A statutory demand is a document sent to a debtor company, requiring it to pay a debt owed. Although this type of demand was not designed to be a debt recovery tool, you may be able to use it to recover your money from someone else. This article explains what a statutory demand is, as well as the risks associated with sending such a demand.
What is a Statutory Demand?
A statutory demand is a document issued by a creditor. It requires a debtor company to pay a debt it owes within 21 days. 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 put a dollar value on what is being demanded from them. If a debtor company has more than one debt, you are not required to issue multiple statutory demands. You can just issue one demand that specifies the total debt owed to you and how the debts have arisen.
What Form Should a Statutory Demand Take?
The Corporations Act specifies the form a statutory demand must take. A demand may be thrown out if it does not substantially comply with the form specified by the Act, or if the debtor company has been mislead by the demand. You also need to use Form 508H for your statutory demand and ensure the demand:
- is in writing;
- has been signed by you or on your behalf;
- states the debtor’s company name and its registered office. You should obtain a new company search for the debtor company before issuing your statutory demand;
- states the total amount of debt owed; and
- specifies a place in Australia where the debt can be paid. Generally, this is your office or solicitor’s office.
There are two ways you can ‘support’ your statutory demand:
- with a judgment of the Court; or
- an affidavit.
If a judgment or affidavit does not accompany your statutory demand, then it will be set aside.
How Do You Serve a Statutory Demand?
Statutory demands may be served to people or companies across Australia. When attempting service of a demand interstate, you must be mindful of theService and Execution of Process Act, which provides guidance for interstate service.
The debtor company’s registered address is where you need to serve the statutory demand, either by post or personal delivery. You can also serve the demand to the company director, so long as their address is in Australia. You may decide to do this if the company has moved and you are not sure what its new registered address is.
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.
What Are the Risks of a Statutory Demand?
A debtor company may file an application to set aside a statutory demand you have served on them. If it is successful, then it may be entitled to recover their legal costs of the application. You should be aware that the potential costs orders are not insignificant.
The court can set aside a statutory demand for a number of reasons:
- 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.
There is also the risk of a debtor company not being able to repay the debt. If you have concerns regarding a company’s ability to pay, you should make preliminary inquiries about the assets it owns.
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.
What Happens When a Debtor Company Receives a Statutory Demand?
The presumption of insolvency lasts for three months after the demand is served. During this period, if a debtor company has not responded to your statutory demand, you may issue winding up proceedings. However, a debtor company may wish to make an application to set aside your statutory demand. It needs to do this within 21 days of service of the demand and attach a supporting affidavit to the application. The Corporations Act provides a number of reasons to set aside a statutory demand:
- the amount owed is less than $2,000, which is the statutory minimum;
- there is a defect in the statutory demand that would cause substantial injustice if it was not set aside; or
- there is ‘some other reason’ why the demand should not be set side.
If a company owes you money, you have the option of serving it with a statutory demand. However, you should receive legal advice before doing so. It is important that you understand how to set out a statutory demand and what you are expected to file with your demand. You also need to understand the process of serving a demand, as well as the risks associated with serving one. If you have need help drafting a statutory demand, contact LegalVision’s debt recovery lawyers on 1300 544 755 or fill out the form on this page.
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