Australia: Statutory demands & obligations of legal practitioners

What is a statutory demand?

In essence, a statutory demand is a means by which a creditor can call upon a debtor company to make good a liquidated claim, without allowing the debtor company to create delay by putting on a defence where there is, in reality, no genuine dispute surrounding the claim.

Pursuant to s9 of the Corporations Act 2001 (Cth) ("Corporations Act"), a 'statutory demand' is either a document that is or purports to be a demand served under s459E or such a document as varied by Court order under ss459H(4).

Part 5.4 of the Corporations Act provides the requirements for winding up of insolvent companies, issuing statutory demands, applications to set aside statutory demands and applications for orders to wind up a company in insolvency.

If the debt is not paid a presumption of insolvency arises following 21 days of service of the statutory demand.

Service

Section 109X of the Corporations Act provides that a document can be served on a company by leaving it at or posting it to the company's registered office or by delivering the document personally to a director of the company who resides in Australia.

A creditor may issue / serve a statutory demand on a company for a debt or debts including taxation liabilities due and payable by the company to the person issuing the demand, provided the total exceeds $2,000.00 (s459E(1) and s9).

Before serving a statutory demand it is important to consider whether there is in fact a 'debt' owed and whether there is any genuine dispute about the debt or an offsetting claim.

Sometimes it is necessary for there to be a default judgment before a statutory demand is served.

Advising clients

It is crucial to advise your client (whether a creditor issuing a statutory demand or a company who has been served with a statutory demand) of the consequences flowing from service of a statutory demand. It is important to note:

  1. A company may apply to set aside the statutory demand and, if successful, is entitled to recover the costs of that application; and
  2. The creditor does not gain any right to enforce the debt simply because the debtor company fails to comply within the 21 day timeframe or take steps to have the statutory demand set aside. It may be that the debtor company will need to be wound up and the creditor will still need to prove the debt owed.

A prudent legal practitioner must:

  1. Properly advise the client regarding the legal consequences of not appropriately responding to statutory demands within the 21 day time frame;
  2. Properly prepare, if appropriate, an application to set aside the statutory demand within the 21 day time frame; and
  3. Ensure to appear at any hearing relating to the statutory demand, which may involve a winding-up application on the basis of non-compliance with the demand.

Failure to advise of timeframes for compliance and take proper instructions and take steps to prevent a presumption of insolvency ultimately arising resulted in the winding up of a corporate client and a finding of negligence by the solicitor in the recent Supreme Court of Victoria case of Dual Homes Pty Ltd v Moores Pty Ltd & Anor [2016] VSC 86.

Failure to properly advise of the legal consequences of not appropriately responding to a statutory demand in accordance with s459G of the Corporations Act may cause your client to fail to comply with the demand pursuant to s459F.

Non-compliance with a statutory demand

Once a company has failed to comply with a statutory demand (by either paying the debt or applying to have the demand set aside within 21 days of service) it is presumed to be insolvent and hence bears the onus of proving its solvency.

In these circumstances the creditor may apply to the court to have the company wound up for failure to comply upon that presumption. In this way, service of a statutory demand may incentivise a company to pay the debt for fear of being wound up and put into liquidation. It is then open to the company to rebut the presumption at a winding up application, often proving complex and requiring the "fullest and best" evidence of its financial position.1

For the prudent lawyer it is imperative to advise the client of the consequences and requirements in relation to responding to demands, namely, applications to set aside a statutory demand on the basis of a "genuine dispute" in relation to the "existence or amount" pursuant to s459H(1)(a)2, or with respect to a defect in the demand pursuant to s9, which will cause a 'substantial injustice'3. Alternatively, the court may be persuaded there is an offsetting claim as defined in s459H(5).4

Footnotes

1 Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728, Weinberg J.

2A genuine dispute has been held to be one of a bona fide nature based upon grounds which are not spurious, illusory or hypothetical: Spencer Constructions Pty Ltd v G&M Aldridge (1997) 76 FCR 452.

3 For example, failure to properly specify the debt in demand: IFA Homeware Imports Pty Ltd v Shanghai Jerrys Candle Co Lts [2003] FCA 533.

4 Edge Technology Pty ltd v Lite-On Technology Corporation (2000) 34 ACSR 301 approved the test in Spencer Constructions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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