Statutory Demands

The Corporations Act specifies that a company is deemed to be insolvent if, having received a Statutory Demand, it fails to pay the creditor or have the Statutory Demand set aside by a court. A company may be wound up if it is insolvent, meaning the company is finalised and its assets sold to pay its debts. Therefore, a Statutory Demand can be a legitimate and useful way to recover debts from corporate debtors.

Insolvency

The most common basis for placing a company into liquidation is insolvency. Just as an individual can be made bankrupt, so a company can be wound up and brought to an end. Whereas an individual continues to live on after bankruptcy, a company is brought to a conclusion by a wind-up application.

The test of whether or not a company is insolvent is whether or not the company is able to pay its debts as and when they become due and payable.

Valid Statutory Demands

Valid Statutory Demands can only be sent by creditors who have a debt, which is due and payable by a company.

Statutory Demands cannot be sent to individuals trading under a business name – the debtor must be a company.

The debt cannot be in dispute. This means that, if the other party claims the goods delivered were incorrect, or not of merchantable quality, or that they have a valid claim against you to set-off the money owed, then there is a dispute. You may feel the dispute is not justified, but that doesn’t matter. If you know that the other party has an arguable dispute (however weak), then you should not issue a Statutory Demand.

Company Directors, managers, accountants and people in credit control can all benefit by knowing how to minimise an allegation of a genuine dispute. For example, if you are being told by a debtor company that they need more time to pay a debt, then before granting the extension, it is prudent then to get the debtor to acknowledge in writing that the debt is payable, and confirm the amount that is payable. It is then so much harder for the debtor to subsequently claim there is a ‘genuine dispute’ in circumstances where someone has said on behalf of the company that it just wants more time.

The Statutory Demand must be in the form set out in the Corporations Act, must be in writing and must be signed by or on behalf of the creditor. It must correctly state the debtor’s company name and its registered office and it must specify a place in Australia where the debt can be paid. It is permissible to specify that payment be made to the creditor’s solicitors. A Court can set aside a Statutory Demand that is not technically correct, so it is advisable to get a lawyer to prepare it.

The Statutory Demand requires the company to pay the debt or secure or compound the amount owed within 21 days of the date of the Statutory Demand “to the creditor’s satisfaction”. Those words require an objective test. It is for the Court to decide whether a creditor acted reasonably if he or she rejected a debtor’s proposal.

Creditors don’t need to obtain a court judgment first

One of the significant advantages of Statutory Demands is that creditors are not required to first get a judgment against the debtor company. This means that in the right circumstances, it is a quick and cost-effective alternative to court proceedings as a way to force a company to pay money that is rightfully owed.

If a judgment has not been obtained then there must be an affidavit accompanying the Statutory Demand, verifying that the debt is due and payable and that it complies with the Corporations Rules. Note that, if the Statutory Demand does not rely on a judgment and it is not accompanied by an affidavit, it will be set aside.

How a Statutory Demand is served

A Statutory Demand can be served by:

• leaving is at the registered office of the debtor company,
• sending it by ordinary pre-paid post to that office, or
• delivering a copy personally to a director of the company who resides in Australia

Where a creditor becomes aware that the company no longer occupies the registered address and the creditor is aware of the new address, then he or she should bring the Statutory Demand to the notice of the company at that new address.

Accountants need to be very careful here. Often accounting firms are the registered offices for many of their clients. Should they receive a Statutory Demand and fail to deal with the document or ignore it then the accountants themselves could be liable in negligence.

Resisting a Statutory Demand

If a company wishes to have a Statutory Demand set aside, it must apply to the Court within 21 days of service of the Statutory Demand and it must serve the application to set aside and the supporting affidavit on the person who made the demand within that 21 day period as well. This 21 day period is strict and cannot be extended.

The supporting affidavit should state all the grounds for making the application, rather than simply making an assertion that the debt is not due. If the affidavit is insufficient, it cannot be supplemented by a late affidavit served outside the 21 day period.

Reasons for setting aside a Statutory Demand

A Statutory Demand will usually only be set aside in one of the following situations:

• if the amount in fact owed is less than the statutory minimum ($2000),

• if there is a defect in the demand that would cause substantial injustice if the demand is not set aside, or

• if there is some other (good) reason why the demand should be set aside.

A Statutory Demand which has a defect can only be set aside where it causes substantial injustice. It will not be set aside if it was a demand within the terms of the Act and the defect is only a minor irregularity or misstatement.

Risks in Statutory Demands for both debtors and creditors

From a debtor’s point of view, the problem with the Statutory Demand is that once the time for compliance with the demand has expired, unless there is a valid application filed and served to set the demand aside, there is absolutely no opportunity of contesting the demand and the debtor can be forced to pay the debt and legal fees or risk being wound up.

A creditor using a Statutory Demand as a quick means of debt recovery can likewise have the whole thing blow up in its face. Where there is no judgment already obtained, all a debtor has to show to set aside a demand is that there is some genuine dispute which is why it is prudent to get debtor the debtor to acknowledge the debt, if that is possible, at an early point.