Demands: Effective Weapon or Double-edged sword?

Essentially, a Creditors Statutory Demand under section 459E of the Corporations Act 2001 is a legal demand for payment of a debt from a corporate debtor. The possible consequences of non-payment make this type of Demand quite potent against debtors as a failure to pay within 21 days may result in the debtor being deemed to be insolvent. However, as a creditor, you also need to take some care so that the Demand does not become a double-edged sword.

It is not a weapon to be used carelessly or indiscriminately!

When can I serve a Statutory Demand on my debtor?

Section 459E of the Corporations Act sets out some basic requirements before you can serve the Demand. It can be issued:

• in relation to one or more debts; 
• that are due and payable; 
• for at least the statutory minimum amount (currently $2,000).

There is a standard form which must be used for the Demand. The Demand should describe the debt, and the amount or total of the amounts of the debts due and payable. The Demand must be drafted with care, so that technical errors do not give the debtor a basis to set aside the Demand.

Time is of the Essence

The potency of the Statutory Demand lies in the fact that the debtor only has 21 days from receiving the Demand to comply with it. Compliance can be by way of full payment or making an arrangement to pay which is acceptable to you as the creditor.

Alternatively, the debtor can apply to the Court to set aside the Demand under Section 459G of the Act. Such an application must be filed at Court and served on the creditor within that strict 21 day time period. This deadline cannot be extended, so time is of the essence.

Judgment debt or not?

You can issue a Statutory Demand whether or not your debt is a judgment debt, i.e. whether or not you sued for it through the court first. If the debt is not a judgment debt, the Demand has to be accompanied by an affidavit (also complying with some formalities) verifying the debt. There is case law that suggests such an affidavit is also required where the debt is a judgment debt, but the amount being claimed in the Demand differs from the amount for which judgment was originally entered.

No Genuine Dispute: A Possible Sticking Point

One critical feature of the accompanying affidavit is that the person swearing it must swear to the fact that there is no genuine dispute as to the existence or amount of the debt. Unfortunately, this is often where creditors come unstuck.

Debtors often argue that there is a "genuine dispute" when applying to set aside a Demand. While each case will depend on its particular facts, case law shows that it is not hard to raise sufficient doubt about a debt for the Court to set aside a Demand. In Panel Tech Industries v Australian Skyreach (no 2) [2003] NSWSC 896, Justice Barrett referred to the task as:

So, if it appears to the Court, on the debtor's application that there is a dispute in relation to whether the debt exists or as to its amount, the Demand will be set aside. If that occurs, the Creditor who served the Demand will probably be ordered to pay the debtor's legal costs of the Court proceedings.

Serious consequences for the debtor

If a debtor neither pays the debt nor applies to set aside the Demand within 21 days from the date it is served, the debtor is deemed to be insolvent, i.e. deemed to be unable to pay its debts as and when they fall due.

This presumption lasts for three months from that 21st day. As a creditor, you will have three months from that 21st day to take the next step - filing an application with the Court to wind up the debtor and have a liquidator appointed to it. If you do not act within this time limit, you will lose the advantage of relying on the presumption that arose from non-compliance with the Demand you served.

When is it an effective weapon?

The Statutory Demand is an effective weapon in your debt recovery arsenal when used correctly. It is imperative that the Demand and any accompanying affidavit are drafted carefully, and that there should be no remotely credible dispute about the debt. If there is a possible dispute, then you need to give careful consideration to whether the risks are worth taking and how to deal with them if the debtor does attack the Demand. If so, the Demand can remain an effective weapon and not become that double-edged sword.

CG Collect can prepare Statutory Demands for you, in accordance with all the rules and legal requirements; help you to assess whether there is anything in the circumstances which might be a "genuine dispute"; and advise on risk management if you do decide to try this potent weapon and the debtor fights back.

If you have any questions in this area of commercial debt recovery, please contact:

 

Rebecca Hegarty, Lawyer
Phone: 9895 9289
Email: rhegarty@colemangreig.com.au

Mark Williams, Lawyer
Phone: 9895 9245
Email: mwilliams@colemangreig.com.au