If you are in business, whether it’s in the capacity of a company director, in management or if you represent a company as its accountant, you must know of the power of a Statutory Demand issued pursuant to the Corporation Act 2001 (Cth) (the “Äct”). This article sets out the huge benefits in using this as a method of very quickly and effectively collecting a debt. Alternatively, if your company receives a Statutory Demand you will see the need to act urgently and seek immediate legal advice.
In practice, the process of issuing a Statutory Demand as a means of collecting debts is now commonly used, although it was originally intended to give rise to the presumption of insolvency which is one basis to commence a winding up application.
The Act specifies that a company has committed an act of insolvency if, having received a Statutory Demand, it fails to pay the creditor the amount demanded, or come to an arrangement with the creditor, or have the Statutory Demand set aside by a Court, within 21 days of service.
That act of insolvency is the most utilised basis to bring winding up proceedings to have the debtor company placed into liquidation by a Court. Once in liquidation, the debtor company comes under the control of a liquidator, the affairs of the company are brought to an end and its assets are sold to pay its debts.
Therefore, a Statutory Demand is a useful way to pressure a company to pay its debts, although it was not originally intended for such purposes.
Valid Statutory Demands
Valid Statutory Demands can only be sent by creditors who have a debt, which is due and payable by a company. This does not apply to individuals or people trading under a business name owing money.
In order to utilise a Statutory Demand, the debt cannot be in dispute. There have been many court decisions over the years as to whether a debt has been genuinely in dispute. If, for example, the other party claims the goods delivered were incorrect, or not of merchantable quality then the debt may be in dispute. It may be that in such circumstances the Statutory Demand is not suitable to you. On the other hand, if you are on the receiving end of a Statutory Demand, it is common that allegations are made that the debt is disputed, at least at first instance.
Company directors, managers, accountants and people in credit control can all benefit by knowing what to look for in order to determine whether or not there is a genuine dispute. One way of minimising this argument is during your negotiations with the debtor company, even as part of your negotiations, ask the debtor company to acknowledge in writing that the debt is payable and to confirm they are authorised by the company to do so. It is then so much harder to subsequently claim there is a ‘genuine dispute’ in circumstances where someone has said on behalf of the company that the debt is payable.
In addition, you have to be able to put a dollar value on the debt and the debt quantum must be at least $2,000.
The document claiming the demand must be in the prescribed form, must be in writing and must be signed by or on behalf of the creditor. It must correctly state the debtor’s company name and its registered office, and it must specify a place in Australia where the debt can be paid. It is permissible to specify that payment be made to the creditor’s solicitors.
The Statutory Demand requires the company to pay the debt or secure or compound the amount owed within 21 days of the date of the Statutory Demand “to the creditor’s satisfaction”. Those words require an objective test. It is for the Court to decide whether a creditor acted reasonably if he or she rejected a debtor’s proposal.
Judgment does not need to be obtained
One of the significant adva/ntages of Statutory Demands is that there is no need to first obtain a court judgment against the debtor company. The effect of this is twofold: the Statutory Demand can be issued for significantly cheaper than commencing court proceedings and the onus of setting aside the Statutory Demand (which requires an application to a superior Court) falls upon the debtor company.
However, if a judgment has not been obtained in order for the Statutory Demand to be valid, there must be an affidavit accompanying the Statutory Demand, verifying that the debt is due and payable. If the Statutory Demand does not rely on a judgment and it is not accompanied by an affidavit in the proper form, it comprises good grounds for it to be set aside.
How a Statutory Demand is served
The service of the Statutory Demand is important. Often when it comes to winding up a company on the basis of an expired statutory demand there are arguments before the Court that the Statutory Demand was not received or not served correctly.
If it is served correctly then the creditor who issued the Statutory Demand may rely on the presumption that the Statutory Demand was received, and it will be on the debtor company to prove otherwise.
It is prudent for directors and accountants to be aware of the registered office of any companies they are involved with, as statutory demands can be served by ordinary post to the registered office of the debtor company as recorded by ASIC, and this is sufficient to amount to valid service. Creditors relying on a Statutory Demand should likewise ensure that the statutory demand is served in accordance with the Act, or otherwise face the risk of an application to set aside the Statutory Demand.
Resisting a Statutory Demand
If a company wishes to have a Statutory Demand set aside, it must apply to the Court within 21 days of service of the Statutory Demand and it must serve the application to set aside and the supporting affidavit on the person who made the demand within that 21 day period as well.
The supporting affidavit should state all the grounds for making the application, rather than simply making an assertion that the debt is not due. If the affidavit is insufficient, then additional grounds, cannot be supplemented by a further affidavit served outside the 21 day period, subject to certain exceptions.
Reasons for setting aside a Statutory Demand
A Statutory Demand will only be set aside if the amount in fact owed is less than the statutory minimum, if there is a defect in the demand that would cause substantial injustice if the demand is not set aside, or if there is some other reason why the demand 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 it was a demand within the terms of the Act and the defect is only a minor irregularity or misstatement.
The “some other reason” basis to set aside the Statutory Demand is the most commonly relied upon basis and includes that the debt is disputed or that the debtor company has a separate claim against the creditor which exceeds the amount claimed in the Statutory Demand.
Risks in Statutory Demands for both debtors and creditors
From a debtor’s point of view, the problem with the Statutory Demand is that once the time for compliance with the demand has expired, unless there is a valid application filed and served to set the demand aside, there is absolutely no opportunity of contesting the demand and the debtor company can be forced to pay the debt and legal fees or risk being wound up unless the debtor company can prove that it is not insolvent, which can be a costly exercise.
A creditor using a Statutory Demand as a quick means of a debt recovery can likewise have the whole thing blow up in its face. Where there is no judgment already obtained, all a debtor has to show to set aside a demand is that there is some genuine dispute which exceeds the amount of monies claimed in the Statutory Demand. For this reason, it is prudent to get debtor concessions, if that is possible, at an early point.
If there is no genuine dispute then the only thing left for the debtor is to urgently negotiate with the creditor, which usually includes the payment of the creditor’s legal costs in full.
Conclusion
Statutory Demands can be very effective and certainly powerful to a creditor. Using a Statutory Demand can be cheaper, faster and more efficient in recovering debts due than other methods and if done properly can be done in circumstances where the debtor must deal with you and do so urgently. There are risks though if it not done properly and this process should always be undertaken with the help of your lawyer.
To find out more call us on 02 9138 7800 or email us at info@icllawyers.com.au for more information.
