Beware of using a statutory demand as a debt collection exercise
What is a statutory demand?
A statutory demand is a demand sent to a company under section 459E of the Corporations Act 2001 (Cth) that relates to a debt of the company that is due and payable. The demand requires the company to pay the amount of the debt within 21 days after the demand is served on the company.
What happens if the debtor company does not comply with the statutory demand?
If a debtor company does not pay the debt stated in the demand, or does not apply to the court to set aside the demand within 21 days, the debtor company has failed to comply with the demand. The effect of the failure to make payment is that the debtor company is presumed to be unable to pay its debts when they fall due and payable, meaning that the debtor company is insolvent.
What happens if the debtor company applies to set aside the statutory demand?
The debtor company can defend the application, or rebut the presumption, by applying to set aside the statutory demand. There are a number of valid bases on which a debtor company might defend the statutory demand, such as:
- if there is a genuine dispute about the debt
- if the debtor company has an offsetting debt
- if the demand was defective
- some other relevant reason
If the debtor company is successful, the court may order the creditor to pay the costs of the debtor company for wasting its time and money. Therefore, it is not wise to serve a statutory demand on a company without first investigating the debt, liaising with the company and sending letters of demand. If there are no grounds for setting the judgment aside, and there is suspicion of insolvency, then a statutory demand may be a suitable course of action.
The debtor company has failed to comply – so I get repaid the debt now, right?
Not quite. If a debtor company has failed to comply with the statutory demand, or has applied to set aside the demand and failed, the creditor can then apply to the court to have the debtor company wound up. A liquidator will likely be appointed, and the creditor may receive payment of the outstanding debt in full, in part or not at all, depending on the debtor company’s financial position. The court will not order payment of the debt upon a winding up application. That is for the liquidation process, after the winding up order has been made.
That is, a statutory demand provides no guarantee to a creditor that it will recover the original debt, even if successful.
Take steps to have a debt paid before issuing a statutory demand
If a debtor company is solvent, using a statutory demand as a means of forcing the company to pay a debt is an abuse of process. The proper course of action is to bring an action for the debt in the Local, District or Supreme Court, depending on the amount of debt owed.
Consider the risks and possible costs before you make a statutory demand
In a recent matter I acted in, a client seeking to get a debt paid wanted to threaten the debtor company with a statutory demand. To “put a gun to their head”, as they put it.
However, the degree of uncertainty of the outcome and the expense of making a statutory demand, particularly where there was no suspicion of insolvency, and where there was a genuine dispute about the tax invoice and amount owing, was too high to risk.
As I explained to the client, the statutory demand could be set aside, they could end up with an expensive legal bill and they risked having to pay the debtor’s legal costs as well.