Statutory demands

How to use them and how to respond to them

The first rule of statutory demands is – IGNORE THEM AT YOUR PERIL!

The second rule of statutory demands is – MAKE SURE THAT THEY ARE USED CORRECTLY!

What is a statutory demand?

The Corporations Act permits a formal demand for payment of debts owed by companies where the debt is not genuinely disputed. While the notice is based on a debt, the purpose of the demand is not primarily debt-collection, but to determine the solvency of the debtor company.

That debt may have arisen following a legal judgment, or merely in normal trade – but there must be a real debt, it must not be genuinely disputed, and it must exceed the monetary threshold of $4,000 (from 1 July 2021, up from $2,000).

There are formal requirements for the notice, including that it state the debt amount, that it be in writing, that it be in the prescribed form, and that it be signed by the creditor (or their representative on their behalf). The statutory demand also needs to be accompanied by an affidavit verifying the debt unless it is a judgment debt.

I want to recover a debt. Should I issue a statutory demand?

As mentioned above, although statutory demands are based on debts, they are not primarily a debt recovery mechanism. They are aimed at determining the solvency (or otherwise) of companies.

If a company is unable to pay its debts as and when they fall due, they are presumed to be insolvent, and there is a strong presumption that an insolvent company should be wound up. The use of the statutory demand is therefore primarily a way of confirming that the debtor company is unable to pay its genuine debts and is therefore insolvent.

This is one of the reasons why a statutory demand should not be issued where there is a potential dispute as to the debt. It is reserved only for debts that are not genuinely disputed.[1]

If you have an outstanding debt for more than $4,000, the debtor is a company, and the debt is not genuinely disputed, a statutory demand might be worth considering, especially if you are worried that the debtor may be struggling with solvency.

I have received a statutory demand. What do I do?

Firstly, make of note of precisely when it arrived. The time for compliance with a statutory demand is strict, so the date you received it is important.

Secondly, seek legal advice.

Thirdly, and you may choose to do this in consultation with your legal advisors, decide whether you accept the debt set out in the demand as genuine. If you do, then you have choices:

1. Pay the demand: generally this will occur when the debtor has the funds and accepts the debt;
2. Enter into a compromise with the creditor: often this will occur when there is a dispute as to part of the debt, or where payment terms can be negotiated; or
3. Offer reasonable security for the debt – while this is an available option under the regime it is relatively rare, but can be an option in the appropriate circumstance,

and this must be done within the 21 day period.

If you dispute the debt claimed in the demand – either because you say it is not genuinely owed or because you have an offsetting claim – then you should set out the basis for the dispute to the person who issued the statutory demand. It is possible for a statutory demand to be withdrawn – however care should be taken to ensure that any withdrawal is express, clear and unequivocal, and in writing.

Absent a clear and unconditional withdrawal of the statutory demand, an application to have the statutory demand set aside must be commenced and served before the 21 day deadline. The supporting affidavit is critical to this application as you will be confined to the grounds contained in the affidavit at any hearing. As a result, it should be as comprehensive as possible.

What happens if I do not do one of those things before the 21 days elapse?

Failure to satisfy or set aside a statutory demand has important legal consequences. It will mean the company is deemed to be insolvent in any subsequent winding up application.

It does not cause the company to be immediately wound-up – that requires a separate Court application – but it does mean that in any winding up application the Court will assume the company is insolvent and that it should be wound up. The burden effectively shifts to the debtor company to show why it should NOT be wound up, with the debtor company limited in what it can put before the Court, not being able to rely on anything that it could have in an application to set aside the statutory demand.

Conclusion

The statutory demand regime is an important tool in ensuring that companies pay their genuine debts as and when they fall due – or risk being wound up in insolvency.

If you want to issue a statutory demand, you should ensure that the debt is not genuinely disputed, and ensure that it is done correctly. In a recent case a statutory demand was set aside for incorrectly describing how the debt arose.

If you receive a statutory demand, act immediately to seek advice over whether the claimed debt should be paid, or the demand set aside. Failure to do so could see you lose your company to liquidation.

[1] Another reason is because applications to set aside statutory demands are typically dealt with in chambers on the basis of affidavits – so the Court process is not able to deal with complex or controversial disputes as to fact.