurisdiction to hear any application in respect of them. As such, barristers are often required to be briefed should you wish to set aside a statutory demand or wind up a company for failure to comply with one.
In conclusion, a statutory demand is an effective tool that can be used for the timely collection of undisputed debts. Essentially, debtors are required to respond to the demand within 21 days of service, failing which a presumption of insolvency will be applied by the Courts to that debtor company for the next 3 months. Whilst the Courts can become easily involved and the costs of such involvement can increase costs, if used properly, statutory demands are a highly persuasive mechanism to force payment of debts.
For further information, or if you have any queries relating to Creditor Statuary Demands, please contact Nicholas Brand, Andrew Cox, Amelita Hensman, Brigid O’Dwyer of our office on 03 9614 7707.