What is a Statutory Demand?
A Statutory Demand is a formal demand for payment of a debt under section 459E of the Corporations Act, and may be made provided that the debt is due and payable. If you are served with a Statutory Demand you have 21 days to apply to the Court to have it set aside. It is important to note that failing to meet the terms of a Statutory Demand is a common basis for the presumption of insolvency (see Section Insolvency), and all that that implies.
When may a Statutory Demand be issued?
A creditor may issue a Statutory Demand immediately after a debt becomes due but only if the debt is not disputed. In fact, a certificate must be signed saying no genuine dispute exists in relation to the debt.
What is the procedure for issuing a Statutory Demand?
Under Section 459E(2) of the Corporations Act, a Statutory Demand under must:
- Specify the debt claimed and indicate the nature of the debt, eg, for goods supplied and delivered
- Require payment within 21 days
- Be in writing and in the prescribed format
- Be signed by or on behalf of the creditor.
What are the implications of a Statutory Demand?
Under section 459C of the Corporations Act, a company is presumed to be insolvent if, in the three months after the day on which a winding up application is made, one of the following events occur: (1) The company fails to comply with a statutory demand, or (2) a judgment remains unsatisfied, or (3) a receiver and/or administrator is appointed to the company, either privately or by the Court.
How important is it to act on receiving a Statutory Demand?
If you do not file an appropriate defence in Court within 21 days, the company may be deemed to be insolvent. This may mean that in as little as 8 weeks of the demand being served, the Court could appoint a liquidator to your company.
Can Statutory Demands be set aside?
The Statutory Demand allows the recipient or debtor company 21 days from the date of the demand to either pay the debt in full, or else file an application in Court to have the statutory demand set aside on the basis of a genuine dispute.
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 Demand cannot be relied upon and the process of issuing the demand will need to be started afresh.
Can the time in which to comply with a Statutory Demand be extended?
A recipient of a Statutory Demand is deemed to have failed to comply at the end of 21 days from the date of service. The time for compliance may be extended if an application is made through the Court to set the Statutory Demand aside, and the time for compliance may be extended 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.
Can a Statutory Demand be resisted?
If you wish, and have grounds, to have a Statutory Demand set aside you must apply to court within the 21 days of the demand having been served and the supporting affidavit must be served on the person who made the Statutory Demand. The supporting affidavit should state the grounds upon which the application is made rather than, for example, 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.
When can a Statutory Demand be set aside?
A Court will only set a Statutory Demand aside when (1) the debt is subject to a genuine dispute, or (2) the amount owed is less than the statutory minimum, or (3) there is a defect in the Statutory Demand that would cause substantial injustice if not set aside, or (4) there is some reasonable other reason why it should be set aside.
If a Statutory Demand us defective, can it to be set aside?
A Statutory Demands with a defect will only be set aside where it can be shown as being likely to cause a substantial injustice. The Court will not set aside a Statutory Demand if it is within the terms of the Act and for example, if the defect is only a minor misstatement or irregularity.
Do “other reasons” exist, for setting aside a Statutory Demand?
The Act provides for setting aside the Statutory Demand “for some other reason”, such as a Statutory Demand containing grossly inflated amounts. An argument that a company may still be solvent would not be considered “some other reason”.
How serious are the risks of a Statutory Demand or Winding Up Application?
Directors often fail to appreciate the seriousness of Statutory Demands and Winding Up Applications. If a Statutory Demand or Winding Up Application is served on your registered office, it is essential that you respond immediately. Even if you are confident you have ways of defraying the eventual process, remember that whatever delaying action you take, you still run the risk of your company being liquidated.
What are the steps following service of a Statutory Demand?
When your company is served with a Statutory Demand, you have within 21 days of service to respond. The response can either be: (1) to claim that the Statutory Demand is seriously defective; or (2) to have the Statutory Demand set aside because of the existence of a genuine dispute. Whatever your approach, Corporations Law does not allow for any extension of time and your application MUST be filed and served within 21 days of service. Even if the issuing party agrees to extend the 21-day period, there are no provisions to extend this time. If you fail to make application have to the Statutory Demand set aside, your company will be deemed to be insolvent, even if (say) your Accounting Records suggest you are not insolvent. A party relying on non-compliance with the rules in relation to a Statutory Demand may or will proceed to issue a Winding Up Application. It may also, under the rules, file a Notice of Intention to Wind Up your company (Form 519) with ASIC, which then becomes public information. Even if you intend to settle the debt after the filing and service of a Winding Up Application, any other creditor of your company is liable to file a Notice of Appearance and make application, based on the non-compliance with the Statutory Demand, to substitute their claim against your company, despite you having settled with the creditor who issued the proceedings. Technically, this process may potentially continue until all your creditors have been paid. The process will leave your company in a precarious position because of the adverse publicity that will have resulted from your company having been named in ASIC’s public records, which would state in effect that “An Application for Winding Up of the (your company) was filed on …/…/…”. Further reputational damage is likely to result from an advertisement being placed in a national newspaper advising of the hearing date for the Winding Up. Finally, the inconvenience and reputational harm you are likely to suffer does not end there; you will also have likely incurred substantial legal costs in relation to having to deal with multiple demands from your creditors.
What if I receive a Statutory Demand?
Most importantly, don’t ignore it — it’s serious. If you receive a Statutory Demand you should seek advice and act immediately. Phone Turnaround Professionals on 1300 518 070.