A statutory demand is an effective and (relatively) inexpensive method for a creditor to recover a debt of at least $2,000.00 owed by a company. Statutory demands provide a powerful incentive to companies to pay their debts. By failing to comply with a statutory demand the Courts will presume the company is insolvent and creditors may apply to have the company wound up on the basis of that failure and its presumed insolvency. Allowing this presumption to arise may tarnish a company’s standing and rebutting this presumption can be a costly exercise.
Overview
A statutory demand is a formal request made by a creditor for the payment of debts owed by company, issued pursuant to Part 5.4 of the Corporations Act 2001 (Cth). In serving the public interest, this statutory regime functions as a tool to prevent or discourage companies from trading whilst insolvent and potentially incurring further debts which will not be repaid.[1]
It is common for creditors to use statutory demands to ascertain whether a company can pay its debts and to compel a company to do so. A company on which a correctly formulated statutory demand has been served has 21 days within which to either:
- Comply with the demand and pay the demanded sum[2];
- Negotiate a settlement with the creditor;
- Apply to have the statutory demand set aside[3]; or
- Not pay the demanded sum and allow the presumptions of insolvency to arise[4].
Courts’ Position
While statutory demands are a tool commonly used by creditors as a means of compelling a company to pay its debts, doing so may be frowned upon and it has been long established that it [may] amount to an abuse of process. The Courts have often followed the approach of Sir George Jessel MR in Niger Merchants Co v Capper that, “[w]hen a company is solvent, the right course is to bring an action for the debt”, and concluded, “[s]o, to pursue a winding-up petition in such circumstances is an abuse of process of the court.”
Mandatory Requirements
Section 459E of the Corporations Act 2001 sets out the requirements for statutory demands. They must:
- Be in writing;
- Relate to a debt, or debts, which total at least $2,000.00;
- Be due and payable to the person making the statutory demand;
- Specify the total amount of the debt;
- Require that the debtor company pay the demanded sum within 21 days after being correctly served;
- Be signed by or on behalf of the creditor;
- Be in the prescribed form; and
- Unless it is a judgment debt, be accompanied by an affidavit that verifies the amount due and payable.
Risks for Creditors
Setting aside:
The company against which the statutory demand has been issued can apply to the court to have it set aside.
A court may set aside a statutory demand if it is satisfied that:
- there is a genuine dispute between the company and the respondent about the existence or amount of a debt to which the demand relates[5];
- The company has an offsetting claim[6];
- Because of a defect in the demand, substantial injustice will be caused unless the demand is set aside[7]; or
- There is some other reason why the demand should be set aside[8].
Importantly, if a company is successful in its application, the Court will likely order the creditor to pay the company’s legal costs of that application.
Creditors should be particularly aware of the most common mistakes fatal to a statutory demand. They include:
- Failure to comply with the prescribed form;
- Reliance on a disputed debt;
- Incorrect service of statutory demand; and
- Reliance on an inadequate affidavit.
The debt may not be paid:
It is important to note that a company’s failure to comply with a statutory demand, or to have it set aside, will not create any legal right for the creditor to enforce the debt. If the company chooses to be wound up, the creditor that issued the statutory demand will still need to prove the debt.
Furthermore, even if the creditor can prove the debt, they may be left empty handed as the last in line of a long list of priority creditors.
[1] Scolaro’s Concrete Construction Pty Ltd v Schiavello Commercial Interiors ( Vic) Pty Ltd (1996) 62 FCR 319 per Sheppard J
[2] Corporations Act 2001 (Cth), s 459F
[3] Corporations Act 2001 (Cth), s 459G
[4] Corporations Act 2001 (Cth), s 459C
[5] Corporations Act 2001 (Cth), s 459H (1)(a)
[6] Corporations Act 2001 (Cth), s 459H (1)(b)
[7] Corporations Act 2001 (Cth), s 459J (1)(a)
[8] Corporations Act 2001 (Cth), s 459F (1)(b)