Statutory demands: What are they, why would I use one and how?

Need to chase a debt from a company? Do you operate a company and someone has issued you a statutory demand? Here is a quick summary of statutory demands and how they work.

What is a Statutory Demand?

A Statutory Demand is a formal written request for payment of debts owed by a company, issued under Part 5.4 of the Corporations Act 2001 (Cwlth) (the Act) (the Demand).

The core intention of the Act is to prevent companies from trading whilst insolvent and thereby incurring further debts which will not be repaid.  It is a useful tool for chasing outstanding debts as it is an initial step in the winding up process. It is, however, just an initial step in the wind-up process, and therefore should be prepared and considered very carefully.

Why use one?

Firstly, because you could see the money owed to you paid quickly. If the debtor does not pay or apply to the Court to set the Demand aside, within 21 days there is a legislative presumption that the debtor is insolvent.

Once that presumption arises, the creditor who served the Demand can apply to the Court for an order winding up the debtor (i.e. placing the company into liquidation). The onus is on the debtor to then prove to the Court that it is in fact solvent and can pay its debts.  This can be a costly exercise and often easier for a debtor to simply pay the original debt.

The risks of issuing a Statutory Demand

The main risk to a creditor in issuing a Demand is incurring unrecoverable expense if it is successfully challenged by the debtor and overturned by the Court.

The Demand may be set aside on a number of grounds, including:

(a)     the amount of the debt(s) claimed is less than $2,000.00 or for an unliquidated amount;

(b)     there is a genuine dispute about the debt;

(c)     the Statutory Demand is defective by failing to comply with the prescribed form;

(d)     the Statutory demand is not properly served upon the company;

(e)     the company has a genuine off-setting debt against the creditor;

(f)      there is some other defect in the Statutory Demand that will cause substantial injustice unless set aside.

If the debtor is successful, the Court can order the creditor to pay the legal costs of the debtor for wasting its time and money. Therefore, it is not wise to proceed with the demand without first undertaking suitable investigations and attempts to resolve the outstanding debt to limit any risks.

An example of circumstances where a Statutory Demand was set aside is the matter of  AAP Investments (Aust) Pty Ltd [2015] NSWSC 1049, which involved a creditor who issued a Statutory Demand based on a debtor failing to pay monies required by a judgment that had been obtained. However, the debtor successfully applied to the Court to have the judgment set aside as there was a genuine dispute over the debt and the creditor had to ultimately pay costs.

Reducing Risk

The creditor may reduce the risk of the Demand being set aside by:

(a)     investigating the debt;

(b)     liaising directly with the company;

(c)     sending letters of demand;

(d)    investigating the solvency of the company.

If the creditor is satisfied that there are no grounds for the Demand to be set aside, and there is a suspicion that the company is insolvent, then issuing a Demand may be the appropriate course of action.

It can be difficult for a creditor to determine the best time to issue a Demand or whether a Demand is the most suitable course of action to pursue the debt without exposing any risks. If you receive a Demand or are thinking that you may need to issue a Demand we can assist.

 

Please feel free to contact our experienced Disputes and Litigation solicitors

Special Counsel – Shannon Say & Solicitor – Sam Ryan-Baker

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