Commercial Litigation News

So You Have Received a Statutory Demand

 So you have received a statutory demand... What now?

When a company receives a document with the title 'CREDITOR'S STATUTORY DEMAND FOR PAYMENT OF DEBT' (“statutory demand”), it is critical that the company immediately gives the statutory demand the respect it deserves. Failing to take prompt and appropriate action can result in the appointment of a liquidator and the effective loss of the company.

A statutory demand is a notice issued under the Corporations Act 2001 (Cth) in respect of a debt of $2,000 or more that is due and payable. A statutory demand will allow the recipient company with a 21 day period to:

  1. pay the debt;
  2. compound the debt (enter into an acceptable payment arrangement or compromise); or
  3. file and serve a application filed in the relevant Court to have the statutory demand set aside.

Consequences of failing to comply with statutory demand

The consequences of failing to comply with a statutory demand are severe. If the recipient company allows the 21 day period to expire without taking appropriate action, it will be presumed to be insolvent. Once this occurs, creditors are entitled to apply to the Supreme or Federal Court seeking orders that the company be wound up in insolvency.

By failing to respond to the statutory demand, the recipient company will also typically lose the right to raise any dispute regarding the statutory demand or the underlying debt. The recipient company will then only be able to resist a winding up application if it is able to satisfy the Court that it is in fact solvent, something which is usually much more difficult than it may initially appear.

Should a creditor’s winding up application be successful, the Court will order that a liquidator be appointed to the company who will assume control of the company from the company’s directors. Once appointed, a liquidator will take steps to investigate the company’s financial position, sell any assets, pay creditors, distribute any remaining surplus to shareholders, and then ultimately deregister the company.

What are the company’s options?

In addition to paying the demand in full or entering into a payment arrangement with the creditor, the company may challenge the statutory demand on certain grounds.

An application to set aside a statutory demand will be successful if the recipient company can establish one or more of the following:

  1. that there is a genuine dispute about the existence of the debt;
  2. the company has an offsetting claim (that is, a genuine counterclaim, setoff or cross-demand);
  3. there is a defect in the demand which would otherwise cause substantial injustice to the company;
  4. there is some other reason that the demand should be set aside.

Should the company wish to challenge a statutory demand, it must file an application in a competent Court to have the statutory demand set aside. It is critical that the application is both filed and served within the 21 day period. Companies should not leave any intended application until the last minute.

If the creditor makes an application and is successful, the Court will order that the statutory demand be set aside.

Some tips and traps:

  1. Whilst it is not the only way to effect service on a company, creditors usually serve a statutory demand by posting the demand to the registered office of a company. The registered office is the address listed on the Australian Securities and Investments Commission (ASIC) company register. The creditor serving the demand does not need to prove that the company actually received the statutory demand at the registered office, only that it was sent to this address. It is therefore imperative that this address is kept current.
  2. Procedures should be put in place with staff regarding what is to occur if a statutory demand is received (such as immediately bringing it to a director’s attention), or where the registered office is at another location (such as an accountant’s office).
  3. Urgent action must be taken or a company will lose the right to challenge on certain grounds. The application should not be left until the last minute, and legal advice should be immediately sought.

The information contained in this article is general in nature only and should not be relied on. You should always seek legal advice about your individual circumstances.

Key words: Commercial litigation, Corporations Act, Statutory Demands

Posted in: Commercial Litigation News at 16 May 16