A statutory demand is a demand for payment of money and is given the force of law. If a company fails to pay or set aside a statutory demand within 21 days, the company is presumed to be insolvent. Failure to comply with a statutory demand is the most common reason why Australian companies are placed into liquidation.
Under the Corporations Act 2001 (Cth), a company is presumed to be insolvent in certain circumstances. One of those circumstances is where the company fails to pay the amount of money demanded in a statutory demand or, alternatively, fails to set the statutory demand aside within the relevant period.
When an application is made to wind up a company, it's up to the court to determine whether the company is actually insolvent. The Corporations Act 2001 (Cth) defines ‘insolvency’ as being unable to pay one’s debts when and as they become due and payable (section 95A). Failure to comply with a statutory demand is indicative that a company is unable to pay its debts as and when they become due.
Author: Farrah Motley, Solicitor of the Supreme Court of Queensland, Australia
What is a statutory demand?
At the end of the day, a statutory demand looks like any other 'legal' document. But it is more than that. What makes a statutory demand a very powerful debt recovery tool is because it is given the force of law.
A statutory demand is a demand made to a company by a creditor under section 459E of the Corporations Act. A statutory demand can be made by someone who is owed amount(s) of money, provided that the total of all amounts owed is at least the minimum amount mandated by law. Currently, this amount is $2,000. Until 1 January 2021, during the height of the COVID-19 pandemic, this amount was temporarily increased to $20,000, but has now reduced back down to $2,000.
You can issue multiple statutory demands, but it's easier if you just issue one demand that specifies the total debt owed.
Aside from being at least $2,000, the amount(s) must also be due and payable. This means that a person can’t issue a statutory demand if the debt is:
That is, the company being issued with a statutory demand must be able to definitively state the dollar amount that is being demanded from them.
What are the Formalities of a Statutory Demand?
Under the Corporations Act, a statutory demand must:
Specify the total amount of the debt owed
Require the company to pay the amount of the debt or secure or compound that amount to the creditor’s reasonable satisfaction within 21 days after the statutory demand is served on the company
Be in writing
Be in the prescribed form (being Form 509H)
Be signed by or on behalf of the creditor
Be "supported" (see below)
State the debtor company's name and its registered office (a new company search should be obtained before issuing a statutory demand)
Specify a place in Australia where the debt can be paid
There are two ways a statutory demand can be ‘supported’:
with a judgment of the Court; or
with an affidavit.
How can a Statutory Demand be Delivered (or - in legal jargon - Served)?
A statutory demand can be served by post it or leaving it at the company’s registered office (this might not be the same as the business address and can be ascertained by obtaining a company search) or by delivering a copy in-person to a director of the company who lives in Australia. Why, you ask, would anyone want to deliver a statutory demand in-person? Firstly, it can be an opportunity to show you mean business (outside of the document itself), but also it may be the only path to take if the company has moved and the new registered address is unknown.
If a statutory demand needs to be served on a person or company located interstate, the Service and Execution of Process Act applies. This Act provides guidance for interstate service.
Importantly, if a statutory demand is issued to a debtor company in a particular State or Territory, the address of the place specified for payment (in order to comply with the statutory demand) must be in that same State or Territory.
How can a Statutory Demand be Complied With?
If a company receives a statutory demand, it has 21 days from service of the demand to either:
(a) comply with the demand, or (b) apply to the Court under s459G of the Corporations Act for an order that the demand be set aside.
A application under s459G of the Corporations Act to set aside a statutory demand must be filed with the Court and served on the person who issued the statutory demand within 21 days after service. The 21 day period is absolute. The courts cannot agree to extend the time period or waive these requirements.
How can a Statutory Demand be Set Aside?
A company may also apply for an order to set aside (i.e. apply to the court to rule that the statutory demand is unenforceable and invalid) if either:
there is a defect in the demand that will cause substantial injustice unless the demand is set aside (s459J(1)(a))
there is a genuine dispute as to the debt (s459H(1)(a))
the company has an offsetting claim (s459H(1)(b))
for some other reason (s459J(1)(b)).
Let's take a look at what makes a statutory demand 'defective'.
The (it's 'the' because it's only the Federal Court of Australia that can hear matters relating to statutory demands) Court is only required to set aside a statutory demand where it is defective where it is satisfied that if it does not set the statutory demand aside it will cause a substantial injustice (Section 459J(2)).
A ‘defect’ includes:
A misstatement of an amount or total
A misdescription of a debt
A misdescription of a person or entity
A statutory demand does not contain a defect simply because the company disputes the amount(s) demanded.
Which takes us to the second point - genuine dispute.
A statutory demand can be challenged on the basis that there is a genuine dispute about the amount(s) demanded. A company may dispute that they owe the amount at all (i.e. that it is not 'due and payable'). The onus is on the creditor to show evidence that the claim is genuine.
The Court must calculate the ‘substantiated amount’ when deciding whether to set aside a statutory demand. The court must set aside a statutory demand where the substantiated amount is less than the statutory minimum ($a2,000). Even if the substantiated amount is more than $2,000, the Court has the discretion to vary the statutory demand. If the statutory demand is varied to reduce the debt claimed, the company then has a further 7 days to pay the amount.
A debtor may also claim that it has a right to set off the debt against amounts owed to it by the creditor that issued the statutory demand. In this case, the debtor company acknowledges that the amount is genuinely owed, but raises a counterclaim.
No matter which ground is used as a basis to challenge the validity of the statutory demand, the debtor company must support the ground with an affidavit.
What Happens if a Statutory Demand is not Complied With?
If a company fails to comply with a statutory demand within 21 days, the company is presumed insolvent under the Corporations Act. Within three months of the date of non-compliance (i.e. the day after the expiry of the 21 day period), the person who issued the statutory demand may rely on the presumption of insolvency to make an application to the Court for orders to wind up the company. The presumption means that the Court must presume (unless there is evidence to the contrary) that the company is insolvent and should be wound up.
Before making an application to wind up, it's important to check that the debtor company in fact failed to comply with the statutory demand. Otherwise, the Court may dismiss the application.
Are Statutory Demands Effective?
The short answer is yes. The long answer is also yes, but you need to strictly comply with all of the legislative requirements.
If a debtor company is successful in setting aside a statutory demand, it may be entitled to recover its legal costs associated with the application to set aside. And (eek!) the potential costs orders can be significant.
The next roadblock to an effective statutory demand is the risk of a debtor company not being able to repay the debt. This risk can be addressed at the outset by undertaking property and asset searches to determine if there is any possible collateral to secure payment of the debt.
A winding up application is also still open to challenge by the debtor company on the basis that the company is solvent. And if a person uses a statutory demand, the only enforcement option is winding up proceedings. If the debt is unsecured and the debtor company has a lot of debts, you may receive very little, if anything, once the winding up procedure is complete.
If a judgment has not been obtained against a debtor company, then it is easier for a debtor to set aside a demand on the basis there is a ‘genuine dispute’. When the Court is considering this, it looks at whether there is a ‘serious question to be tried’. This has the effect of lowering the bar for the debtor company.
Should I Seek Legal Advice Before Serving a Statutory Demand?
Hopefully after reading this article, it's apparent how challenging and complex statutory demands can be. One wrong step and they are not worth the paper they are written on.
It's really important for businesses to seek legal advice before serving a statutory demand. A business lawyer will be able to sense-check the commerciality of issuing the demand and assess whether it's the best path forward for your business.
If your business needs legal advice - contact Prosper Law today!
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Author: Farrah Motley | Legal Principal
PROSPER LAW - A Law Firm for Businesses
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