A guide to statutory demands & what to do if you are served with a demand

Intro

If a company owes one or more debts which are due and payable to a creditor and which remain outstanding, it is possible that the creditor may decide to serve a statutory demand on the debtor company. The statutory demand may require the debtor company to either pay the debt(s) in full or provide security for the debt(s) to the creditor’s reasonable satisfaction within 21 days after the demand is served on the company[1].

Requirements for a valid demand

In summary the requirements for a valid statutory demand on a company are as follows:

  1. If the demand relates to a single debt the demand must specify the debt and its amount. If the demand relates to 2 or more debts then the demand must specify the total;
  2. The total debt(s) owed must be more than $2,000;
  3. The demand must require payment of the debt or the debtor company to secure or compound the debt to the creditors reasonable satisfaction within 21 days of service of the demand on the debtor company;
  4. The demand must be in writing, in the prescribed form, and signed by or on behalf of the creditor; and
  5. If there is no judgement in respect of the debt then the demand must be accompanied by an affidavit which clearly verifies that the debt is due and payable in full and the affidavit must comply with the rules.

Bear in mind the available grounds to have the demand set aside, and the likely costs outcome if it is set aside (discussed below).  All of the circumstances should be considered before deciding to proceed with service of a demand.

Time is of the essence

If you are on the receiving end of a statutory demand, legal advice should immediately be sought.

If the debtor company does not take any action (i.e. comply with the demand, ensure that the demand is no longer in effect, or apply to the relevant Court) within 21 days of service of the demand, and the demand is still in effect, the creditor[2] can immediately apply for the debtor company to be wound up and the Court “must” presume that the debtor company is insolvent[3]. Extensions of time are not possible.

Aside from the very harsh effects of winding up proceedings on the debtor company, the onus will be on the debtor company to then prove that it is in fact solvent. In such circumstances the debtor company will not, without the leave of the Court[4], be able to oppose the application on a ground that it might otherwise be able to do so in an application to set aside the statutory demand.

Application to set aside a statutory demand

If however an application is made to set aside the statutory demand within 21 days of service, supported by an affidavit, and the application to set aside the statutory demand along with the supporting affidavit is served on the person who served the demand on the debtor company within the 21 day period[5], then the application to set aside the demand would be validly issued[6].

Grounds for setting aside the statutory demand

The Court must be satisfied either:

  1. that there is a “genuine dispute” between the company and the creditor about the existence or amount of the debt;
  1. that the debtor company has an offsetting claim[7];
  1. that there is a defect in the demand “and substantial injustice will be caused unless the demand is set aside”; or
  1. that some other reason exists why the demand should be set aside[8].

If the demand is set aside then there will be no automatic presumption of insolvency and it is likely that the creditor would have to pay the debtors costs of the application to set aside[9] unless the debtor has behaved unreasonably.

Contact our Sydney business lawyers for assistance in relation to the above.  Our commercial lawyers, business lawyers, and disputes lawyers provide expertise in corporate and commercial advisory services as well as litigation and dispute resolution.  Take a look also at a sample selection of our more basic fixed fee legal services.

The information provided in this article is provided by way of general information only. It does not constitute legal advice, and should not be relied upon as such. Specific independent legal advice should be obtained before deciding to act, or not to act, upon the views expressed or information contained in this article.

Copyright of Heathfield Grosvenor 2016. All rights reserved.

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[1] S.459E of the Corporations Act 2001 (Cth) (Corps Act)

[2] being one of the class of persons under s.459P of the Corps Act

[3] s.459C (2) (a) of the Corps Act

[4] the Court can only grant leave if it is satisfied that the ground is “material” to proving that the company is solvent under s.459S of the Corps Act.

[5] Sufficient time must be allowed for service in compliance with s.109X of the Corps Act. Any person receiving a statutory demand must take action immediately.

[6] s.459G of the Corps Act

[7] s.459H of the Corps Act

[8] s.459J of the Corps Act

[9] s.459N of the Corps Act

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