Receiving a creditor’s Statutory Demand can be daunting if you do not understand what it is, how you can respond to it, and the legal implications of doing so (or failing to do so). Although they are intended to be demands which cannot be ignored, here we will outline the options available to you if you receive one.
What are Statutory Demands?
Statutory Demands are written documents in a specified form issued by creditors seeking a payment of a debt or amount that is owed to them. Statutory Demands will specify each debt and its amount, and the total amount of debt (if the statutory demand is in relation to two or more debts).
Creditors are authorised to make statutory demands under section 459E of the Corporations Act 2001 (Cth). Part 5.4 of the Corporations Act contains the provisions that relate to Statutory Demands, so look to the Act to get a better understanding of the law. However, it is advisable that you seek the advice of a lawyer if you need further assistance.
What should you do if you receive a Statutory Demand?
You could pay the creditor
The Statutory Demand must require the company to pay the amount of the debt, or to secure that amount to the creditor’s reasonable satisfaction, within 21 days after the demand is served on the company.
If you fail to pay the debt within the 21 days, your company is taken to fail to comply with a Statutory Demand. The legal consequence of this is that this can be used to create a presumption of insolvency, which can be relied on within the following 3 months if a person applies for an order to wind up a company in insolvency, on the basis that the company is unable to pay its debts as and when they become due and payable.
Depending on your relationship with the creditor, you could also try to negotiate another payment arrangement with them. This may include offering to pay in instalments, offering security against your property, etc.
You could apply to have the Statutory Demand set aside
You may apply to the Court for an order setting aside a Statutory Demand. This application should be supported by an affidavit specifying the grounds for making the application and must be made within 21 days after the demand is served. A copy of the application and the affidavit must then be served to the creditor.
Before you make the application to the court, you should be aware that a demand will only be set aside if particular circumstances exist. A Statutory Demand will be set aside if:
- The amount owed is less than the statutory minimum ($2000); or
- There is a genuine dispute over the debt; or
- The debtor company has an offsetting claim; or
- There is a defect in the demand that would cause substantial injustice; or
- There is some other reason why it should be set aside based on discretion of Court.
The Courts have noted that a Statutory Demand is only appropriate in circumstances where there is no genuine dispute about the debt and there is no offsetting claim in respect of the amount owed. Therefore, Statutory Demands cannot be substituted for commencing substantive proceedings to recover a debt. The Court may order costs in favour of the company applying for the order to set aside the demand, if the company is successful in its application.
Important to note: if your application to set aside the Statutory Demand is not successful, you will have 7 days from the date the application is determined to pay the debt, unless the Court allows otherwise. Again, the legal consequence of not paying will be the presumption of insolvency.
Conclusion
The important thing to remember is not to ignore a Statutory Demand because there are legal consequences to doing so. Instead, use this article to understand your options and decide what the best course of action for your business would be. You may have a course of action to set aside the Statutory Demand if the circumstances listed above exist.
