Pay up, kick up or be wound up: the 411 on statutory demands
Creditors’ statutory demands are a very powerful, and commonly used weapon by creditors. They are cheap and easy to issue, and the consequences for not dealing with one appropriately can be extremely serious – i.e. liquidation.
Because of this, the courts enforce strict compliance with the requirements imposed on a party seeking to rely on one, so creditors should ensure they are up to date on those requirements.
Similarly, because a recipient who fails to deal with a Statutory Demand in a timely manner can face the doomsday scenario of a liquidation application, they too should ensure they are aware of the requirements.
Luckily for both sides, we set out below a comprehensive summary of the statutory demand regime.
What are statutory demands?
A statutory demand is effectively a formal letter of demand addressed to a company requiring it to pay a debt. Unlike a normal letter of demand, a statutory demand is backed by the force of the Corporations Act 2001 (Corporations Act).
If the company does not deal with the statutory demand in one of the prescribed ways, it is deemed to be insolvent, and the creditor can apply to the Court for an order that a liquidator be appointed.
When can a statutory demand be issued?
A statutory demand can only be issued where there is a debt (or debts) owing by the company to the creditor. The debt must be due and payable at the date the demand is issued, and total an amount above the statutory minimum, which is currently $4,000.
The company has 21 days after the date on which the statutory demand is served to comply with the demand, reach a deal with the creditor, or apply to the Court to set it aside.
A debt for the purposes of issuing a statutory demand must be an identifiable or ‘liquidated’ sum of money that is due, owing and payable by the company. This includes a quantifiable amount payable as a result of a breach of contract, or a judgment debt. A prospective liability (for example, an unquantified or ‘unliquidated’ sum) is not a valid debt for the purposes of a statutory demand.
How is a statutory demand served?
The statutory demand must be served on the registered office of the company, as recorded with ASIC.
Service must be effected by a method set out in the Corporations Act, which is nearly always done by regular post, and a party serving via this method is only required to prove that it was posted, not prove that it was actually received.
This is particularly important because some companies nominate their accountants or professional advisors as their registered office, and in some cases do not update their registered office when they engage new advisors. However, this cannot be used as an excuse by a company for failing to properly respond to a statutory demand.
It is therefore critical that companies ensure that their registered office is current.
I’ve received a statutory demand – what do I do?
It is critically important that a recipient of a statutory demand act promptly: do not ignore it, or delay dealing with it. The recipient has a narrow timeframe in which to respond or otherwise deal with the statutory demand. Failing to do so within that timeframe can have very significant consequences.
There are broadly 3 options available to a company that receives a statutory demand. They are:
- Pay the debt and notify the creditor that payment has been made. The company should seek written confirmation from the creditor that the statutory demand has been withdrawn.
- Negotiate with the creditor to settle the debt and/or agree a payment plan, and have the statutory demand withdrawn.
- Contest the statutory demand by making a court application to set aside the statutory demand on the basis that it suffers from a defect, there is a ‘genuine dispute’ regarding the debt/s, or the company has an offsetting claim. Recently, the Chief Justice of the Supreme Court of Victoria published a Notice to the Profession setting out important considerations for parties and practitioners who are considering such an application.
One of the steps outlined above must be taken within the 21-day period after service of the statutory demand.
Unlike many legislated deadlines, this time period cannot be extended by the Court. If the 21-day period expires, an application to set aside the statutory demand cannot be filed, and the company is deemed to be insolvent.
How can a statutory demand be set aside?
The usual grounds for setting aside a statutory demand are:
- genuine dispute;
- offsetting claim; or
- defect in the statutory demand.
Genuine dispute
The company can apply to the Court to set aside the statutory demand where there is a ‘genuine dispute’ about the debt (for example, the existence or amount of the debt). To support such an application, the company is required to provide evidence substantiating its claim (ie, in the form of contracts, invoices and/or other relevant documents).
