A Statutory Demand is a means of recovering a debt owed by a company, provided under the Corporations Act 2001 (‘the Act’). If a company fails to comply with a Statutory Demand, the Court will presume that the company is insolvent. The Act states that the Statutory Demand must:
- Require payment within 21 days;
- Be in writing and in the prescribed form;
- Be signed by or on behalf of the Creditor;
- Be accompanied by an affidavit verifying the debt IF the debt is not a judgement debt (where a Court Order exists for the amount claimed).
Once a demand is received by the debtor company, one of 4 things may occur:
- The company pays in full;
- The company contacts the creditor to negotiate a payment arrangement;
- The company applies to have the demand set aside by the Court; or
- The company does not respond, in which case the creditor can apply to have the company wound up.
Setting Demand Aside
If a company receives a Statutory Demand claiming a debt, it may apply to the Court for an Order setting the Demand aside. Any application must be made within 21 days of receiving the Statutory Demand and must demonstrate:
- That there is a genuine dispute regarding the amount claimed; or
- The debtor company has an offsetting claim; or
- That because of a defect in the demand, a substantial injustice will be caused unless it is set aside; or
- There is some other reason why it should be set aside.
When applying to the Court to set aside a Statutory Demand on the grounds of a genuine dispute existing in relation to the debt, the debtor company does not need to establish and prove a defence to the debt. The debtor company only needs point to facts that may give rise to a defence. In determining whether a genuine dispute exists, the Court will not make an in-depth examination of or determination of the merits of the alleged dispute.
Effect on non-payment
If, after the 21 day period following service of the Statutory Demand, the debtor company has failed to pay the amount claimed or has not made an application to set aside the Demand, an Application to wind the Company up in insolvency can be made. If the Application is successful, the Court will appoint a liquidator to commence winding up the company.
The 21 day period commences once the Statutory Demand has been served at the registered office of the company. A document may be served on a company by:
- Leaving it at, or posting it to, the company’s registered office; or
- Delivering a copy of the document personally to a director of the company who resides in Australia or in an external territory; or
- If a liquidator of the company has been appointed – leaving it at, or posting it to, the address of the liquidator’s office in the most recent notice of that address lodged with ASIC; or
- If an administrator of the company has been appointed, leaving it at, or posting it to, the address of the administrator in the most recent notice of that address lodged with ASIC.
If serving a Statutory Demand by post, the best practice is to conduct an ASIC search immediately prior to ensure that the address on the envelope matches the current registered office of the debtor company exactly. Failure to serve the Statutory Demand at the correct address will give rise to a defect in the statutory demand which may lead to it being set aside.
Risk of Proceedings
Before using a Statutory Demand as a method of debt recovery from a company, parties should consider whether it is likely any argument to set aside the demand will be raised. As a Statutory Demand can result in costly Court proceedings for either a setting aside application (by the debtor) or winding up application (by the creditor), parties should seek legal advice on whether this is the correct means of recovery.