Australia: Statutory demands: Not to be ignored (or overlooked)

21 days to act!

A company director who receives a statutory demand for payment from a creditor and fails to act appropriately, within 21 days from receiving it, can have grave consequences on the future of what might be, a viable business. This is because the next step in the process is for a creditor to file a winding up application. If this is filed, the available options to resolve the circumstances become limited.

At Worrells, professional advisors often ask us what options are left for clients who receive a statutory demand. Our advice always urges them to act before the demand's 21-day period expires.

The reality is that, this hinges on whether the company is solvent, its underlying business is viable, or whether receiving a statutory demand indicates wider systemic financial problems the company may be facing. Acting before the demand expires reduces the likelihood of having to defend a winding up application or taking remedial action to save a company and its underlying business.

In the event that a statutory demand for payment is received, the directors have several options available to them to deal with it. Prior to the 21-day expiry of the demand (or at least before the filing of a winding up application), the options include:

  • Pay the amount demanded (or negotiate with the creditor to withdraw it).
  • If the amount demanded cannot be paid, either:
    • Appoint a voluntary administrator; or,
    • Resolve to enter into a creditors' voluntary liquidation.
  • Apply to set the demand aside if there is:
    • a genuine dispute; or
    • the demand appears to be defective.

After the 21-day expiry (without the above steps being taken), the issuing creditor has an 'act of insolvency' to rely upon to wind up the company. If a winding up application has been filed, the director's influence on the company's future becomes limited as the next steps are a matter for the court to decide. By virtue of the law, if a winding up application has been filed, the company is unable to pass a resolution appointing its own liquidator and as such the appointment of a liquidator is a court decision.

If the company's business is ultimately viable but suffering from a short-term cash or solvency crisis, appointing a voluntary administrator with the view to propose a Deed of Company Arrangement could return the business to viability. If a winding up application has been filed this option is stymied because the applicant must consent to adjourning the winding up proceedings to enable a voluntary administration to continue. This adds an additional layer of risk in that consent of the winding up applicant is not guaranteed and if they do not consent, the court will then consider whether the company should be wound up, or the voluntary administration can proceed. If the court determines that the company should be wound up, then there is no ability for a Deed of Company Arrangement to be proposed.

In previous 'Worrells – On The Pulse' articles, Worrells Partners, Lee Crosthwaite and Stephen Hundy have discussed the outcomes of receiving statutory demands when the Australian Taxation Office (ATO) has ultimately applied to wind up the company. These articles add further flavour to the discussion on statutory demands where the ATO is the creditor:

The reality is that certain factors should be considered in advance of a statutory demand being received. Because statutory demands are typically served upon the company's registered office, this is problematic if the registered office is only visited intermittently, or the main person at that office is not familiar with these types of demands: the demand could be easily overlooked. Ensuring the registered office according to the Australian Securities and Investments Commission's (ASIC) records is up to date is imperative. Further, if the registered office changes (e.g. when a client changes their professional advisor or moves to a new address) that ASIC's records are updated immediately.

The key point to take away from this article is that it is essential to get timely and appropriate advice from an insolvency practitioner when a client receives a statutory demand for payment. If the right advice is not received the consequence can be dire consequence, such as:

  • The creditor applying to wind up the company and court appointing a liquidator.
  • Control of the company being lost, while the liquidator realises the company's business and associated assets.
  • A liquidator can commence insolvent trading claims against directors and setting aside of voidable transactions.
  • The director's personal assets may be exposed and creditors may call upon personal guarantees.

Seeking the right professional advice can mean the difference between a viable business being lost to a court liquidation, or saving it through restructuring its affairs (and creditors) if a Deed of Company Arrangement is proposed under the voluntary administration regime. If your client is served with a statutory demand or winding application (or suspects one might be on the horizon), contact your local Worrells Partners or Team Members immediately for advice that will assist you and your client navigate the next steps.

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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