A statutory demand is a demand sent to a debtor company and can be a beneficial tool to recover your money. Although it is not designed to be a debt recovery tool (originally intended to be part of the winding up process), it can be a real incentive for your debtor to pay its debts. This article unpacks some further information about statutory demands and the benefits and risks of issuing a statutory demand.
What is a Statutory Demand?
A statutory demand is a document that a creditor can issue to require a debtor company to pay its debt within 21 days. A statutory demand can be served under s459E of the Corporations Act (Cth).
If the debtor company fails to:
- pay the debt (or come to a suitable arrangement with the creditor); or
- make an application to set it aside within that time period,
- then the company is presumed to be insolvent.
Once there is a presumption of insolvency, then it is open to the creditor to commence proceedings to wind up the debtor company. These proceedings can be issued in the Federal Court or a State Supreme Court.
What is Considered a Debt?
A statutory demand can only be issued when a debt is over $2,000 and is due and payable. That is, you can’t issue a statutory demand if the debt is:
- contingent, or
The debtor company must be able to clearly put a dollar value on what is being demanded from them. If a debtor company has more than one debt with you, you are not required to issue multiple statutory demands. You can just issue one demand that clearly specifies the total debt owed to you and how the debts have arisen.
The Form of the Statutory Demand
The Corporations Act specifies the form a statutory demand must take (Form 509H). A statutory demand must be in writing and must also be signed by or on behalf of the creditor.
You also need correctly to state the debtor’s company name and its registered office. We recommend that before issuing a statutory demand a new company search for the debtor company is obtained.
It is also essential that the demand specifies a place in Australia where the debt can be paid. That is, generally your office or your solicitor’s office.
There are two ways you can ‘support’ your statutory demand – either with a judgment of the Court or an affidavit. If you do not have a judgment and an affidavit does not accompany it, then the statutory demand will be set aside.
Statutory demands are a frequent source of litigation, particularly because of the dire consequences if a debtor company does not comply with it! The general test is that a statutory demand ‘substantially complies’ with the Act and form. The Court must be satisfied that a debtor company has not been misled by the demand. In reality, the key components such as the debt, address for payment, the name of the debtor, etc. are paramount to ensuring the statutory demand is valid.
How to Serve a Statutory Demand
As set out above, the debtor company’s registered address needs to be clearly set out on the statutory demand. The registered address is where the statutory demand needs to be served, either by post or delivering it to the registered office. Additionally the statutory demand can be delivered to the director of the company at an address in Australia. This can be prudent if a company has left their registered address but you don’t know where the company has moved.
For that reason, we recommend undertaking an up-to-date company search for the debtor company before drafting it.
As the statutory demand is an instrument of a Commonwealth Act, it is available Australia wide, and can be served interstate. When attempting service of a statutory demand interstate a creditor must be mindful of the Service and Execution of Process Act 1992 (Cth) which provides guidance for interstate service.
The address for payment and the address to serve any application to set aside the default judgment MUST be in the same jurisdiction in which it is served. That means if you issue a statutory demand to a debtor company in NSW you need an address in NSW.
Benefits of a Statutory Demand
The presumption of insolvency that occurs if a debtor company does not comply with a statutory demand can be an incredibly powerful motivator for a debtor company. Obviously having a presumption of insolvency hanging over them can carry risk, and suddenly a dialogue might open up between the parties.
Despite the process not being designed to be a debt recovery tool, undoubtedly it can prove to be effective in helping a party recover a debt.
The Court process to recover a judgment and then commence wind up proceedings can be lengthy and expensive. The statutory demand process can be a faster and far more efficient to bring winding up proceedings.
Risks of a Statutory Demand
The obvious risk is that a debtor company makes an application to set aside the statutory demand. This is usually forewarned in correspondence first so a creditor has an opportunity to withdraw the statutory demand. If the debtor company does make an application to set aside the statutory demand and is successful, then it may be entitled to also recover their legal costs of the application.
Creditors need to be aware that the potential costs orders are not insignificant. In the case of Niruzzi Pty Ltd heard by the Supreme Court in 2012, the matter was resolved by consent in favour of the plaintiff (that is, in favour of the debtor company seeking to set aside the statutory demand). In those proceedings, it also involved the transfer of the matter to the Supreme Court of South Australia. The evidence before the Court showed that the costs were around $38,000, and the Court determined that the amount of $22,500 was fair and reasonable costs on a party/party basis. This is not small change!
The Court can set aside a statutory demand on a number of grounds including:
- the debtor company has an offsetting claim against the creditor (which would reduce the debt below the statutory minimum); or
- there is a genuine dispute about either the amount of the debt or the debt itself.
If you have not obtained a judgment against a debtor company, then it is easier for a debtor to set aside a demand on the basis there is some ‘genuine dispute’. When a Court is considering this, the merits of the dispute are not required. There just needs to be a ‘serious question to be tried’. What this means is that the bar to jump over is not as high as it would ordinarily be.
A debtor company can still oppose a wind-up application, generally on the basis that the company is solvent. If a creditor utilises a statutory demand, then the only enforcement option is winding up proceedings.
Of course, creditors should also be mindful throughout this process (and any debt recovery process) of the real chance that you may not be able to recover funds from a debtor company because there aren’t any! If you have doubts about a debtor company’s ability to repay, we may be able to make preliminary inquiries about possible assets owned by it.
I Have Received a Statutory Demand – What Can I Do?
The consequences in not responding to a statutory demand are severe. Section 459C(2) of the Corporations Act states that the presumption of insolvency lasts for three months after the demand is served. That is, a creditor company has three months after service of a statutory demand (not complied with) to issue winding up proceedings.
If you are served with a statutory demand and wish to apply to set it aside it must be made within 21 days. This is done via an application and a supporting affidavit. When preparing a supporting affidavit you need to ensure it is fairly detailed. It is not enough to say the debt is not due.
The Act provides a number of reasons to set aside a statutory demand including:
- The amount owed is less than $2,000 (the statutory minimum).
- There is a defect in the statutory demand that would cause substantial injustice if it was not set aside.
- There is ‘some other reason’ why the demand should not be set side.
If your company is served with a statutory demand then, real consideration should also be given by the directors to whether the company is in fact insolvent.
Statutory demands are quite a powerful weapon in a creditors arsenal. Despite the fact they are not designed to be used as a debt recovery means, it can be an efficient means of recovering debts. There are however risks if it is not done correctly. For that reason, it is advisable to seek the advice of a lawyer before proceeding with one.
If you are served with a statutory demand, we cannot stress the importance of dealing with it promptly. Once you are out of time, you are out of time! If you are out of time, then it is recommended that you pay the debt in full to avoid the wind-up proceedings, then commence separate proceedings to recover the amount of money you have just paid. If you would need advice on statutory demands – whether you want to issue one, or if you are served with one, we can assist you. Get in touch with LegalVision’s dispute lawyers by calling us on 1300 544 755 or filling out the form on this page.