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If you are chasing a company over an unpaid debt, one option is to send a statutory demand. Depending on the context, statutory demands can be used as both as a means to have a court order them to pay the debt, or as a debt recovery tool if you presume that the company is insolvent. This article will outline: 

  • how a statutory demand works; 
  • the pros and cons of using a statutory demand; and 
  • how your business can use them strategically.

What is a Statutory Demand

A statutory demand is a letter which follows a prescribed format set out in legislation. You can send a statutory demand to a company which owes you a debt of $2,000 or more.

The key points to remember are that the:

  • party that owes the money must be an incorporated company, rather than a sole trader, partnership or a trust; and
  • debt must be legitimate. You will need to attach supporting documentation to your statutory demand to demonstrate this.

How Does it Work?

You send a statutory demand directly to the debtor, rather than to the court. Once you have sent the demand, the debtor will have a 21-day window either:

  • pay the debt,
  • apply to the court to set the statutory demand aside, or
  • request that you withdraw the statutory demand.

The demand is an effective tool because the company must respond quickly to avoid facing serious consequences. This includes being presumed insolvent if they do not respond after the 21 days.

Is It Easy for the Debtor to Set the Demand Aside?

If the debtor does not want to pay or negotiate with you to have the demand set aside, their only option is to apply to the court to set it aside. To do this, they will have to prove to the court that there is a genuine dispute over the existence of a debt or the amount of money they owe you.

As mentioned above, when you prepare a statutory demand, you will need to attach something which demonstrates that the debt is legitimate. You can either attach:

What is an Affidavit?

An affidavit is a written statement for use as evidence in court. In the context of a statutory demand, this will be the document in which you will affirm that you believe that there is no genuine dispute about the existence or amount of the debt.

Using an affidavit allows your debtor to dispute your claim. It can be quite easy for a debtor to prove a genuine dispute, particularly if there is some ambiguity or subjectivity in the transaction that led to the initial payment issues. Take caution if you are issuing a statutory demand for a tenuous claim because if the debtor is successful applying to the court to set aside your demand, you will usually have to pay their legal costs.

What is a Judgement Debt?

A judgement debt is a court order outlining that the other party owes you money. If you include a judgement debt with your statutory demand, it will have a much higher chance of success. It is incredibly difficult for the debtor to argue that there is an ongoing dispute over the debt when a court has already issued a judgement in your favour.

If you are sending a statutory demand after court proceedings, the demand becomes more of an enforcement tool. The other party’s only option will be to appeal the existing court judgement.

However, obtaining a judgment debt before filing a statement of demand is slower than using an affidavit. This is because you need to obtain a judgement first. If the company you are recovering debt from is close to insolvency and you need to urgently file a statement of claim, this option may be too slow for you.

What Happens if They Do Not Respond in 21 Days?

If the 21-day time limit on your statutory demand lapses and the debtor has not attempted to set it aside, they will automatically be presumed insolvent. Insolvency means the company cannot afford to pay its debts when they fall due. Being insolvent has two major implications:

  1. it is illegal to continue trading while insolvent. If a company continues to trade, their director(s) could be personally liable for any further debts that the company accumulates; and
  2. you will have the option to apply to wind up the company. You will have a three-month window in which you can apply to the relevant court to wind up the company. 

After you apply to wind up the other party, it will be up to the company to prove that they are solvent.

Will I Get My Money Back if I Wind Up the Company?

Applying to have a company wound up does not guarantee repayment. When a company is wound up, the creditors will be paid out in the following order: 

  1. secured creditors will have their debts repaid, based on the sale of the company’s secured assets;
  2. as the applicant of the winding-up order, you will have your legal costs reimbursed; and
  3. all remaining unsecured creditors will be paid proportionately from whatever funds remain.

If you are an unsecured creditor, and the company is insolvent, the chances that you will recover the full debt are not in your favour. Depending on how indebted the company is, you may not be able to claim your legal costs. 

Is It Possible to Confirm the Company’s Financial Position?

If you have already received a judgement debt, the statutory demand is not the only enforcement tool you have available. You can also send an examination notice to the debtor to request information about their: 

  • revenue;
  • assets; and 
  • liabilities.

If they ignore the notice, you can apply to the court for an examination order.

If you have received a judgement debt and are not sure whether a statutory demand and winding up application will be commercially viable, it may be appropriate to send an examination notice first.

Key Takeaways

A statutory demand can be an effective debt recovery tool. This is because the debtor company’s failure to respond has major consequences, including being presumed insolvent. You can issue a statutory demand after a court-ordered debt as an enforcement tool, or issue it to initiate debt-recovery proceedings. If you have questions about issuing statements of claim, contact LegalVision’s debt recovery lawyers on 1300 544 755 or fill out the form on this page. 

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Simon Hillier | Disputes and Litigation Lawyer | LegalVision
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