Author: Elyssa Maragoudakis
ADC Legal is frequently asked about what debt recovery methods are available when a debtor company does not pay money owed.
Section 459E of the Corporations Act 2001 (Corporations Act) enables creditors to formally demand and pressure a company to pay a debt owed by issuing a statutory demand.
Changes to Statutory Demands due to COVID-19
There are temporary changes which effect the operation of statutory demands.
These changes are governed under the Coronavirus Economic Response Package Omnibus Act 2020 (the Coronavirus Economic Response Act) which came into effect on 25 March 2020.
These regulations are tendered to automatically expire on 15 October 2020.
As such, these temporary changes under the Coronavirus Economic Response Act are as follows:
- The debt amount in which a creditor is owed has increased from $2,000 to $20,000, and
- The timeframe in which a debtor company must respond to a statutory demand has changed from 21 days to 6 months.
Who can issue and be issued with a Statutory Demand?
A statutory demand can be made by any person who a debt is owed to, or in the alternative, owed more than one debt.
Only certain legal entities can be issued with a statutory demand, including a company or a trust with a corporate trustee.
Unfortunately, a statutory demand cannot be issued to a partnership, a sole trader or a trust with a trustee who is an individual.
At ADC Legal, we can assist you in determining whether a debtor is in fact a company. In addition, we can recommend alternative debt recovery methods should a debtor be considered a different legal entity.
What are the considerations for issuing a Statutory Demand?
A statutory demand is a useful and effective debt recovery method if you are confident that a debtor company has no reasonable grounds to set aside the demand.
The strict 21-day requirement under the Corporations Act places pressure on a debtor to respond to your demand in a relatively short timeframe, prompting a solution. However, this timeframe has temporarily been increased which provides a debtor company which a longer period to respond to a statutory demand which should be taken into consideration.
We recommend that you consider the financial position of a debtor company prior to issuing a statutory demand, along with their circumstances for not paying the debt owed.
It is important to note that a debtor company will be deemed as insolvent if they fail to adhere with a statutory demand. As such, it may not be financially viable to attempt recovering money a debtor company does not have.
If a Court decides to set aside a statutory demand, there is a risk that you will need to pay the debtor company’s legal costs.
Prior to issuing a statutory demand, we can advise whether issuing a statutory demand is an appropriate and financially worthwhile means to recover your debt.
What are the requirements to serve a Statutory Demand?
In order to serve a statutory demand on a debtor company, the following requirements are necessary under the Corporations Act:
- A debtor company must owe a creditor at least $2,000 (now $20,000),
- The debt must be due and payable,
- A creditor is required to use a prescribed form (Form 509H), and
- Form 509H must be accompanied with an affidavit to verify that there is a debt and it is due.
How do you respond to a Statutory Demand?
Once a statutory demand is issued by a creditor, a debtor company will be required to respond.
A debtor company will have two options in responding to a statutory demand which are to:
- Pay the debt owed to the creditor, or
- Request that the statutory demand be set aside by the Court.
Alternatively, a debtor company can also engage with the creditor in an attempt to negotiate a settlement.
How do you set aside a Statutory Demand?
A debtor company can apply to the Court to have a statutory demand set aside.
This application must be accompanied with an affidavit that has been filed with the Court and served on the creditor who made the statutory demand.
The four grounds in which a debtor company can seek that a statutory demand be set aside include:
- There is a genuine dispute about the debt,
- A debtor company has an offsetting claim against the creditor,
- There is a defect in the demand which causes substantial injustice to a debtor company if not set aside, or
- Other reasons why the Court should set aside the demand.
What if a Debtor fails to comply with a Statutory Demand?
If a debtor company is unsuccessful in setting aside a statutory demand or alternatively does not pay the debt, a debtor company will be presumed to be insolvent as it is unable to pay its debts when they are due and payable.
A creditor will then be able to place an application with the Court to wind up the debtor company. This does not guarantee payment of a debt as the Court will not make an order for a debt to be paid in a winding up application.
Instead a liquidator will be appointed, and it will depend on the financial position of the debtor company to determine whether a creditor will recover the debt amount in full, in part or at all.
It is important to note that this application will involve additional costs and we would only advise pursing this action if it is financially worthwhile.
Contact us
ADC Legal can assist in understanding whether a statutory demand is the right debt recovery method for you.
Please feel free to contact our team at ADC Legal Litigation Lawyers on 1300 799 820 or via email at email@adclegal.com.au.