By Piyush Bhimwal
What is a Statutory Demand and when is it appropriate to serve one?
A Statutory Demand from a creditor is a written demand issued under section 459E of the Corporation Act 2001 (Cth) (Act) that demands for a payment of a debt/s owing to the creditor in an amount of at least $4000 by a company.
The Statutory Demand regime offers a method for quickly and cost effectively establishing acompany’s insolvency for the purpose of filing an application to wind up the debtor company[1]
Importantly, the Court has made it clear that it does not look favourably upon creditors that seek to utilise a Statutory Demand as a vehicle for debt recovery. Therefore, creditors should exercise caution when issuing Statutory Demands to ensure that the Statutory Demands are served for valid reasons and in accordance with the Act, including the absence of any genuine disputes or offsetting claims.
Insolvency under section 95A of to the Act, is the inability to pay one’s debts when they become due and payable. Under section 459C(2) of the Act, a rebuttable presumption of insolvency in respect of a company is established ifafter three (3) months a company fails to make payment of a legitimate Statutory Demand served upon it. A creditor may rely on thepresumption of insolvency when submitting an application to wind up the company.
A Statutory Demand must be properly drafted. If a Statutory Demand does not comply with the Act, the debtor company may apply to the Court to have the defective Statutory Demand set aside.
Under the section 459E of the Act, aStatutory Demand:
- Must adequately specify the nature of debt and the quantum of debt;
- Must be signed by or on behalf of the creditor;
- Must be in writing and in the prescribed form; (Form 509H)
- Must be accompanied by an affidavit verifying that the company owes the debt and is payable to the creditor; and
- Require compliance within the statutory period, being 21 days after the Statutory Demand is served.
Service of Statutory Demand:
A Statutory Demand can be served by either of the following:
- Leaving it at the registered office of the debtor company;
- Mailing it to that address; or
- Hand-delivering a copy of the demand to an Australian-based director of the company.
A Statutory Demand can be delivered interstate pursuant to section 15 of the Services and Execution of Process Act 1992 (Cth). The Statutory Demand must additionally include a payment address located in the same jurisdiction in which it is served.
Action required once the Statutory Demand is served:
Upon effective service, the debtor company will have 21 days from the date of service to either:
- Comply with the Statutory Demand; or
- Apply to the Court under section 459G of the Act for an order to set aside the Statutory Demand if the company believes that there is a genuine dispute regarding the debt, whether as a result of an insufficient or unclear demand or because the existence or quantum of the debt itself is in question.
The debtor company is presumed to be insolvent if it fails to take one of the above actions. Failure to do so, gives creditors the right to apply for the winding up of the company. It is thereforeadvised that a debtor company to act as soon as possible after receiving a Statutory Demand.
Setting aside a Statutory Demand:
There are several options available to a debtor company should they seek to set aside aStatutory Demand. After receiving a Statutory Demand, it is important to determine if the debtor company has a legitimate reason to seekthat the demand be set aside.
Pursuant to section 459G of the Act, a debtor company may obtain an order from the Court to set aside a Statutory Demand that has been served on them within the statutory period (being 21 days afterservice).
Pursuant to the Act, a debtor Company may apply to have a Statutory Demand set aside when:
- The statutory minimum is not met;
- There is an offsetting claim;
- There exist any formal defects with the Statutory Demand; or
- There is a genuine dispute over the existence or quantum of the debt that is the subject of the statutory demand.
Statutory Minimum
Under the Corporations Amendment (Statutory Minimum) Regulations2021 (Cth), the Federal Government has increased the minimum debt amount required to satisfy a Statutory Demand from $2,000 to $4,000 effective from July 1, 2021. All Statutory Demands served on or after July 1, 2021, are subject to the new threshold. The amount mentioned in the Statutory Demand must meet the statutory minimum, otherwise, it can be set aside by the Court.
OffsettingClaims
A debtor firm has the right to contest a Statutory Demand on the basis that it has an offsetting claim against the creditor. In saying that, the claim must be legitimate and seek to offset the entirety of the debt or reduce it to an amount which is less than the statutory minimum.
Pursuant to section 459H of the Act,only a debt owed and payable to the creditor who issued the Statutory Demand may be the subject of an offsetting claim.Further, the debtor company asserting the existence of an offsetting claim must quantify the claim or the Court may reject the application.[2]
Formal Defects with the Statutory Demand
The Statutory Demand must meet the requirements mentioned under section 459E of the Act as stated above. The Court may set aside the Statutory Demand, if:
- TheStatutory Demand does not adhere to the criteria outlined in section 459E of the Act; and
- The debtor company upon whom the demand was served suffers substantial injustice because of the defect.
Statutory Demands may be set aside due to defects in either service or form.
Genuine Disputes
Under section 459G of the Act, the Court may set aside the Statutory Demand if the debtor company can establish that there is a genuine dispute between the parties regarding the existence or quantum of the debt. The Court in Spencer Constructions v G&M Aldridge[3] interpreted the meaning of ‘genuine dispute’ as a “bona fide dispute that truly exists in fact” where “the grounds for alleging the existence of a dispute are real and not spurious, hypothetical, illusory or misconceived …”
Further, the Court in the matter of Aussie Hoist Property Pty Ltd vs Mulqueen[4] stated that a debtor company must produce some admissible evidence to the Court to prove that a dispute is genuine, as a mere assertion that the debt is denied by the debtor company is insufficient.
Key Take Away:
Companies that are served with Statutory Demands may suffer serious repercussions if they fail to properly comply with the strict time constraints imposed by the law.Further, companies receiving Statutory Demands made under Section 459E of the Act were afforded some temporary but considerable room to breathe in the COVID economy. However, those modifications are now firmly in the past and the laws governing compliance with statutory requests have returned to its strictest compliance pre-COVID.
The alternatives available to a debtor to contest or offset the debt are considerably limited once the statutory period has passed. As such,it is critical that a debtor who has received a Statutory Demand act right away.
Don’t let procrastination catch you unprepared if you are served with a Statutory Demand. Contact D&D law if you requireadvice on how to deal with a Statutory Demand.
[1]Aussie Vic Plant Hire Pty Ltd v Esanda Finance Corp Ltd [2008] HCA 9.
[2]Jesseron Holdings Pty Ltd v Middle East Trading Consultants Pty Ltd (No 2) (1994) 12 ACLC 490.
[3](1997) FCR 452.
[4] [2018] FCA 1493.
