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If your company has an outstanding debt, you may have been served with a creditor’s statutory demand. This is a formal legal document that demands payment of an outstanding debt.

If a creditor has served you with a statutory demand, you have 21 days from the date you receive it to either:

  • pay the debt;
  • come to some other suitable payment arrangement with your creditor; or
  • make an application to set aside the statutory demand.

If you are unable to do any of the above, your company will be deemed insolvent. Your creditor can then take steps to wind up your company. However, there are four grounds or reasons on which you can set aside or defend against a statutory demand. This article will discuss these four grounds.

1. A Genuine Dispute

The most common ground for setting aside a statutory demand is a genuine dispute about the existence or the amount of the debt the statutory demand claims. It is up to you to convince the court that there is a “genuine dispute”. In practice, this is not too hard to do. You need to show that there is a plausible dispute requiring investigation. You do not need to prove that you are likely to be successful at any final hearing.

2. You Have an Offsetting Claim Against the Creditor

An offsetting claim is any genuine claim you have against the creditor. This includes:

  • counterclaims;
  • set-offs. This is when you have a right to balance a mutual debt with your creditor); and
  • cross-demands. This is a demand that you make against your creditor.

Your claim against the creditor does not need to be about the debt in the statutory demand. Again, you do not need to prove that you will be successful. You only need to prove that there is a genuine offsetting claim.

3. Defect in the Statutory Demand and Substantial Injustice

If there is a defect in the statutory demand, you can have the statutory demand set aside. A defect is defined in law as:

  • a lack or absence of something necessary or essential for the statutory demand to be considered complete;
  • a shortcoming or deficiency; or
  • an imperfection.

Common examples of defects resulting in a court setting aside a statutory demand include where:

  • there is an inconsistency in the amount the statutory demand claims; or
  • the description of the debt is misleading or ambiguous.

Note that the defect must be in the statutory demand itself and not any other supporting document.

There will be a substantial injustice if the statutory demand is likely to:

  • cause confusion;
  • mislead you, the debtor company, in some way; or
  • fail to inform you of the substantive requirements of the Corporations Act 2001.

Minor errors will generally not amount to a substantial injustice.

4. Other Reasons for Setting Aside the Demand

There must be a sound reason to set aside the statutory demand for some other reason, including:

  • failure to provide a supporting affidavit along with the statutory demand. An affidavit is a written statement used as evidence in court which is confirmed by oath or affirmation;
  • where the affidavit supporting the statutory demand fails to verify the amount of the debt or that the debt is due and owing; or
  • where the affidavit and the statutory demand are not signed at the same time.

On the other hand, the fact that the debtor company is in fact solvent is not a ground for setting aside a statutory demand.

What About Ineffective Service?

Ineffective service is when a claim is not properly brought against you. Usually, the person bringing the claim against you has failed to follow the correct process. A court can only set aside a statutory demand that has been served on your company. This means that ineffective service is not a valid reason for setting aside a statutory demand. Rather, you should raise ineffective service during any subsequent winding up application. If you can prove ineffective service, you will be successful in defending any winding up application.

When a creditor is serving a debtor company interstate, service of the statutory demand is ineffective if the statutory demand:

  • is not accompanied by notice. Notice is a document that formally begins proceedings in court. It also informs you about the claim; or
  • does not contain an address for payment that is in your state.

Key Takeaways

If your creditor has served you with a creditor’s statutory demand, you may have a valid reason to set it aside. This may be:

  • a genuine dispute;
  • an offsetting claim you have against your creditor;
  • a defect in the statutory demand or a substantial injustice; or
  • another valid ground.

If you think you have a valid ground to set aside a statutory demand, you must bring an application to set it aside within 21 days of receiving the statutory demand. If you have questions about setting aside a creditor’s statutory demand, get in touch with LegalVision’s dispute resolution lawyers on 1300 544 755 or fill out the form on this page.

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