There are a number of methods by which to secure repayment of a debt. For individuals, letters of demand and initiating proceedings in small claims jurisdictions are often suitable and effective options. However, when it comes to debts owed by companies, a more aggressive approach is sometimes called for, and statutory demands can be excellent at fulfilling this purpose.
What is a statutory demand?
A statutory demand is a formal written request by a creditor for payment of a debt or debts owed by a company, issued pursuant to section 459E of the Corporations Act 2001 (Cth) (“the Act”). It is an initial step in the winding up process against an insolvent company. This means that it can be a highly effective tool with which to induce a company to repay its debts, because, should a company ignore it, it may be liquidated. Further, because of the implications of ignoring a statutory demand, and the tight, 21-day window within which companies are required to respond, it can prove effective in inducing a response from an unresponsive debtor.
What are the features of a statutory demand?
The Act dictates certain requirements for a statutory demand to be valid, and it is important that creditors adhere to them to avoid the statutory demand being set aside. The statutory demand must be:
- Prepared pursuant to the prescribed form (Form 509H); and
- Accompanied by an affidavit verifying that the debt is due and payable.
What can a company do when they receive a statutory demand?
Once the statutory demand has been served upon a company, within 21 days the company must either:
- Pay the debt(s) which is the subject of the statutory demand; or
- Apply to have the statutory demand set aside.
In order to apply to have the statutory demand set aside, the company must identify a ground on which to challenge it.
Grounds for setting aside a statutory demand: Genuine dispute
A debtor company can apply to have the demand set aside if there is a genuine dispute about the existence or amount of the debt. The threshold for what constitutes a genuine dispute is not high, with the court defining it as whether the debtor company has satisfied the court that there is a serious question to be tried about the size or existence of the debt. Ordinarily, it will be sufficient to identify a “plausible contention requiring investigation”, in the sense that the dispute is put forward in good faith and that the grounds for alleging the existence of a dispute are not spurious, illusory or hypothetical.
Therefore, creditors should only issue a statutory demand if there is no genuine dispute about the debt, or consider withdrawing the demand once the debtor company raises the issue of a genuine dispute. If the creditor does not withdraw the demand and the company successfully obtains a court order to have the demand set aside, the creditor may need to pay the company’s costs in making the application. Given the potential consequences it would be prudent for the creditor to obtain legal advice prior to issuing a statutory demand.
Other grounds for setting aside a statutory demand
- the amount of the debt claimed is less than the statutory minimum;
- the amount of the debt is unspecified;
- the statutory demand does not comply with the prescribed form (Form 509H);
- the statutory demand is not clear and fails to include the warning about the 21-day period;
- the accompanying affidavit verifying the existence of the debt is not a proper affidavit;
- the demand was not properly served on the company;
- the company has a genuine off-setting claim against the creditor; and/or
- the statutory demand is defective and will cause substantial injustice if not set aside.
What if a company doesn’t respond to the statutory demand?
Should the company fail to pay the debt(s) or apply for the statutory demand to be set aside within the 21-day period, it will be presumed insolvent and any further operations by the company may be in the breach of the Act. The presumption of insolvency can be rebutted by the company, but it is not easily achieved and it is usually costly. The creditor can then make an application to the court for the company to be wound up, and the court may appoint a liquidator. For this reason, the implications of a statutory demand can be significant, and it is accordingly prudent not to ignore a statutory demand once served on the company.
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 a significant sum from a company for one of our clients. The debt related to invoices which had been outstanding for over 6 months and there was no genuine dispute regarding the debt owed. Our client had been chasing payment for quite some time and the debtor company had started to dodge their calls! An initial letter of demand from our office resulted in part of the original debt being repaid, but over $20,000 remained due and owing. A statutory demand was issued and the debtor company was left with only two choices: 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, the opposite effect.
If you’ve been served with a statutory demand, or are having trouble recovering debts owed to you by a company, elringtons lawyers can help.
For further information in relation to debt recovery:
elringtons lawyers regularly provide legal advice in relation to a range of debt recovery matters. Please contact our Litigation and Dispute Resolution Team for more information or to make an appointment.