In an application based on a genuine dispute, the Court is not required to determine the merits of the claim – the company is just required to show that the dispute is genuine and not spurious. The relevant threshold for establishing a genuine dispute is not high.
The Court will take into account things such as when the alleged dispute was first raised, and the evidence supporting the dispute. If the company only raises the dispute after receiving the statutory demand, and can’t provide any evidence beyond a vague assertion, the Court is less likely to find it to be a “genuine dispute”. Conversely, if there has been extensive exchange of correspondence and documentation in respect of the dispute, the Court is more likely to find that there is a genuine dispute, and that the creditor is seeking to misuse the statutory demand regime as leverage.
If the genuine dispute claim is successful, the statutory demand may be set aside or varied by the Court.
Offsetting claim
An offsetting claim may exist where the creditor is also indebted to the company. If such a claim exists, even if the company owes the debt to the creditor, the company may apply to the Court for the debt to be ‘offset’ from the amounts owed to it by the creditor and included in the statutory demand. If the Court agrees, the statutory demand will be set aside, but only if the amount owed by the company after applying the offset is less than the statutory minimum, $4,000.
An example of a successful offsetting claim is In the matter of Platypus Impact Housing Australia Limited [2024] NSWSC 753. There, the company admitted the debt the subject of the demand. However, it also successfully argued that the issuer of the demand, who was a previous director of the company, misused his position, causing damages to the company in the amount of $27 million. The Court set aside the statutory demand on the condition that the company brought separate proceedings against the previous director for the alleged damages.
Defect
A defect in respect of a statutory demand includes:
- an irregularity, a misstatement of an amount or total, or
- a misdescription of a debt, other matter, person or entity.
If a defect exists, the Court may set aside the statutory demand on the basis that the company will experience “substantial injustice” if the statutory demand is not set aside.
Examples of a defect which the courts have found may cause “substantial injustice” are:
- Where the demand is vague and ambiguous and it fails to identify the general nature of the debt (LSI Australia v LSI Holdings [2007] NSWSC 1406).
- Failing to set out in sufficiently clear detail what the statutory demand relates to (Universal Music Australia Pty Limited v Robert Geoffrey Brown[2003] FCA 1213).
If the company’s application to set aside the statutory demand is unsuccessful, the creditor can apply to wind up the company and the presumption of insolvency applies.
Doing nothing can have dire consequences
The same applies to a company which chooses not to respond to a statutory demand.
After the 21 days’ notice period expires, the company is presumed by law to be insolvent, and the creditor can apply to wind up the company. Further, although the company can still oppose the winding up application (on the basis that it is not insolvent) it is not permitted to raise matters which it could have raised in an application to set aside the statutory demand.
Further, any winding up application filed following a failure to comply with the statutory demand will be recorded with ASIC against the company, and be publicly available information.
I am owed money – why shouldn’t I just serve a statutory demand?
Given how powerful and effective a tool they can be, it is tempting for a creditor dealing with a recalcitrant debtor to immediately issue a statutory demand.
However, doing so can backfire if the circumstances aren’t appropriate. In particular, a company is not obliged to contact a creditor before filing an application to set aside a statutory demand. If there is (for example) a clear genuine dispute over the debt, the company may immediately file an application to set it aside.
The creditor is then left with the invidious decision to either run a doomed defence of the application (and incur a costs order when unsuccessful) or request the debtor withdraw the application by consent (and potentially have to pay some or all of the legal costs which the company incurred in preparing and filing it).
Whether to serve a statutory demand is therefore something which requires careful consideration.
Key takeaways
The key takeaways are:
- Be proactive if you receive a statutory demand and seek legal advice.
- Companies should ensure that their registered office listed with ASIC is monitored and kept up to date to avoid missing a statutory demand (and other important legal documents).
- Consideration should be given to a potential set aside application as a person issuing a statutory demand that is subsequently set aside may be ordered to pay the company’s costs of the court application.
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