A statutory demand is a formal written request issued by a creditor to a company, demanding payment of a debt that is due and payable issued pursuant to section 459E of the Corporations Act. The debt must meet the statutory minimum requirement being $4,000.00 (as at April 2023). It is important to note that a statutory demand cannot be issued if there is a genuine dispute about the debt or if there are offsetting claims.
Requirements for a Statutory Demand
To be legally valid, a statutory demand must meet specific requirements:
- Be in writing and in the prescribed form.
- Clearly state the amount of the debt.
- The debtor company must be required to pay the debt, or make arrangements to secure or compound the debt, within 21 days.
- If the debt is not a judgment debt, the statutory demand must be accompanied by an affidavit confirming that the debt is due and payable and that it complies with the relevant legal requirements.
The affidavit must be sworn or affirmed by a person authorised by the creditor/s. If the affidavit does not comply with the requirements or is improperly executed, the statutory demand may be set aside.
Service of a Statutory Demand
For a statutory demand to be valid, it must be served correctly. Service can be done in several ways:
- By leaving or mailing the document to the company’s registered office.
- By delivering a copy to a director of the company residing in Australia or its external territories.
It is important to confirm the company’s registered address and the location of its directors to ensure proper service. A defect in service can lead to the demand being set aside.
What Happens if You Receive a Statutory Demand?
Receiving a statutory demand requires prompt action. If you do not respond within the 21-day statutory period, a presumption of insolvency is established under the Corporations Act. This means the debt is considered due and payable, and the creditor may file a winding-up application. To avoid this, you must either:
- Comply: Pay the debt as required by the demand.
- Apply to Set Aside: Apply to the court under section 459G of the Act for an order to set aside the demand. This must be done within the 21-day period and requires filing an affidavit and serving a copy of the application on the creditor.
Failure to respond within the statutory period will lead to the presumption of insolvency, and a winding-up application may be filed against the debtor company.
Grounds for Setting Aside a Statutory Demand
A statutory demand may be set aside if one of the following conditions applies:
- There is a genuine dispute regarding the debt.
- The debtor company has a counterclaim/offsetting claim that reduces or eliminates the debt.
- There is a defect in the demand that would result in substantial injustice if not corrected.
- The statutory demand is being used improperly (e.g. to pressure the company into paying a disputed debt).
Failure to Comply with a Statutory Demand
If a debtor company fails to comply with a statutory demand by not applying to set it aside within the 21-day period, the creditor may file a winding-up application. This triggers a presumption of insolvency, which could lead to the company being wound up by the court.
On filing a winding-up application, other creditors may join the proceedings as supporting creditors. The debtor company will then need to provide evidence to oppose the application and demonstrate that it is solvent.
Responding to a Winding-Up Application
If a debtor company is served with a winding-up application, it must file a notice of appearance and stating the grounds on which it opposes the application, such as:
- Proving the debtor company is solvent and financially viable through documents such as financial statements, tax returns, and evidence of assets and liabilities.
- Demonstrating that the debt in question is disputed.
The court may order the company to be wound up in insolvency unless the defendant can provide evidence to the contrary, such as demonstrating the debtor company’s solvency.
Contesting a Winding-Up Application
If you oppose the winding-up application, you will need to file an affidavit, typically by the debtor company’s director, supporting the claim of solvency. This may require expert evidence, such as an accountant’s statement, to verify that the debtor company can pay its debts as they fall due.
Evidence of ongoing operations, financial stability, and a lack of excessive debt will support your case. If you can convince the court of the debtor company’s solvency, the application may be dismissed.
Conclusion
Receiving a statutory demand or a winding-up application should never be taken lightly. If left uncontested, these actions can lead to the company’s insolvency. As the process is technical and time-sensitive, it is crucial to act quickly, within the statutory periods, to avoid significant legal and financial consequences.
Whether you are responding to a statutory demand or pursuing a winding-up application, it is essential to seek legal advice from experienced legal professionals. In complex cases, having the right legal representation can make the difference between surviving a financial challenge and being forced into liquidation.
Kennedy Guy
Kennedy Guy can help ensure that all procedures are followed correctly and your interests are protected.
