Creditor's Statutory Demand

What can you do if you are owed over $2,000 by a company?

Did you know that if you are owed over $2000 by a company debtor you might be able to utilise a creditor’s statutory demand (“a statutory demand”) to pursue the debt?

What is a creditor’s statutory demand?

Section 459E of the Corporations Act 2001 (Cth) (“The Act”) provides that creditors who are owed more than $2000 are permitted to serve a creditor’s statutory demand on a debtor company if:-

• there is a genuine debt due and owing by the debtor company;
• there is no genuine dispute about the money; and
• there is no genuine offsetting claim.

There are also some very strict rules to follow. The statutory demand must be in the appropriate form (“form 509H”), which may seem straightforward, but there are pitfalls you must avoid to ensure the statutory demand is legally compliant. Further, if it does not relate to a judgment debt, it must be accompanied by a supporting affidavit which must not predate the statutory demand, made from or on behalf of the creditor to verify that the debt is due and owing, and that there is no dispute about the debt.

When to use a statutory demand

You could issue a statutory demand to a debtor company if you have issued an invoice to a company, the company has acknowledged the debt is due and owing, but is refusing to pay the invoice.

The process

Once the debtor company is served with the statutory demand, it has 21 days to do one of the following:-

• pay the amount listed on the demand; or
• commence an application in the Court to have the statutory demand set aside.

The 21-days deadline is very strict and cannot be extended.

What happens if the debtor company doesn’t pay the debt or apply to set it aside within 21 days?

Failure to either pay the debt or apply to the Court to have the debt set aside gives rise to a presumption of insolvency and may be disastrous for the company.   Once the 21 days has expired the company is not permitted to apply to set the demand aside and  a creditor can bring an application to wind up the debtor company. Generally speaking, the only defence to a winding-up application is proving that the company is actually solvent.

Setting aside the statutory demand

There are a few ways a debtor company might apply to the court to have the statutory demand set aside such as:-

• Formal defect: If the statutory demand does not strictly comply with the legal requirements and there are errors in the statutory demand (such as  incorrectly identifying the debtor company, registered address, debt amount or address for service) and the court finds that the defect has caused substantial injustice to the debtor company it will usually order the demand to be set aside.
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• Genuine dispute: if there is a “genuine dispute” as to the existence of or the amount of the debt(s) (and the debt is not a judgment debt) the court may be convinced that the statutory demand be set aside.  A court will not be interested in the merits of the dispute, all it needs to determine is that there is a question to be tried to set aside the demand, which is a relatively easy threshold to meet.  However, it will not be considered a  genuine dispute if it is a “merely aspurious claim, bluster or assertion, has insufficient factuality or is vexatious and futile” see the following case: (TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd [2008] VSCA 70).
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• Other reasons: Section 459J(b) of the Act provides that a statutory demand may be set aside for ‘some other reason’. ‘Other reasons’ for which the court has set a demand aside include:
  • a creditor serving a demand at the same time as proceeding against the debtor company’s directors in relation to the same debt;
  • the demand containing grossly inflated amounts;
  • If the debtor company has a genuine offsetting claim which is more than or equal to the value of the statutory demand.

How to serve a statutory demand?

Pursuant to section 109X of the Act, the statutory demand may either be served personally at the company’s registered office on the director, or can be served by post to the company’s registered address. However, a company debtor may complain to the court about service. Sometimes practitioners use a process server to eliminate problems with service but this is not a requirement.

A creditor is generally entitled to rely on the effective service at the company’s registered office recorded in the ASIC records, even where that party knows that the company has moved.  However, strict attention should be given to the address, including floor and suite number.  It is also good practice to always prepare an affidavit of service of the statutory demand so that it can be relied upon in winding up proceedings if the debt is not paid.

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You think you should serve a statutory demand – what should you do?

It is a fairly expensive process to serve a statutory demand and to wind up a company. Given the serious consequences and the scope for error, we recommend you seek advice in relation to this.

We have an experienced team of commercial lawyers who can provide you with advice and assist you with specific circumstances. Please call our Drouin or Warragul offices to make an appointment or book a telephone appointment online.

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Disclaimer: The information in this post is general in nature. This does not constitute legal advice and should not be relied on as such. Please contact one of our Lawyers if you are seeking advice about a specific legal matter.

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