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What You Need to Know About Creditors’ Statutory Demands

Statutory Demands

No matter what we do for a living, or even if we’re independently wealthy, we’ve all got one thing in common: we’ve all got bills to pay. And if we don’t pay them, we can all end up facing some pretty unpleasant consequences. In the business world, this can mean being served with a statutory demand.

Keep reading to learn more about what this is, how it is crafted, how it is served and more.

The statutory demand

Put in its simplest terms, a statutory demand is a legal tool that a creditor can use to recover money owed.

In this document, the creditor officially notifies the ‘debtor company’ that it has 21 days in which to render payment. If the debtor company doesn’t comply, negotiate acceptable terms for payment with the creditor, or make an application to have it set aside within that time period, there is a presumption of insolvency. At this point, the creditor can initiate proceedings to wind up the debtor company. This can be done in the Federal Court or a State Supreme Court.

Defining debt for the purposes of a statutory demand

A creditor can only issue a statutory demand when the amount owed is more than $2,000 and is currently due and payable. This means a statutory demand can’t be issued if the debt is:

  • prospective (in the future);
  • contingent (or debt that may become fixed in future, dependent upon the occurrence of some other event which is doubtful or uncertain. The future event must occur to establish the obligation for payment);  or
  • unliquidated (a liability for which the exact amount owed is unable to be ascertained from reviewing the agreed upon contractual terms or that remains in dispute).

Furthermore, anything demanded from the debtor company must have a specific monetary value that is easily identifiable by the debtor company. If a debtor company has multiple debts, you don’t have to issue a statutory demand for each one. Instead, you can issue one document noting the total debt owed and how it accrued.

The elements of a statutory demand

Information about the elements to include in a proper statutory demand can be found in the Corporations Act. The demand should be prepared accordingly because it may be rejected if it lacks the required elements, or if it is misleading in any way. Form 508H should also be used for the statutory demand and it should:

  • be in writing;
  • be signed by the creditor or on the creditor’s behalf;
  • include the debtor’s company name and its registered office (obtained through a new company search);
  • specify a place in Australia where the debt can be paid, such as the creditor’s office, or the creditor’s lawyer’s office.

The statutory demand should be supported by a judgment of the court or an affidavit. Without this supporting evidence, the demand will be set aside.

Proper service of a statutory demand

Statutory demands are routinely served upon people or companies throughout Australia. Guidance for proper service can be found in the Service and Execution of Process Act.

The statutory demand should be served at the debtor company’s registered address. It can be served in person or by mail. It can also be served on the company director, provided their address is in Australia. This is a good option if the company has moved and its new address can’t or hasn’t been obtained.

The address for payment and the address to serve any application to set aside the default judgment must be in the same jurisdiction where it is served. In other words, if the statutory demand is issued to a debtor company in NSW, the payment address must be there, too.

The risks of a statutory demand

Of course, there is no guarantee a statutory demand will work. The biggest hurdle is the debtor company’s right to file an application for the demand to be set aside. If the debtor company prevails,  it may be allowed to recover their legal costs of the application.

The court can grant a request to set aside a statutory demand if:

  • the debtor company has a counter claim against the creditor that would reduce the amount owed by the debtor company to less than the statutory minimum; or
  • there is a legitimate disagreement about either the amount of the debt, or the debt itself.

Another risk is that the debtor company won’t be able to repay the debt.  If there are concerns about this, as a precaution the creditor should make preliminary inquiries about the debtor company’s assets.

If a judgment against a debtor company hasn’t been obtained, it is easier for the court to set the demand aside on the grounds that there is a legitimate dispute. In this context, the merits of the dispute are not essential. The only standard is a lesser one mandating that there is “a serious question to be tried”.

A debtor company can still challenge a wind-up application, usually on the basis that the company is solvent. If a creditor utilises a statutory demand, winding up proceedings is the only means for enforcement.

Receipt of the statutory demand

As we have already noted, a presumption of insolvency takes effect once the debtor company receives the statutory demand. It lasts for three months, and if the debtor company hasn’t complied with or acknowledged the statutory demand, the creditor can implement winding up proceedings.

Keep in mind that the debtor company may want to make an application to have the statutory demand set aside. In this case, it must do so within 21 days of service of the  demand. It must also attach a supporting affidavit to the application. As per the Corporations Act, a statutory demand can be set aside if:

  • the amount owed is less than statutory minimum of $2,000;
  • the statutory demand contains inaccurate or misleading information, or there are other errors or omissions that would cause substantial injustice if it was not set aside;
  • there is “some other reason” why the demand should not be set side.

In summary

A statutory demand is one means of debt recovery that can be used when a business fails to meet its financial obligations. Because this demand involves specific requirements for creditors and debtor companies, it is best to get sound legal advice prior to pursuing this option.

If you are a creditor trying to recover money owed, or a debtor company that is in receipt of a statutory demand, we can help. McNamara Law has a solid reputation for providing high-quality legal advice and solutions across diverse industries, providing prompt, expert and cost-effective solutions for all commercial matters, including debt recovery. Contact us on 13 58 28 to arrange a consultation, today.