By Parnia Firouzabadi and Lara Wehbe Law Clerks of Matthews Folbigg, in our Insolvency, Restructuring and Debt Recovery Group
Receiving a statutory demand from a creditor claiming that your company owes money can be quite an overwhelming experience, particularly if you are unfamiliar with the process of responding to the demand and the legal implications of failing to do so.
On the other hand, it can be tempting (but extremely unwise) to treat a statutory demand like any other demand from a creditor. From the moment your company receives a statutory demand the clock is ticking, as such it is important that you act in a timely manner to either respond to, or comply with, the demand. In the event that your company fails to respond or comply with the statutory demand within the strict timeframe, it is presumed to be insolvent which may in turn lead to winding up proceedings.
What is a Statutory Demand?
A statutory demand is a formal, written request for payment of a debt, issued by a creditor to a debtor company, pursuant to Section 459E of the Corporations Act 2001 (Cth) (“the Act”). Upon receipt of the statutory demand, the creditor has 21 days to either:
- pay the debt;
- secure or compound for the debt;
- apply to have the statutory demand set aside.
What Happens If I Have Been Served a Statutory Demand?
A debtor company which fails to comply with the strict timeframe of 21 days to comply with, compromise the debt, or apply to set aside a statutory demand, must be presumed to be insolvent in any subsequent application to wind up the company: s459C(2)(a) the Act. This is the most common basis for winding up applications against corporations and may result in a company being wound up and a liquidator being appointed to sell the company’s assets.
Can I Challenge The Statutory Demand?
Depending on whether there are sufficient grounds, as a debtor company, you may within 21 days, apply to the Court (a Supreme Court or Federal Court having corporations jurisdiction) to seek an order to set aside the statutory demand: s 459G(1)-(2) of the Act. In such circumstances, as a debtor company you may choose to rely on either of the following grounds outlined in the Act:
- Genuine Dispute to the Existence of a Debt – (s 459H(1)(a))
This is one of the most common grounds raised when setting aside a statutory demand. In One GC MQ Park Pty Ltd [2024] NSWSC 8, the Supreme Court of NSW has outlined that if a “genuine dispute” exists, then a statutory demand will be set aside. The Court has emphasised that a “genuine dispute” is not an unreasonable threshold to satisfy. However, a genuine dispute “must be bona fide and truly exist in fact and the grounds for the dispute must be real and not spurious, hypothetical, delusionary, or misconceived” (at [13]). So whilst the bar is low to having a demand set aside, there is still a threshold which the debtor must cross.
Moreover, the Court noted that in determining the threshold question a court will be reluctant to consider questions of contractual interpretation: “It is usually inappropriate on an application to set aside a statutory demand that the court attempt to decide competing contentions as to contractual interpretation, partly because to do so might embarrass a judge before whom that issue arises and fundamentally because if the disputed question of contractual interpretation is arguable there will be a genuine dispute as to the existence of the debt, albeit one that does not depend upon a disputed matter of fact” (at [18]).
Proceedings regarding statutory demands are not the place to have a contested debate about a disputed debt. Typically, they come before the court with minimal supporting evidence which makes it more difficult for the court to examine the contract correctly. However, if the terms of a contract are “plain as a pikestaff”, then the court will be able to govern whether a “genuine dispute” is present (at [18]).
- The Company Has an Off-Setting Claim Against The Debtor – (s 459H(1)(b))
An off-setting claim is one which will decrease the sum claimed in the statutory demand. This seeks to ensure that a creditor asserting a claim is not in fact a debtor.
Section 459H defines an offsetting claim as “a genuine claim that the company has against the respondent by way of counterclaim, set-off or cross-demand (even if it does not arise out of the same transaction or circumstances as a debt to which the demand relates)”.
Under s459H(2) where there is an offsetting claim (or a genuine dispute about part only of the creditor’s debt) the Court must calculate the substantiated amount in accordance with the formula set out in that section – that is, the admitted amount total less the offsetting total. If the substantiated amount is less than the statutory minimum ($4,000), then the demand must be set aside.
Defective Demand That Will Cause Substantial Injustice Unless Set Aside & For Some Other Sound Reason – (s 459J))
A statutory demand may also be set aside by the Court if there is a formal defect in the demand itself. However, such a defect must be of a nature that will cause “substantial injustice” to the debtor company: s 459J(1)(a) of the Act.
Alternatively, if the court deems that there are any other sound reasons, then it may exercise its jurisdiction and set aside a statutory demand: s 459J(1)(b) of the Act. Under s 9 of the Act, a ‘defect’ is defined to include an: irregularity, misstatement of an amount or total, misdescription of a debt or other matter and a misdescription of a person or entity.
If you have been served with a statutory demand don’t panic! However, you need to act promptly and in particular you should consider seeking professional advice to assess the potential options available for your company to respond to the demand well before it expires. If a statutory demand is not handled properly, within the strict timeframe the presumption of insolvency will arise, and your company may face the risk of being wound up by order of the court. At Matthews Folbigg Lawyers, our specialised team can assist you with understanding the requirements of or contesting a statutory demand, depending on your circumstances. Remember, it is crucial to ensure compliance with the statutory demand within 21 days of being served. There are also other pathways which you may choose to consider in relation to the potential insolvency concerns which may be affecting your business and we have experts who can assist guide you through this process as well. If you are struggling to decide which path to take, our team can provide you with useful advice and guidance.
Get in touch
If you would like more information or advice in relation to insolvency, restructuring or debt recovery law, contact a Principal of the Matthews Folbigg Insolvency, Restructuring & Debt Recovery Group:
