The destructive power of Statutory Demands
What is a statutory demand?
A statutory demand is a document which can be served on a debtor company by a creditor. The rules of its application are set out under the Corporations Act 2001 which states a company must pay the debt, or within 21 days of receiving the demand, it must apply to have it set aside. Failure to respond in either option results in the debtor company being presumed insolvent and may lead to the company being petitioned to be wound up.
Issuing a statutory demand
A creditor can issue a statutory demand by executing the required documentation and including an affidavit, both of which must be posted or delivered to the registered office of the debtor company. Demands can be issued without a court order, but must strictly adhere to certain criteria. The demand must:
- Relate to a debt worth more than $2000;
- Be a debt due and payable at the time of issuing the demand;
- Appear in the prescribed form;
- Be signed by the creditor or their solicitor; and
- Be accompanied by an affidavit where the demand does not relate to a judgment debt.
What happens if a company ignores a statutory demand?
If a company fails to respond to a statutory demand within 21 days, the debtor company will be presumed insolvent. This presumption is a powerful tool for creditors looking to enforce a debt ? it means they can apply to the court for the company to be wound up. Failure to comply with a statutory demand could be lethal to a company.
What can a company do if served with a demand?
A company has three options it must take within 21 days of being served with a demand:
- Pay the amount demanded;
- Reach a compromise with the creditor and have the creditor withdraw the demand in writing; or
- Make an application under s 459G of the Corporations Act 2001 to have the statutory demand set aside.
A company seeking the demand be set aside can do so on the following bases:
- If there is a formal defect in the statutory demand that would cause significant injustice to the debtor;
- If the debtor company can show a genuine dispute as to the amount or existence of the debt; or
- If the debtor company can establish an off-setting claim.
Formal defect
The defect must cause substantial injustice to the company being served. Common defects include wrongly identifying the creditor, not correctly witnessing the demand and errors in the affidavit. Notably, the courts have viewed incorrect identification of the parties as more serious than any other defect. Omitting a signature and errors in addresses or dates will not usually justify setting aside a demand, however, the court will look at the circumstances of every case to determine whether substantial injustice has been caused by a formal defect.
Genuine Dispute
If a debtor company can prove to the court there is a genuine dispute in relation to the demand, then it can have the debt set aside.
An off-setting claim
A company may have an off-setting claim against the creditor, even if it does not arise out of the same transaction to which the demand relates. If the off-setting claim is equal to, or more than the statutory demand, the court will set aside the statutory demand
If the claim is less, the demand will be reduced but remain in force. The debtor company must have evidence to support its off-setting claim. If successful, the court may order costs in the debtor's favour, but if there are insufficient grounds for an application, the statutory demand will remain.
The Graywinter principle
The party applying to set aside a statutory demand must ensure allgrounds of dispute are supported by an affidavit filed and served within the 21-day deadline. Debtor companies must think carefully about why a statutory demand is being disputed because once the affidavit is complete, it defines the scope of what evidence the company can rely on. Anything outside the scope of the affidavit won't be permitted.
Special rules for statutory demands relying on adjudication determinations made under the Building and Construction Industry Security for Payment Act 1999
In Tesoro [2009] FCA 802 the Federal Court said a party should be careful if issuing a statutory demand which relies on an adjudication determination. This is because the determination is only an interim decision to implement a 'pay-now-argue-later' regime for issues regarding construction contracts, it does not necessarily determine the final legal position between the parties. If a court finds a party wrongfully refused to withdraw a statutory demand it may order the costs accrued by the other side be paid.
Protect your company
Healthy companies can be destroyed by overlooking or underestimating the power of a statutory demand for a small debt. If a company is served with a statutory demand, seeking immediate legal advice is vital. That advice can protect a company from paying a debt which is not yet enforceable, or worse still, being wound up.
This article is provided courtesy of MYOB in conjunction with www.australianbiz.com.au, a leading small business portal and useful resources for small businesses.
