WHAT IS A STATUTORY DEMAND?

Under section 459E of the Corporations Act 2001 (Cth) (“the Act”), a creditor (a person who is owed money by a company) may serve on a debtor company a document requiring payment of one or more debts if those debts are due and payable and amount to $2,000. This document is called a statutory demand.

MAKING A VALID STATUTORY DEMAND – WHAT TO KNOW AS A CREDITOR:

How to issue a statutory demand:

In short, a creditor can issue a statutory demand by completing and signing a Corporations Regulations Form 509H and serving it on the company by mailing it to the company’s registered office.

However, the Act imposes strict requirements for a statutory demand to be valid. A statutory demand should therefore be prepared with accuracy and careful attention and strict adherence to these requirements. The requirements for a valid statutory demand are outlined below.

Requirements for a valid statutory demand:

A statutory demand must:

• be in writing:
  • a copy instead of the original demand has been held to be sufficient;
• be signed by or on behalf of the creditor:
  • the demand may be signed on behalf of the creditor by:
    • the creditor’s solicitor;
    • if the creditor is a partnership – by a partner;
    • if the creditor is a corporation – by a director, secretary, or an executive officer of the corporation;
• be in the prescribed form:
  • the form prescribed is the Corporations Regulations Form 509H;
• relate to one or more debts and must specify the debt(s) and their amount;
• be validly served on the company:
  • pursuant to section 109X of the Act a document may be served on a company by leaving it at, or posting it to, the company’s registered office or delivering a copy of the document personally to a director of the company;
  • if the creditor is aware that the company no longer occupies its registered address and knows the new address of the company, the creditor should serve the demand at the new address;
  • if the creditor does not know the company’s new address, the demand should be served personally to a director of the company.

The debt(s) the statutory demand relates to must:

• be due and payable;
• amount to at least $2,000 (the current statutory minimum as defined by the Act);
• be a judgement debt OR accompanied by a supporting affidavit that verifies the debt is due and payable and that it complies with the rules of the court:
  • note: the date of the affidavit must be the same as the date of the statutory demand.

A multiple number of creditors are not allowed to serve a single demand on one company.

A creditor may not simultaneously serve a statutory demand and commence proceedings against the debtor company’s directors in relation to the same debt. The court may set aside a demand under section 459J(1)(b) if this is found.

Withdrawing a statutory demand:

If the requirements for a valid statutory demand have not been complied with, the company upon which the demand has been served may apply to have the demand set aside. If a demand is set aside, the creditor who served the demand will have to pay costs.

If a creditor recognises or becomes alerted to defects in a statutory demand it has served, it is advisable that the creditor withdraw the demand within the time specified for compliance (usually 21 days of service). Be aware that if a creditor withdraws a demand after the debtor company has applied to have it set aside, the creditor may still be ordered to pay costs.

Winding up a company:

If a company fails to comply with a statutory demand (i.e. it does not pay or apply to have the demand set aside within 21 days of service) the company will be presumed insolvent. A creditor may rely on the failure and the presumption of insolvency to make an application under section 459Q of the Act to the Supreme Court to wind up the company.

The presumption of insolvency means that the creditor can avoid the onerous and expensive task of proving that a company is insolvent. Note that the presumption only lasts for three months – if a winding up application is not made within three months of the demand it can no longer be relied upon.

Statutory demands should not be used as a means of quick debt recovery:

For debts other than judgement debts, all a debtor has to do is show that there is a genuine dispute regarding the debt to set the statutory demand aside. A court will not be interested in the merits of the dispute, all it needs to determine is that there is a question to be tried, which it usually does find, to set aside the demand.

Therefore, creditors using statutory demands as a quick avenue for debt recovery should be careful as they can quickly run into difficulties.

RESPONDING TO A STATUTORY DEMAND – WHAT TO KNOW AS A DEBTOR

How to respond to a statutory demand:

Once a demand is served on a company, the company will have to respond by one of the following actions within 21 days:

1. Pay the amount of the debt(s) demanded (or compound for that amount to the creditor’s satisfaction); OR
2. Apply to the Supreme Court to set aside the demand.

Setting aside a statutory demand:

A statutory demand can be set aside on the following grounds:

• Defect: There are strict requirements imposed for a statutory demand to be valid (see above). If the requirements are not complied with the receiving company can apply to have the demand set aside. If the court finds that the defect has caused substantial injustice to the company it will usually order the demand to be set aside.
• Genuine dispute: A statutory demand may be set aside if there is some genuine dispute as to the existence of or the amount of the debt(s). It will be enough for the debtor company to demonstrate that the dispute is arguable for the court to order it be set aside.
• Other reasons: Section 459J(b) provides that a demand may be set aside for ‘some other reason’. ‘Other reasons’ for which the court has set a demand aside have included:
  • a creditor serving a demand at the same time as proceeding against the debtor company’s directors in relation to the same debt; and
  • the demand containing grossly inflated amounts.

Alternative action:
Considerable work is required to apply to set aside a statutory demand. As a less expensive first resort, a company may decide to alert a creditor of any defects in the demand before filing an application. A creditor may then withdraw the demand. If the demand is withdrawn within the 21 days compliance period the company will not need to make an application to have it set aside. If the creditor withdraws after an application has been made a costs order may be made by the court against the creditor for the unnecessary expenses incurred by the company.

Time is of the essence:

It is important to review and pay careful attention to the requirements for a statutory demand as soon as it is served on you. Even if there is some dispute regarding the debt(s), if the company runs out of time to have the demand set aside, the only way to counter the demand will then be to pay the debt(s) (if resources are available) and avoid the serious consequences of non-compliance, and later sue for the money back.

Serious consequences of non-compliance:

If a company does not respond to a statutory demand within 21 days, the company will be taken to have failed to comply with the demand. It will then be presumed that the company is insolvent and the company will be susceptible to winding up applications.

To defend winding up applications, the company will have to provide detailed evidence of its solvency.

Even if the company is able to settle the debt with the creditor after winding up proceedings are commenced, there are circumstances in which the courts will allow other creditors to substitute the outgoing creditor’s place and continue the winding up of proceeds.

If you require any advice in relation to making or defending statutory demands, please do not hesitate to contact us at Lynn & Brown Lawyers.