Statutory demands
Statutory demands are a quick and effective way to get people who owe you money to pay their debts. The failure to respond effectively to a statutory demand is the main reason that companies go into liquidation. On 1 July 2021 the threshold for issuing a statutory demand will increase to $4,000.
1. Introduction
Statutory demands are relatively simple, quick and cheap to prepare and serve. If a statutory demand is not responded to adequately within the time frame allowed, that failure will form the basis for the party to make an application in Court that the company upon whom the demand has been served be wound up in insolvency.
Whilst statutory demands can be useful for the party serving them to seek to have debts paid, they are very technical and mistakes can easily be made, which makes the demand unenforceable. Equally, for the recipient of a demand, they can have a devastating effect on the company if they are ignored or not responded to properly. It is highly recommended that early legal advice is sought in both circumstances.
2. Formal requirements
A statutory demand must strictly comply with what has been set out in the Corporations Act. It must contain the following elements:
· be in writing
· accurately set out the debt in terms of the amount owed and what it is for
· the debt must be at least $2,000; but, will increase to $4,000 from 1 July 2021
· stipulate that the debt must be repaid (or an arrangement) in 21 days
· follow the prescribed form set out in the Corporations Act 2001(Cth)(Form 509H)
· signed by or on behalf the creditor
· an affidavit verifying the debt (unless the debt is as a result of a Court order)
If the formal requirements are not met, it may form the basis for the company who the demand is served on to set aside the statutory demand.
It should be noted that a statutory demand can’t be relied upon to make an application for winding up of a company that is not registered in Australia, even if the company operates in Australia.
3. Service of a statutory demand
Statutory demands can be served on the debtor company by either:
· posting or delivering it to the registered office of the company; or
· delivering a copy of the document personally to a director of the company who lives in Australia.
This can get many companies in trouble if either their registered office is not the primary place of business (because eg the registered address is the company’s accountant) or if it is served over a holiday period. It doesn’t matter if the demand is not passed on by the accountant to the company or if the office is not attended over the holidays, the time continues to run and if 21 days passes, the company will have committed and act of insolvency which can form the basis for a winding up application. This includes weekends and public holidays.
A company will also be validly served if the statutory demand is served on the registered address as recorded in the ASIC records, even if the company has moved. It is entirely up to the company to ensure that the ASIC records are correct.
4. Setting aside a statutory demand
A company that is served with a statutory demand can make an application to the Court, within the 21 day period from service, to set aside the statutory demand. An application can be made either on the basis that:
· there is a genuine dispute as to the debt;
· the company served has a debt owed to it by the party serving the statutory demand that can be off set against the debt claimed; or
· there is an error in the formal requirements of the statutory demand to the effect that it causes substantial injustice.
It is important that the application to set aside the statutory demand is supported by the affidavit of a person from the company qualified to speak to the matters upon which the application is based. Whilst “genuine dispute” does not require a full hearing by the Court, the affidavit must set out sufficient facts to show that there is a genuine dispute as opposed to just saying there is a dispute. The affidavit must be served on the party who issued the statutory demand at the address set out in the statutory demand. That could be the address of lawyers acting for the party issuing the demand.
If the application is not either filed or served (or the affidavit is not served) within 21 days, the company will be deemed to have failed to comply with the statutory demand. The only basis to set aside the statutory demand after the 21 days has passed is to pay the full amount of the debt claimed, even if there is a genuine dispute about that debt.
It can’t stress enough that you need to seek legal advice to deal with statutory demands. In circumstances that you receive a statutory demand, you should consider getting advice immediately.
