February 4, 2016

Creditor’s Statutory Demands: Friend & Foe

Where a creditor is owed at least $2,000 by a company, the Corporations Act 2001 (Cth) contains a powerful mechanism to recover that debt:  a Creditor’s Statutory Demand (statutory demand).

The Debt
A statutory demand is essentially a notice to a debtor company that it is required to pay the debt(s) set out in the statutory demand within 21 days of service, or a presumption of insolvency will arise. This presumption allows the creditor (or anyone else for that matter) to take immediate steps to wind-up the debtor company.

To issue a valid statutory demand, the Corporations Act requires:

  • the debt(s) to be at least $2,000;
  • the demand to be in the prescribed form;
  • the demand to be supported by an affidavit that verifies that the debt is due and payable (unless the debt is a judgment debt, i.e. Court ordered); and
  • there must be no “genuine dispute” about the debt.

The Action
Once a statutory demand has been served on the company, the debtor must either apply to the Court within 21 days of service (without exception) to set it aside or pay the debt.

If the debtor applies to the Court to set the statutory demand aside, the debtor has to satisfy the Court that:

  • a “genuine dispute” exists;
  • it has a counter-claim or some other claim that can be off-set against the debt;
  • a defect in the statutory demand would cause “substantial injustice” to the debtor; or
  • there is some other reason why the demand should be set aside.

All that is required for a “genuine dispute” is that the debtor has a “plausible contention requiring investigation”, but it cannot be “fanciful” or “far-fetched”.  The dispute must truly exist in fact and the grounds for the dispute must be real and not hypothetical or misconceived.

If the debtor company ignores the statutory demand, or fails to set it aside, it will be presumed to be insolvent due to the Corporations Act, and the creditor (or a 3rd party) may take steps to wind-up the debtor company.

Takeaway

  1. Due to the serious implications of a valid statutory demand, the demand must be meticulously prepared and based on a clear debt that is due and owing to the creditor.
  2. The threshold for establishing a ‘genuine dispute’ is a low one, and by no means difficult or demanding – accordingly, the statutory demand must be for a debt clearly owed (and by comparison, not an amount that would be more appropriately claimed by commencing recovery proceedings).
  3. Any defect in the statutory demand may be grounds for having the demand set aside; for example, a mis-statement of an amount, or a mis-description of a debt or other matter will likely constitute a defect.
  4. For creditors wanting to avoid costly and lengthy litigation, statutory demands are ideal to place maximum pressure on debtor companies in the shortest period of time; but there are plenty of technicalities, so legal advice should be sought to maximise their use.