Useful Information

A Statutory Demand is one of the most powerful business debt collection tools available to a creditor and is commonly used by the Australian Taxation Office, Workers compensation Insurers and trade suppliers.

The Statutory Demand may be issued immediately after a debt becomes due but can only be issued by a creditor if the debt is not disputed. In fact, a certificate must be signed saying no genuine dispute exists in relation to the debt.

The Statutory Demand allows the recipient or debtor company 21 days from the date of the demand to;

• Pay the debt in full; or
• File an application in court to have the demand set aside on the basis of a genuine dispute.

If within the 21 days an appropriate defence is not filed in court — the company is deemed to be insolvent!

This may mean that in as little as 8 weeks of the demand being served, the court could appoint liquidators to your company.

The test of whether or not a company is insolvent under Section 95A of the Corporations Act is whether or not the company is able to pay its debts as and when they become due.

Under Section 459C of the Act, a company is presumed to be insolvent if, during or after three (3) months preceding the day on which an application is made for the winding up of the company, one of a number of events occurred including, most commonly, failure to comply with a Statutory Demand.

In other words, if a debtor company fails to respond to a Statutory Demand — the company is presumed insolvent and the creditor can easily and quickly move to lodge a winding up application that would result in the appointment of liquidators.

A Statutory Demand under Section 459E(2) must;

• Specify the debt claimed and indicate the nature of the debt ie. goods supplied and delivered
• Require payment within 21 days
• be in writing and in the prescribed form
• be signed by or on behalf of the creditor

A Statutory Demand may not include a claim for unliquidated damages however, one can subtract the amounts not due from the amount that is actually due so long as more than $2,000 is owing.

Multiple creditors are not allowed to serve a single Statutory Demand on one company.

A creditor is not entitled to serve a Statutory Demand at the same time as proceeding against the debtor company's directors in relation to the same alleged debt.

If a creditor is a company, the Statutory Demand should be given under common seal

The demand must correctly state the debtor's name and its registered office

The demand must specify a place in Australia where the debt can be paid.

If your business has been served with a statutory demand or you are concerned about business bankruptcy, contact us at Liquidation Direct today for free advice on business bankruptcy and to discuss potential solutions.

By acting now, we may be able to help you avoid liquidation, bankruptcy and the stress involved in becoming insolvent.

A Statutory Demand is served by;

• Leaving it at the registered office of the debtor company
• Sending it by post to the reigstered office of the debtor company
• Delivering a copy of the Statutory Demand personally to the director(s) who resides in Australia

Where a creditor becomes aware that the company no longer occupies the registered address, and the creditor is aware of the new address, then they should bring the demand to the new address.

If the creditor is aware the company no longer occupies the registered address but does not know where the company has moved, it is prudent to serve the demand on the company director(s).

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Section 459C(2) provides that the presumption of insolvency only lasts for three (3) months after the Statutory Demand is served and before the application to wind up the company is lodged.

If an application to wind up the debtor company is not lodged within that time, then the Statutory Demand cannot be relied upon and the process of issuing the demand will need to be started afresh.

A company is taken to have failed to comply with a Statutory Demand at the end of 21 days after the date of service.

The time for compliance may be longer if the company seeks to set aside the demand and the court may extend the time for compliance where the hearing of an application pursuant to that section is sought.

If the court does not extend the time for compliance, then compliance ends 7 days after the application is finally determined.

If a company wishes to set aside a Statutory Demand it must apply to court within the 21 days of service of the demand and it must serve the supporting affidavit on the person who made the Statutory Demand.

The supporting affidavit should state the grounds upon which the application is made rather than simply making the assertion that the debt is not due. If the affidavit is insufficient, it cannot be supplemented by a late affidavit served outside the 21 day period.

A Statutory Demand will only be set aside if;

• The debt is subject to a genuine dispute
• The amount in fact owed is less than the statutory minimum
• There is a defect in the Statutory Demand that would cause substantial injustice if not set aside
• There is some other reason why it should be set aside

A Statutory Demand which has a defect can only be set aside where it causes substantial injustice. It will not be set aside if the Statutory Demand is within the terms of the Act and the defect is only a minor irregularity or misstatement.

The Act provides for setting aside the Statutory Demand for some other reason. The fact a company is solvent is not some other reason. A demand containing grossly inflated amounts might be some other reason.

From a debtor's point of view, the problem with the Statutory Demand is that once the time for compliance has expired, unless there is a valid application filed and served to set the Statutory Demand aside, there is absolutely no opportunity of contesting the Statutory Demand.

The only way of dealing with the Statutory Demand in those circumstances is to pay the debt, reserve one's rights and sue for the money back. That of course can create major problems particularly if the debt claimed is in fact disputed.

A company that would otherwise be solvent can find itself having to pay a debt it believes it does not owe and one which may render it insolvent.

A creditor, using a Statutory Demand as a quick means of a debt recovery can likewise have the whole thing blow up in their face. All the debtor has to show to set aside the Statutory Demand is that there is some genuine dispute. The court is not interested in the merits of the dispute - just the fact that one exists and ought to be tried.

If however you have received a Statutory Demand, it may be time to consider the position of the company and your position as director.

Directors of companies that are trading entities and that are insolvent, leave themselves open to potential insolvent trading claims. Consequently, the receipt of a Statutory Demand is possibly a time to think about your exit strategy from the company or how the company's business may be saved - such as through a Voluntary Administration or a Creditors Voluntary Liquidation.