By Kate Davey (Senior Associate) and Paul Welling (Principal Solicitor)
Your company has been served with a Form 509H Creditors Statutory Demand for Payment of Debt – what happens next?
In our earlier post titled ‘Statutory Demands – the pros and the cons‘ we discussed the use of Statutory Demands by creditors to recover debts from companies. In this post we adopt the perspective of the debtor company and consider the serious consequences of being served with a Statutory Demand.
Brief recap: 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).
Once a Statutory Demand has been served on a company it has 21 days within which to pay the debt, secure/compound the debt (i.e. cut a deal with the creditor), or make an application to set aside the Statutory Demand.
If none of these steps are taken then a legislative presumption arises that the debtor company is insolvent. The creditor may then apply to a court to have the debtor company wound up (placed into liquidation).
We’ve been served – what happens next?
Given the serious consequences that arise from a failure to comply with a Statutory Demand, it should not be ignored.
Firstly, keep a record of when the Statutory Demand is received and diarise 21 days from that date. After that – act quickly! The courts do not have any power to extend the 21 day time limit.
In order to maximise response time when documents are served, make sure that your company’s registered office details (lodged with ASIC) are kept up to date. If a third party such as your accountant is the registered office, mail should be passed on promptly.
As noted above, a company served with a Statutory Demand has three options:
- pay the debt;
- secure or compound for the amount of the debt, to the creditor’s reasonable satisfaction; or
- apply to have the Statutory Demand set aside.
Pay the debt
If the debt is not disputed and you wish to bring matters to a swift conclusion, simply pay the debt. Make sure that payment is made well in advance of the 21 day deadline.
Reach a compromise
If a settlement can be reached with the creditor, document that agreement in writing. In particular, you should obtain a written undertaking from the creditor that the Statutory Demand will be withdrawn. Again – this should be done prior to the 21 day deadline.
Apply to set the Statutory Demand aside
Most applications to set aside a Statutory Demand are made on the basis that there is a genuine dispute about the amount or existence of the debt.
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.
Alternatively, it is also possible to argue that the Statutory Demand suffers from a defect which would cause serious injustice to the debtor company. This is a difficult threshold to reach – minor typing errors won’t be sufficient.
Critically consider your company’s position
Notwithstanding the options above, it should also be kept in mind that directors will face significant consequences pursuant to the Act if their company is found to have traded while insolvent (defined as being unable to pay its debts as and when they fall due).
If a Statutory Demand is received and the company is experiencing financial difficulties, then the opportunity should be taken to seriously consider whether the business should (or can) continue to trade.
What if we do nothing?
If a company fails to comply with a Statutory Demand, or take one of the steps outlined above, it will be deemed to be insolvent.
Once a company is deemed insolvent, an application to wind the company up can be made by any of its creditors – not only by the creditor who served the Statutory Demand.
Such an application can only be resisted in limited circumstances, such as the company never having received the Statutory Demand or being able to satisfy a Court that, despite failing to comply with the Statutory Demand, it is actually solvent.
A winding up application cannot be opposed using arguments that could have been (or were) used in an application to set aside the Statutory Demand. If there is a genuine dispute about the debt is too late to raise this argument at the hearing of a winding up application. An application to set aside the Statutory Demand must be brought within the 21 day deadline.
Once a company is wound up/placed into liquidation a liquidator will take control of the company and its operations will be brought to an end. Assets will be distributed to creditors and shareholders.
If your company has received a Statutory Demand, it is crucial that you act immediately and seek legal advice. We can assist you through every step of the process. Contact us for an obligation free discussion.