Debt Recovery Against Companies – Statutory Demand

A Statutory Demand is a formal written request for payment of debts owed by a company, issued pursuant to the Corporations Act 2001 (Cth) (“Act”) http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/. Under the act the companies are prohibited from trading insolvent and incurring further debts.

The Statutory Demand is an initial step in the winding up process against an insolvent company. Thus, the Statutory Demand is a very powerful tool in recovering debts against companies, as ignoring it may result in the company being liquidated.

Once the Statutory Demand has been served upon a company, within 21 days the company must either:

(a) pay the debt(s) which is the subject of the Statutory Demand; or

(b) apply to have the Statutory Demand set aside.

Should the company fail to take either of those actions within the 21 day period, it will be deemed insolvent and any further operations by the company may be in the breach of the Act. If a Statutory Demand is not set aside, the creditor can make an application to the court that the company be wound up. The presumption of insolvency can be rebutted by the company, but it is not easily achieved and it is usually costly. Therefore, it is prudent not to ignore a demand once served on the company.

Grounds for setting aside the Statutory Demand

Under the Act the Demand should only be issued if there is no genuine dispute about the existence or the amount of the debt. The Act does not define what the genuine means, so the common law definition applies. Creditors need to be careful, as there only need to be a reasonable argument about the existence or amount of the debt alleged by the Statutory Demand and the threshold is relatively easily achieved.

Once the debtor company raises the issue of a genuine dispute, the creditor then has to make a decision whether or not it should withdraw the statutory demand. If the dispute is genuine then the creditor should withdraw the demand, as otherwise exposes itself to a judgment for costs if the company applies to the court to have the demand set aside. Giving the low threshold of proving the genuine dispute imposed on the debtor company, the issue of genuine dispute is not hard to prove. Therefore, creditors need to be careful when deciding whether or not to withdraw the demand after a genuine dispute defence has been raised. Given the potential consequences it would be prudent for the creditor to obtain a legal advice prior to issuing a Statutory Demand.

There are other grounds for setting aside a Statutory Demand, such as:

  • the amount of the debt claimed is less than the prescribed amount;
  • the amount of the debt is unspecified;
  • the Statutory Demand does not comply with the form (509H);
  • the Statutory Demand is not clear and fails to include the warning about the 21 day period;

(d) the accompanying affidavit verifying the existence of the debt is not a proper affidavit;

(e) the demand was not properly served on the company;

(f) the company has a genuine off-setting claim against the creditor; and

(g) the Demand is defective.

Case study

Here at elringtons, we have lawyers specialising in debt recovery against companies and individuals. This ensures that our clients are provided with quality legal advice and professional support.

Recently, we managed to recover circa $40,000 debt from a company for one of our clients with minimum costs. The debt had been outstanding for over two years when we received instructions. At first client’s instructions were that there was no genuine dispute regarding the debt owed. This is a usual response from our clients, based on common misconception of what a “genuine dispute” means. After reviewing the client’s documents, we realised that this was not the case. Consequently, we assisted client with liaising with the debtor company and reissuing new invoices. When the debtor company failed to pay the outstanding account again we served it with the statutory demand. Needless, to say the debtor company had only two choices after that, to pay the debt or be wound up. They chose to pay.

Whilst the Statutory Demand is a very powerful tool for recovering debts against companies, it must be done properly. Failure to do so may result in costly and prolonged legal proceedings with, sometimes, opposite effect.

For more information please contact our Civil Litigation team:

p:  +61 2 6206 1300 | e:  Info@elringtons.com.au