Special Counsel, Blair Campbell, in our Dispute Resolution team outlines statutory demands and what to do if you receive a statutory demand.
Do not ignore a statutory demand! One would think that this would be self-evident, especially since the statutory demand document explicitly states on it:
A failure to respond to a statutory demand can have very serious consequences for a company. In particular, it may result in the company being placed in liquidation and control of the company passing to the liquidator of the company.
However, in recent months we have seen several examples of people who have failed to address a statutory demand and had to deal with the consequences. Some of this might be a hold-over from the COVID measures which raised the debt threshold and extended the period to respond to a statutory demand to six months.
What is a statutory demand?
The Corporations Act 2001 (Cth) provides a mechanism for creditors to establish a company's insolvency, triggering the right to have the company wound up. If a company is unable to pay their debts as and when they fall due, including a failure to meet a genuine statutory demand, that company should not be permitted to continue.
This mechanism is set out in s. 459E of the Corporations Act and provides that the demand must:
- Specify the debt amount, which must meet the statutory minimum (presently $4,000 as of 1 July 2021),
- Must require the company to pay, secure or compound for that amount to the creditor's reasonable satisfaction within the statutory period after service of the demand (currently 21 days),
- Be in writing,
- Be in the prescribed form (Form 509
- Be signed by the creditor or on their behalf
- Be accompanied by an affidavit that verifies the debt unless it is a judgment debt.
A statutory demand is a means of identifying whether a company can meet its debts as and when they fall due. A statutory demand is not an appropriate avenue for debt collection of genuinely disputed debts.
What do I do if I receive a statutory demand?
As indicated above, the Corporations Act gives a company options upon receiving a statutory demand. The company can either:
- Pay the amount demanded,
- Secure or compound to the creditor's reasonable satisfaction, or
- Apply to set the demand aside.
Pay - if the statutory demand is for a real debt that is not genuinely disputed, the first option would be to pay the debt. Provided the debt is legitimate, a failure to pay is strong evidence of insolvency - justifying the presumption that arises. Money can be paid into Court if the tender of payment is not accepted.
Alternatively, it is possible to compromise the debt.
Secure or compound - a debtor 'compounds' when it enters into an agreement with its creditor for payment - either on terms for the demanded sum, or for a different amount.
A company can 'secure' a debt by putting up security for the demanded sum.
In relation to both securing and compounding, the act must be to the creditor's 'reasonable satisfaction'. This imports an objective standard - meaning that the offer of security or compound cannot be unreasonably rejected.
Set aside the demand
There are several grounds on which a statutory demand can be set aside.
The most common is that a demand will be set aside if the debt on which the statutory demand is genuinely disputed. Importantly, not any dispute will be sufficient - the Court must be satisfied that the dispute is 'genuine'. While the applicant debtor company carries the burden of persuasion, the threshold is not particularly high.
A demand can also be set aside where the debtor company has an offsetting claim. Importantly the offset must be sufficient to reduce the demand below the statutory minimum of $4,000.
The Court can also set aside a statutory demand for a defect in the demand - but only where the Court is satisfied substantial injustice would be done.
Finally, the Court has a wide discretion to set aside a statutory demand for any other reason. Generally, this will turn on issues regarding the propriety of the issue of the demand, whether there is some compelling reason on the company's behalf, or whether the demand is a form of abuse. One example we have seen of this is where the debt the subject of the demand is currently being litigated in the Court. Not only is this evidence of a genuine dispute, but the Court generally will not permit its processes to be misused with what amounts to a collateral attack to circumvent the action.
Of course, there is always the option of doing nothing. If this course is chosen, the company is deemed to be insolvent, and the creditors may have the company wound up.
Failing to respond to a statutory demand has consequences. Not only does it give rise to the presumption of insolvency and provide the basis for a winding up order, it also severely limits a company's ability to defend the subsequent winding up application. A company cannot rely on any ground on which it could have relied to set aside the statutory demand without leave - and leave will only be granted to establish solvency. This means a company may not be able to argue in the winding up proceeding that the demanded debt was genuinely disputed.
In all things statutory demand related - TIME IS CRITICAL.
The deadlines contained in the Corporations Act for statutory demands are tight, and strict.
So, not only do debtor companies have a strict timeframe to pay a statutory demand - they also have the same strict timeframe to apply to set aside the statutory demand.
Any application to set aside the statutory demand must support the grounds. It is not enough to lodge a 'quick and dirty' application with a cursory affidavit in the hopes of supplementing it at a later stage. If you want to raise an issue in support of your application to set aside the demand - it must be found in your original application and affidavit. The so-called Graywinter principle requires a 'supporting affidavit', to at least provide a statement of the material facts on which the applicant intends to rely to show a genuine dispute. It can be brief, it can be in the form of a pleading, it can annex correspondence which sets out the details of the dispute, but it cannot be a mere statement that the debt is disputed and further details will follow.
That said, if a complying affidavit is filed, it can be supplemented at a later time.
The only circumstance in which a statutory demand should be ignored is if you want the company to be wound up in insolvency.
In every other circumstance, you should seek legal advice, you must act urgently, and you need to consider whether you pay, secure or compound, or set aside the demand.
In the recent cases we have seen failure to do so cost one client over six figures to resolve, and the other client ended up being wound up when an arrangement might have been reached.
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.