Statutory Demand FAQ’s, What Is A Statutory Demand?

A Statutory Demand is one of the most powerful business debt collection tools available to a creditor and is commonly used by the Australian Taxation Office, Workers compensation Insurers and trade suppliers.

The Statutory Demand may be issued immediately after a debt becomes due but can only be issued by a creditor if the debt is not disputed. In fact, a certificate must be signed saying no genuine dispute exists in relation to the debt.

The Statutory Demand allows the recipient or debtor company 21 days from the date of the demand to;

  • Pay the debt in full; or
  • File an application in court to have the demand set aside on the basis of a genuine dispute.

If within the 21 days an appropriate defence is not filed in court – the company is deemed to be insolvent!

This may mean that in as little as 8 weeks of the demand being served, the court could appoint liquidators to your company.

What is the procedure for issuing a Statutory Demand?

Statutory Demand under Section 459E(2) must;

  • Specify the debt claimed and indicate the nature of the debt ie. goods supplied and delivered
  • Require payment within 21 days
  • be in writing and in the prescribed form
  • be signed by or on behalf of the creditor

How long does a creditor have to lodge a winding up application?

Section 459C(2) provides that the presumption of insolvency only lasts for three (3) months after the Statutory Demand is served and before the application to wind up the company is lodged.

If an application to wind up the debtor company is not lodged within that time, then the Statutory Demandcannot be relied upon and the process of issuing the demand will need to be started afresh.

Can the 21 days in which to comply with a Statutory Demand be extended?

A company is taken to have failed to comply with a Statutory Demand at the end of 21 days after the date of service.

The time for compliance may be longer if the company seeks to set aside the demand and the court may extend the time for compliance where the hearing of an application pursuant to that section is sought.

If the court does not extend the time for compliance, then compliance ends 7 days after the application is finally determined.

Resisting a Statutory Demand

If a company wishes to set aside a Statutory Demand it must apply to court within the 21 days of service of the demand and it must serve the supporting affidavit on the person who made the Statutory Demand.

The supporting affidavit should state the grounds upon which the application is made rather than simply making the assertion that the debt is not due. If the affidavit is insufficient, it cannot be supplemented by a late affidavit served outside the 21 day period.

Statutory Demand will only be set aside if;

  • The debt is subject to a genuine dispute
  • The amount in fact owed is less than the statutory minimum
  • There is a defect in the Statutory Demand that would cause substantial injustice if not set aside
  • There is some other reason why it should be set aside

Statutory Demand which has a defect can only be set aside where it causes substantial injustice. It will not be set aside if the Statutory Demand is within the terms of the Act and the defect is only a minor irregularity or misstatement.

The Act provides for setting aside the Statutory Demand for some other reason. The fact a company is solvent is not some other reason. A demand containing grossly inflated amounts might be some other reason.

STATUTORY DEMANDS AND WINDING UP APPLICATIONS – THE RISKS OF IGNORING THEM!!

Experience has shown that most company directors do not understand the significance of Statutory Demands and Winding Up Applications when served on the registered office of the company. The general presumption is –

  1. “I can pay this out before it gets to court” – in the case of a Statutory Demand
  2. “I can settle this matter in the eleventh hour before the matter proceeds to a hearing” – in the case of a Winding Up Application
  3. “I can appoint a Voluntary Administrator and prevent the court from appointing a liquidator” – in the case of a Winding Up Application

The above measures may delay the eventual process, but it still leaves at risk the possibility that your company may be liquidated. In the event that your company is served with a Statutory Demand, you must respond to it within 21 days of service. The response can either be:

  1. to claim that the Statutory Demand is defective in some way; or
  2. have the Statutory Demand set aside because of the existence of a genuine dispute.

In either case the application MUST be filed and served within 21 days of service. There is no provision to extend this time, even if the issuing party agrees to extend the 21 day period. The legislation (Corporations Law) does not allow for this extension of time. If you fail to make application to set aside the Statutory Demand, your company will be deemed to be insolvent, even if the facts (the Accounting Records) indicate otherwise. A party relying on non-compliance with the rules in relation to a Statutory Demand will or can proceed to issue a Winding Up Application to wind up your company. It will also, under the rules, file with ASIC a Notice of Intention to Wind Up your company (Form 519). This then becomes public information. Even if you intend to settle after the filing and service of a Winding Up Application, any other creditor of your company can file a Notice of Appearance and make an application to substitute their claim against your company, after you have settled with the party who issued the proceedings, based on the non-compliance with the Statutory Demand. This process can technically continue until all potential creditors have been paid. This process will leave your company in a precarious position because of the adverse publicity by having your company named in public records of ASIC, stating “An Application for Winding Up of the Corporation was filed on …/…/… “ and the adverse publicity that will result in an advertisement being placed in a national newspaper advising of the hearing date for the Winding Up. This inconvenience does not end there. You would have incurred substantial legal costs in having representation in relation to substitution by many creditors. Summary If you receive a Statutory Demand:-

  1. Act IMMEDIATELY and seek advice; and
  2. Contact Bernie Neville on 0414 586 665.