Statutory Demands - What You Need To Know

How can you make someone pay you money they owe you? This is a common question for small business owners looking at their cash flow projections late at night.

The ‘standard’ course for enforcing debts requires you to file a debt claim at court, prove the debt (which may require rebutting defences), obtain a judgment debt, then seek to enforce the judgment debt (there are a variety of ways to do this).

However, in some cases you may be able to serve a statutory demand which simplifies this process.

In this blog post, we will explore what a statutory demand is, how to issue such a demand as well as how you might respond if you are served with one. 

What is a statutory demand?

A statutory demand can be defined as a formal request for payment of a debt that a company owes. These demands are issued pursuant to section 495E of the Corporations Act 2001 (Cth) (Corporations Act).

A statutory demand can only be issued when a debt is: due and payable, there is no genuine dispute as to whether the debt is payable or the amount of the debt, and the debt is at least $2000 in amount.

ISSUING A STATUTORY DEMAND – GUIDE FOR CREDITORS 

How do you issue a statutory demand?

When issuing a statutory demand, you must follow the specific requirements set out under the Corporations Act. If you fail to comply with these requirements, the court may set aside the demand. Corporations Regulations Form 509H must be used for your statutory demand, and you need to ensure that the demand:

-       is in writing;

-       has been signed by you or on your behalf;

-       states the name of the debtor’s company and its registered office;

-       states the total amount of debt owed; and

-       states a location within Australia where the debt can be settled. Ordinarily, this would be your office or your lawyer’s office.

Your statutory demand must also be accompanied by:

-       a court order for a judgment debt; or

-       an affidavit in the proscribed form as set out in the Corporations Act.

The statutory demand must be served at the debtor company’s registered address, either via mail or personal delivery. It is also possible to serve the demand to the company director, provided their address is in Australia. You may choose to do this if the company has relocated, and you are unsure about their new registered address.  It is important the service is properly effected.

What are the potential risks associated with issuing a statutory demand?

A debtor company can dispute a statutory demand served on them by filing an application to set it aside. If successful, the debtor company could recover the legal costs of their application, which can be substantial.

In situations where you have not obtained a court judgment against the debtor company, it is easier for them to have the demand set aside. This can be achieved by arguing that there is a ‘genuine dispute’. A genuine dispute could include a dispute over the quality of the services rendered, the costs of the services, or other pertinent issues.

When the court assesses the existence of a ‘genuine dispute’, it does not delve into the specifics of the dispute or arrive at a definitive conclusion on the matters at hand. The only requirement is the existence of a ‘serious question to be tried’.

RESPONDING TO A STATUTORY DEMAND – GUIDE FOR DEBTORS

How to respond to a statutory demand?

If you receive a statutory demand, you should take one of the following actions within 21 days:

1.     Pay the amount of the debt demanded; or

2.     Lodge an application with the Supreme Court to invalidate the demand. 

If you fail to do so, your company will be presumed to be insolvent and the creditor may apply for it to be wound up.

How do you set aside a statutory demand?

 Under the Corporations Act, a court may set aside a statutory demand on the following grounds:

-       Defect: There are stringent requirements in place for a statutory demand to be valid (as discussed above). If the creditor company fails to meet these requirements, you can apply to have the demand set aside. If the court determines that the defect has led to substantial injustice for the company, it will generally order the demand be set aside.

-       Existence of a genuine dispute: As discussed, a statutory demand may be set aside if a genuine dispute exists regarding the presence or amount of the debt(s).

-       Existence of an offsetting claim: A statutory demand can be set aside if your company has a genuine claim against the demanding company through counterclaim, set-off or cross demand. To establish a valid offsetting claim, there must be ‘mutuality’ between the offsetting claim and the statutory demand, such as mutual debts or credits.

-       ‘Other reasons’: Section 459J(b) stipulates that a demand might be set aside for ‘some other reasons’.

What are the consequences of non-compliance?

The consequences of non-compliance with a statutory demand can be serious.

Failing to respond within the stipulated 21-day period results in non-compliance with the statutory demand. Your company will then be presumed insolvent under the Corporations Act. Following the expiry of the 21-day period, the issuer of the statutory demand may rely on the presumption of insolvency to apply to the court to have your company wound up.

Countering a winding-up application can be complicated, as it requires you to provide detailed evidence of your company’s solvency.

For further information on issuing or responding to statutory demands, you can get in touch and schedule a consultation by clicking here.

The above article was written by Pippin Barry (BA; JD University of Melbourne) an Australian Legal Practitioner and Hyein Kim (Paralegal).