The Power of a Statutory Demand

If you are in business, whether you are a company director, manager, accountant or advisor, you should understand the power of a Statutory Demand.

This article explains what Statutory Demands are and why they are such a powerful and efficient weapon for collecting debts

. We will also explain what you must to do, and do fast, if you are served with a Statutory Demand. In practice, the process of issuing a Statutory Demand as a means of collecting debts is now commonly used, although it was originally intended to be the first step in an application to wind up an insolvent company.

The Corporations Act deems a company to be insolvent if, having received a Statutory Demand, the company fails to pay the creditor or have the Statutory Demand set aside by a court. It is easy to see how a Statutory Demand places immense pressure on a company to pay its debts.

Insolvency

The most common basis for placing a company into liquidation is insolvency. Just as an individual can be made bankrupt, so a company can be wound up and brought to a

commercial end. Whereas an individual continues to live and breathe through and after

bankruptcy and the slate is wiped clean, a company that is wound up will usually cease

to exist at all.

The test of whether or not a company is insolvent is whether or not the company is able

to pay its debts as and when they become due and payable.

Valid S

tatutory Demands

Statutory Demands can only be

served for debts of at least $2,000 and can only be

served upon companies. A person trading under a business name without the use of a

company cannot be served with a Statutory Demand.

The debt cannot be

in

dispute

. This means that, for example,

if the other party claims

the goods delivered were incorrect, or not of merchantable quality

, and that they should

therefore not have to pay for them, then there is a dispute. Also, if there is a claim

against you

by the c

ompany, then this can be used as a basis to ‘offset’ the amount

claimed. Statutory Demands in these circumstances cannot assist you. On the other

hand,

if you are on the receiving end of a Statutory Demand,

it may be possible to resist

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it by

raising an on offsetting claim.

Company

directors, managers, accountants and

people in credit control can all benefit from

knowing how to minimise the grounds for the

debtor company to claim there is a

genuine dispute. For example, if you are being

asked

by a debtor company for

more time to pay a debt, it is prudent to ask

the person

you are dealing with to put it in writing and confirm they are authorised by the company

to do so.

This will make it

much harder for them

to claim subsequently that there is

a

‘genuine dispute’

.

In addition, you have to be able to put a dollar value on the debt and the debt amount

must be at least

$2,000.

The

Statutory Demand document claiming the demand must be in the prescribed form,

must be in writing and must be signed by or on behalf of the creditor. It must correctly

state the debtor’s company

’s name and its registered office and it must specify a place

in Australia where the debt can be paid. It is permissible to specify that payment be

made to the creditor’s solici

tors.

The Statutory Demand requires the company to pay the debt or secure or compound

the amount owed

within 21 days

of

receiving

the Statutory Demand “to the creditor’s

satisfaction”. It is for the Court to decide whether a creditor acted reasonably by

rejecting

a debtor’s proposal.

Judgment does not need to be obtained

One of the significant advantages of Statutory Demands is that it is

not

necessary

to

first get judgment against the debtor company. So if there is no genuine dispute about

the debt

, then serving a Statutory Demand is a faster and more

efficient

than

the

alternative

of first commencing a

legal action.

If a judgment has not first

been obtained then there must be an affidavit accompanying

the Statutory Demand which verifies that the debt is due and payable and complies with

the

relevant

rules

. If the Statutory Demand does not rely on a judgment and it is not

accompanied by an affidavit

verifying the debt

, it will be set aside.

How a Statutory Demand is served

A Statutory Demand

must be properly served. It can be served by leaving it at the

registered office of the debtor company, sending it by post to that office or delivering a

copy of the Statutory Demand personally to a director of the company who resides in

Australia.

Where

a creditor becomes aware that the company no longer occupies the registered

address and the creditor is aware of the new address, then he or she should bring the

Statutory Demand to the notice of the company at that new address.

Accountants need to be very

careful here. Often accounting firms are the registered

offices for many of their clients. Should they receive a Statutory Demand and fail to

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deal with the document properly,

or

simply

ignore it

, then the accountants themselves

could be liable in negligence.

Resisting a Statutory Demand

If a company wishes to have a Statutory Demand set aside, it must apply to the Court

within 21 days of receiving

the Statutory Demand. The application must be supported by

an affidavit. The application and affidavit mus

t also be served upon the creditor within

the same 21 day period.

The supporting affidavit should state

all

the grounds for making the application, rather

than simply making an 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.

There are strict rules about how an application to set a

Statutory Demand

aside must be

served, especially if the creditor is in another State.

Reasons for setting aside a Statutory Demand

A Statutory Demand will only be set aside if the amount owed is in fact owed less than

the statutory minimum

; if the debtor has an offsetting claim; if there is a defect in the

demand that would cause substantial injustice;

or if there is some other

, generally

technical,

reason why the demand should be set aside.

A Statutory Demand which has a defect can only be set aside where it causes

substantial injustice. It will not be set aside if it constitutes

a demand within the terms of

the

Corporations

Act and the defect is only a minor irregularity or misstatement.

Risks in Statutory Demands for both debtors and creditors

From a debtor’s point of view, a

problem with Statutory Demand

s is that once the time

for compliance with the demand has expired, unless there is a valid application filed and

served to set the demand aside,

there is absolutely no opportunity of contesting the

demand

and the debtor must either

pay the debt and legal fees or risk being wound up.

A creditor using a Statutory Demand as a quick means of a debt recovery can likewise

have the whole thing blow up in its face. Where there is no judgment already obtained,

all a debtor has to show to set aside a demand is that a

genuine dispute exists. This is

why

it is prudent to get written

debtor concessions, if possible, at an early point.

If the

Statutory Demand is successfully set aside by the debtor

, the Court will

usually

order

the creditor to pay the debtor’s legal costs

.

If there is no dispute,

then

normally

the only thing left for the debtor company

to do

is

urgent

ly negotiat

e payment of the

debt, often

including payment of the creditor’s legal

costs.

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Conclusion

Statutory Demands can be

a very effective and

powerful tool for a creditor. Using a

Statutory Demand can be cheaper, faster and more efficient in recovering debts than

other methods and,

if done properly

, will force a debtor to act and act quickly.

There are significant risks for both creditors and debtors when serving or responding to

Statutory Demands. These risks can be minimised by seeking legal advice as early as

possible.

If you

require

more information or if you need assistance and

advice on how to handle

any debt matters, please call us on

(03)

9347 0355

or email

info@schembrilawyers.com.au today.

Commercial Law Enquiry