By Kate Davey (Lawyer) and Paul Welling (Principal Solicitor)
As we noted in our earlier blog post titled “You’re owed money…what next?”, in certain circumstances, a Statutory Demand may be an appropriate method for recovering a debt from a company.
The purpose of this post is to detail the process for issuing a Statutory Demand and to consider the pros and cons of doing so.
What is a Statutory Demand?
A Statutory Demand is a formal demand for payment of a debt owed by a company, issued pursuant to Part 5.4 of the Corporations Act 2001 (the Act). Unless the debt is a judgment debt a Statutory Demand must also be accompanied by an affidavit attesting to the fact that there is no “genuine dispute” about the debt.
A Statutory Demand must be in the prescribed form and must relate to a debt (or debts) totalling at least $2,000. It must also:
- be in writing;
- be signed by or on behalf of the creditor;
- correctly state the debtor company’s name and its registered office; and
- specify a place in Australia where the debt can be paid.
Once a Statutory Demand has been served the debtor company must either:
- pay the debt; or
- apply to have the Statutory Demand set aside.
If the debtor company does not take one of these steps within 21 days then a legislative presumption arises that the company is insolvent. The creditor may then apply to a court to have the company wound up (placed into liquidation).
Setting aside a Statutory Demand
It is crucial that a Statutory Demand is formulated correctly and accurately.
Grounds upon which a Statutory Demand can be set aside include:
- there is a genuine dispute about the existence or the amount of the debt;
- the debtor company has an offsetting claim;
- because of a defect in the Statutory Demand, substantial injustice will be caused unless it is set aside;
- the Statutory Demand was not served properly; and/or
- there are deficiencies in the accompanying affidavit.
The term “genuine dispute” is not defined in the Act. The courts have held that what is required is that:
- the dispute be bona fide and truly exist in fact;
- the grounds for alleging the existence of a dispute are real and not spurious, hypothetical, illusionary or misconceived.
The Court’s task is not to adjudicate or assess the merits of the dispute. All that needs to be determined is that there is a serious question to be tried. Once a Statutory Demand is set aside, the creditor will find itself faced with a significant costs order against it. It is therefore essential that the possibility of a debtor company having a genuine dispute is considered thoroughly before a Statutory Demand is issued.
The existence of a defect is not sufficient grounds for a Statutory Demand to be set aside. The defect must be one that will cause substantial injustice if the Statutory Demand is not set aside.
It is not easy to find such defects. Defects such as service at an address that is no longer the debtor company’s registered office and failure to specify the amount of each debt where a demand claimed payment of a number of debts have been held to not be capable of causing substantial injustice.
On the other hand, defects which have been held to have caused substantial injustice include a failure to specify individual debts when multiple debts are claimed if the creditor company cannot determine whether it is liable for the amounts claimed, and where a Statutory Demand and the attached schedule of debt claimed different sums.
Abuse of process in winding up application
As noted above, failure to pay the debt or apply to have the Statutory Demand set aside within 21 days gives rise to a legislative presumption that the company is insolvent. The creditor may then apply to a court to have the debtor company wound up.
However, the courts will reject the use of the winding up application process where it considers that the application amounts to an abuse of process. Examples include:
- if the applicant is seeking to use the proceeding to cause the debtor company to pay an alleged debt without affording it a reasonable opportunity to ascertain or establish that the debt is properly payable;
- if there is likely to be a substantial contest as to the existence or enforceability of a debt, which would properly be resolved in separate proceedings brought for that purpose;
- threatening winding-up proceedings in an attempt to coerce a company into doing something for the creditor’s benefit; and
- applications against long established, highly reputable listed public companies whose financial position could be ascertained easily from publicly available balance sheets and financial statements.
Even if it appeared to a creditor that there was no genuine dispute as to the existence of the debt, an adverse costs order might be made if the creditor had no genuine belief that the debtor was insolvent.
As the Court said in Ayrton Investments Pty Ltd v Robert Andrlik (2000) 34 ACSR 643:
“It is not appropriate to invoke winding up proceedings merely as pressure upon a reluctant debtor to pay sooner rather than later”.
A creditor using a Statutory Demand as a quick means of debt recovery can run into a number of difficulties. All that a debtor has to show to set aside a Statutory Demand is that there is some sort of genuine dispute. Furthermore, the courts have shown a willingness to reject the use of the winding up application procedure where its use amounts to an abuse of process.
We recommend that, where a judgment has not already been obtained, all of the surrounding circumstances be considered carefully before a Statutory Demand is issued.