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Creditors Statutory Demands – Short Cut to Cash or Catastrophe?

Creditors Statutory Demands are a relatively cheap but powerful tool which can produce significant results quickly and efficiently, saving months on a long drawn out debt recovery process. However, with great power comes significant risk, and creditors need to understand when and how best to make use of this short cut, without getting lost in a labyrinth of litigation.

What is a Statutory Demand?

A statutory demand is a formal prescribed notice issued to a debtor company by a creditor pursuant to section 459E of the Corporations Act 2001 (Cth) (“the Act”). The demand is for the debtor to pay the outstanding debts within the statutory period of 21 days, or be presumed to be insolvent and face the risk of a winding up application being filed against the debtor company. Issuing a statutory demand however is subject to certain criteria stipulated in the Act. Section 459E states that a statutory demand can be issued to a person in respect of one or more debts, totalling the statutory minimum of $2,000 and must:

  • Be in writing; and
  • Be in the prescribed form (form 509H which is the prescribed form in Schedule 2 and identified in regulation 1.0.03 of the Corporations Regulations 2001 (Cth) (“the Regulations”); and
  • Must be signed by or on behalf of the creditor.

Where the debt being recovered is not a judgment debt, the statutory demand must be accompanied by an affidavit that verifies that debt is due and payable by the company (s 459E(3)). A statutory demand in its correct form can be served pursuant to s 109X of the Act in the following ways:

  • Leaving it at the company’s registered office
  • Posting it to the company’s registered office
  • Delivering the document personally to a director who lives in Australia.

I have received a Statutory Demand, what do I do?

If a debtor company wants to challenge and set aside the statutory demand received, an application must be filed within 21 days of service of the statutory demand. This is a strict time limit so it is critical that action is taken promptly. Debtors can challenge a statutory demand and may do so by relying on the following grounds outlined in the Act:

  • A genuine dispute to the existence of a debt (s 459H(1)(a))

The most common ground for applying in the Supreme Court or Federal Court to set aside a statutory demand is on the basis of a genuine dispute about the existence or amount of the debt. It is important to understand that this does not require proof of whether or not the dispute is legitimate, merely whether there is sufficient evidence to satisfy the Court that indicate an arguable case.

The Court will not decide the dispute. Instead, if it finds there is a ‘genuine dispute’ it will set aside the demand, and almost certainly order costs against the creditor. It is therefore important to consider whether a debt is likely to be disputed before issuing a statutory demand, even if the creditor does not accept that any dispute is likely to succeed. Having a Supreme Court or Federal Court costs order against the creditor can have a catastrophic effect on the creditor’s further attempts to recover a debt and can sometimes leave the creditor as a debtor, depending upon the amounts involved.

Consider carefully the evidence that supports the existence and amount of the debt; what responses have been received to the debt, any acknowledgements of the debt owed or disputes raised, and the merits of these alleged disputes.

Although the Courts have set the bar fairly low to set aside a demand, the evidence needed must still be detailed enough to establish genuine dispute. So it is not necessarily the case that a statutory demand may not be used simply because the debtor alleges a dispute, if the dispute is obviously not genuine. Seek expert advice on when a statutory demand may be best for your debt, or if you are a debtor, whether a court will accept a dispute is genuine.

  • The company has an offsetting claim against the creditor (s 459H(1)(b))

A statutory demand may also be set aside (or the amount payable reduced) where the debtor has a set-off, counter-claim or cross-demand against the creditor. An offsetting claim when deducted from the amount demanded by the creditor results in an amount less than the statutory minimum. The debt owing must be more than $4,000 (459E(1) and s9 definition of “statutory minimum”, together with regulation 1.1.0 and Schedule 4 of the Regulations) therefore if the balance of the debt does not exceed or equal this amount, you may seek an order to set aside the demand.

  • Defective demand that will cause substantial injustice unless set aside (s 459J(2); or

Formal defects in the statutory demand may form the basis of an application to set aside the demand however such a defect must be of a substantial nature that will cause significant injustice to the debtor.

  • For some other reason (s 459J)

Other sound reasons to set aside a statutory demand may be decided upon by the satisfaction of the Court, pursuant to the general discretionary power stipulated in s 459J. There are some tricky questions in relation to this basis (see for instance our article on some relatively recent cases on this section)

Failure to comply with a statutory demand leads to a presumption of the debtor’s insolvency: s 459C(2)(a) of the Act. This is the most common ground for application to wind up a company. However it is also important to remember that this is only a presumption. If a debtor company proves that it is solvent, then the winding up application will be dismissed and the creditor will again normally be ordered to pay the debtor’s costs, and forced to recover the debt in another way. A statutory demand is a powerful short cut for the right matter, but picking the right matter is an important part of the process.

If you are thinking of service a creditors statutory demand, it is well worthwhile seeking legal advice regarding whether and how to a demand will serve your purposes most effectively. If you have been served with a statutory demand it is critical to engage a lawyer urgently to ensure you have time to take the best steps to deal with the notice and maximise your chances of success.

Matthews Folbigg Lawyers has a specialist team dedicated to Insolvency, Restructuring and Debt Recovery. If you would like more information or advice in relation to Insolvency, Restructuring or Debt Recovery practice and procedure, please contact Stephen Mullette or Jeffrey Brown on (02) 9806 7459 or (02) 9806 7446, or email stephenm@matthewsfolbigg.com.au or jeffreyb@matthewsfolbigg.com.au