Immediate Action Required! The Dangers of Statutory Demands

Failure to comply with a statutory demand may lead to the insolvency of your company

Failure to comply with a statutory demand may lead to liquidation of your company

If you are running a business through a company structure, it is critical that you know about statutory demands, particularly if you are served with one.

What is a statutory demand?

The Corporations Act (“the Act”), which is the major legislation dealing with companies in Australia, allows a creditor (the person to whom a debt is owed) to serve a statutory demand on a company which is alleged to owe the debt compelling the company to repay the debt within 21 days of service of the demand.

A statutory demand is a much more powerful debt collection procedure than a letter of demand or a notice of claim.  For a start, a creditor does not need to first obtain a Court judgement to enable it to issue and serve a statutory demand against a company.

If the company does not comply with the statutory demand within 21 days, the company is then presumed to be insolvent, which enables the creditor to apply to the Court to wind up the company. This means that all of the affairs of the company are placed in the hands of the liquidator who can then sell the assets of the company to pay its debts.

Who can issue a statutory demand?

Anyone who is owed $2,000 or more by a compan is able to issue a statutory demand against the company compelling payment of the debt. An individual, members of a partnership, another company, a trust: all of them can issue a statutory demand against a company.

What are the formal requirements of a statutory demand?

For a statutory demand to be legally effective it must be in strict compliance with requirements of the Act. It must:

  • Be in writing
  • Be in a prescribed Form (Form 509H);
  • Specify the total amount of debt(s);
  • Require the company to pay the total amount of debt(s) within twenty one (21) days after the demand is served on the company or secure or compound the debt to the creditor’s reasonable satisfaction (settle the debt by agreeing to accept a lesser amount);
  • Be signed by or on behalf of the creditor;
  • Specify the name, ACN or ARBN of the debtor company and the address of the company’s registered office.

It may be possible to set aside a statutory demand, or seek the voluntary withdrawal of a statutory demand, if the demand is defective.  There may be any number of highly technical reasons why this may be so: seek our advice!

What to do if you are served with a statutory demand

If you are served with a statutory demand, you essentially have one of three options. Within 21 days of service of the statutory demand, you MUST seek legal advice which may be either to:

  1. Pay the debt(s) or negotiate with the creditor for the creditor accept a lesser amount.  If your company has no legitimate reason for not paying the debt, then you should be attended to paying the debt immediately and well before the end of the 21 day period.If your company is experiencing financial difficulties, but is still solvent, it would be wise to negotiate with the creditor for your company to pay a smaller debt or to pay off the whole debt by instalments.
  2. Seek the agreement of the creditor to withdraw the statutory demand.  It may be that the statutory demand is defective, or was not properly served in accordance with the Act, or that there is a genuine dispute about the debt, or other reasons that may be pointed out to the creditor who may be invited to withdraw the statutory demand and negotiate a resolution of the dispute.
  3. File AND serve an application to the Court have the statutory demand set aside.  You may be able to apply to the Court for an order setting aside the statutory demand. The application must be made within twenty one (21) days after the statutory demand was served upon your company.  The application to set aside the statutory demand must be filed in Court, together with an affidavit supporting the application and a copy of the application and supporting affidavit must be served on the person who served the statutory demand on your company.The Court has the power to set aside a statutory demand where:
    • There is a “genuine dispute” between the company and the creditor about the existence or amount of the debt;
    • The company has an “offsetting claim”, that is, the company has a counterclaim, set-off or cross-demand against the creditor;
    • There is a defect in the statutory semand which would cause substantial injustice, which may include an irregularity, misstatement or error in the description of the debt(s), company or creditor;
    • There may be other reasons why the Court considers the statutory demand should be set aside (seek urgent independent legal advice about this).

What happens if you do nothing

If your company fails to comply with the statutory demand, by either failing to pay the debt(s), failing to negotiate with the creditor or failing to apply to have the statutory demand set aside, your company will be automatically be presumed to be insolvent.

Once this “presumption of insolvency” arises, the creditor then has the right to apply to Court within three (3) months for an order that a liquidator be appointed to take control of your company and start selling off the assets.  This means all your other creditors can come forward and support the winding up of your company.  Even more bad news!

The moral of the story is this: non-compliance with a statutory demand could be “sudden death” for your company, so you need to act immediately once you are served with one.

How we can help

As you can see, strict time limits apply for statutory demands that cannot be extended. If you are the owner of a small business you need to get legal assistance straight away.

Statutory demands are a legal minefield even for experienced lawyers and there is absolutely no margin for error, either as the creditor or the debtor.  Involving us immediately upon being served with a statutory demand is your best chance of negotiating your way out of your predicament or seeking appropriate relief from the Court.

Even if you reach agreement with a creditor as to particular terms of payment for the debt, whether by way of instalments or otherwise, you need to ensure that the agreement is documented so that the agreement can become legally enforceable if need be.

For more information on this topic, or any other issue relating to statutory demands or debt collection, please do not hesitate to call us on 8354 2233 or send us an email at admin@dirosalawyers.com.au. The first telephone call is always free and no obligation.

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