Cash is king in any type of business, but what happens when debtors don’t pay? We often get asked what avenues for collection a client can pursue, and a Statutory Demand can be an effective tool to recover debts from companies.
What is a Statutory Demand?
It is a demand issued by a creditor, pursuant to the Corporations Act 2001 (“the Act”), to a debtor company requiring payment of a debt which is more than $2,000 within 21 days (“the Demand”). It is in writing, in the form prescribed by the regulations (Form 509H) signed by the creditor and accompanied by an affidavit of the creditor supporting the Demand.
It is important to note that a Statutory Demand can only be issued to a company, or if the entity is a trust with a corporate trustee. If the debtor is a partner in a partnership, a trust with individual trustees or a sole trader, a Demand under the Corporations Act cannot be issued, and we advise you contact our office to discuss further avenues for seeking payments from individual debtors.
What happens after the Demand is Served?
The debtor company will have 21 days to either comply with the Demand or make an application to the relevant court to have the Demand set aside. If the debtor company fails to do either there is an assumption under Section 459G(2) of the Act that the company is insolvent and provides that basis for a creditor to make an application to the court to have the debtor company wound up.
Setting Aside a Demand
A Demand will only be set aside if:
- The debt is subject to a genuine dispute;
- The amount in fact owed is less than the statutory minimum;
- There is a defect in the Demand (such as an incorrect address) that would cause substantial injustice to a party;
- There is some other reason why the court should set it aside (such as a Demand containing grossly inflated amounts, or the debtor has an offsetting claim for example).
It is important to note that the threshold for demonstrating whether a genuine dispute exists is a low threshold. A company that can provide even a potential weak defence before a court might successfully have the Demand set aside. If that happens, you, the creditor, will be faced with the likelihood of being ordered to pay the company’s legal costs of the court proceedings.
For this reason proper consideration must be given to the question of whether a genuine dispute might exist before a Demand is issued.
Having said that, Statutory Demands can be very effective to secure payment of a debt.
The Statutory Demand procedure is a very technical area of law and care must be taken in every step of the process. Legal advice should always be obtained before making any decisions.
Please contact our office should you wish to discuss the possibility of issuing a Statutory Demand or if you are a Director of a company that has been served with a Demand, and one of our staff can advise you on the next step in the process and put you in touch with a contact in our legal network.