In our experience, whilst most directors know the nature of a Statutory Demand (that is, a demand for a payment), the consequences of failing to deal with a Statutory Demand expediently are not always understood.
What is a "Statutory Demand"?
A Creditor's Statutory Demand for Payment of Debt or "statutory demand", is a document demanding payment of a debt, issued to a company, pursuant to the Corporations Act 2001 (Commonwealth) ("the Act").
The purpose of statutory demand is to provide a scheme for the quick resolution of the issue of a company's solvency without incurring the delay normally associated with disputes about debts (unless those disputes are raised promptly).
Contents of a Statutory Demand
A statutory demand is addressed to the debtor company and put simply, demands the repayment of a debt (which must exceed $2,000) with 21 days of service of the statutory demand.
Statutory demands are usually served at the registered office of the company, however, they can be served on directors of the debtor company.
An affidavit is usually served with the statutory demand. The affidavit verifies the contents of the statutory demand.
Who can issue a statutory demand?
Generally, statutory demands can be issued by any creditor of a debtor company with a debt exceeding $2,000.
What should I do if my company is served with a statutory demand?
Act quickly. Any action to defeat the statutory demand, must occur within the 21 days after service. This cannot be stressed enough.
There are four options for a debtor company after being served with a statutory demand:
(a) Pay the debt within the 21 days.
(b) The debtor company may commence court proceedings within the 21 day period of the statutory demand and seek to set aside the statutory demand on one or more of the following grounds:
- there is a genuine dispute about the debt claimed in the demand;
- the debtor company has an offset in claims;
- there is a defect in the statutory demand that causes substantial injustice to the company; or
- there is some other reason why the demand should be set aside.
(c) Negotiate.
(d) Ignore it. If the debtor company ignores the statutory demand and does nothing in the 21 days after service, under the Act, the debtor company is presumed to be insolvent for a period of 3 months after the expiry of the statutory demand. The issuing party may proceed to seek to have the debtor company placed in liquidation.
Generally, to prevent the company being placed in liquidation at this stage, the debtor company must to prove it is solvent.
Consequences of failing to comply with a statutory demand (or ignoring it!)
The main consequence of failure to comply with a statutory demand, is usually, the issuing party seeking to have the debtor company placed in liquidation and a liquidator be appointed.
Whilst the main ground for defeating such Court action is to show the company is solvent and while such Court proceedings can be defended or settled, there can be commercial consequences for a debtor company should court proceedings commence.
The presentation of the originating process to the court is recorded by the Australian Investment and Securities Commission ("ASIC"). The fact that the court proceedings seeking to wind up the company have been filed will appear on a company's search on the ASIC register. Usually, the filing of such proceedings will constitute an "event of default" under security documents (such as loan and mortgage documents) held by the debtor company. Unless the issue is dealt with quickly or the financiers fully informed, a secured lender may call on the mortgage and/or crystallise a charge and appoint a receiver over the assets of the company.
Further, suppliers may refuse the debtor company credit or seek a change in terms of trade.
Conclusion
The effects of an expired statutory demand can have serious commercial consequences for a company and may ultimately cause the company to be placed in liquidation.
Swaab was recently named winner 'Best Law Firm in Australia (Revenue < $20m)' at the 2007 BRW-St George Client Choice Awards.
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.
