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Recovering debts with statutory demands

Insolvency Law News | February 2016

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.

The mechanisms of a 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:

  1. Be in the prescribed form referred to as a Form 509H; and
  2. Be accompanied by an affidavit verifying that the debt is due and payable. Where the creditor has obtained a court judgement the judgement can be attached to the Form.

When a company is served with a statutory demand, it will have 21 days from the date of service to either:

  1. Pay the debt that is owed;
  2. Negotiate a settlement with the creditor;
  3. Make an application in the Supreme Court to have the statutory demand set aside; or
  4. Ignore the demand and the creditor can apply to have the company wound up.

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.

Disputed debts and other non-compliances

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:

  1. There is a defect in the statutory demand which causes substantial injustice to the company [e.g. it might include that the demand was served at an incorrect address or the accompanying affidavit contained errors];
  2. The company has a genuine dispute about the existence or amount of a debt that is referred to in the statutory demand; or
  3. The company has an off-setting claim against the creditor.

Non-compliance with the prescribed form of a statutory demand is only one of the areas where creditors make mistakes. Other areas include:

  1. Relying on a disputed debt;
  2. Service of the statutory demand; and
  3. Inadequate affidavit evidence.

Courts have helped to define "disputes"

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 [2008] 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.

If you receive a statutory demand, it is vitally important that you contact a legal representative immediately for assistance. Please ring Annette at Forum Law Solicitors on +61 2 9560 3388 to discuss.

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