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Outstanding debts can have serious flow-on effects for a business, especially where they have been outstanding for a long period of time. A relatively inexpensive avenue for the recovery of debts is by way of a creditor’s statutory demand.
For a debt of more than $2,000.00, the Corporations Act 2001 (Cth) [“the Act”] allows creditors to serve a company with a creditor’s statutory demand. The statutory demand must:
When a company is served with a statutory demand, it will have 21 days from the date of service to either:
The 21-day period must be strictly complied with and cannot be extended even by the court. Where a company has been validly served with a statutory demand and fails to pay the debt within the 21 day period, under section 459C(2)(a) of the Act the company can be deemed to be insolvent. After this occurs, the company is at risk of the court making orders for a liquidator to be appointed to wind up the company.
This means that a statutory demand is useful for incentivising a company to pay its debts.
However the ease of issuing a statutory demand does come with a warning to creditors. The creditor must be sure that the debtor does not dispute your debt. If the debt is a “disputed debt” then the debtor company can apply to have the statutory demand set aside by a court, and the creditor could have a substantial costs order made against it for wrongly serving the statutory demand.
A company that has been served with a statutory demand may bring an application to set aside the statutory demand in a range of circumstances including:
Non-compliance with the prescribed form of a statutory demand is only one of the areas where creditors make mistakes. Other areas include:
When determining whether a genuine dispute exists, a primary consideration is whether the company has a genuine claim to the debt. The Full Federal Court in Spencer Construction Pty Ltd -v- GAM Aldridge Pty Ltd (1997) 76 FCR 452, 464 stated that a “dispute” will be genuine if it is “real and not spurious, hypothetical, illusory or misconceived”. In TR Administration Pty Ltd -v- Frank Marchetti & Sons Pty Ltd  VSCA 70 Dodds-Streeton JA held that “no in-depth examination or determination of the merits of the alleged dispute is necessary, or appropriate …”
If you are a creditor seeking payment of an outstanding debt, it is important that you consider whether a genuine dispute exists with the company in relation the debt before a statutory demand is served.