In these economically challenging times, distressed companies are frequently receiving statutory demands from their creditors, and those who claim to be their creditors.  These documents have potentially devastating consequences for the company- and swift action must be taken to deal with them.  

Statutory demands should only be served in the clearest of cases and the creditor must strictly adhere to the legal requirements of preparing and serving such a document.  We have found that, when properly advised, there are often multiple grounds available to the recipient of a statutory demand to challenge it.

It is essential for a debtor or creditor who is on either side of a statutory demand to partner with a law firm that is knowledgeable, experienced, capable and confident in dealing with them.

A Victorian solicitor has been found negligent for failing to appropriately advise his client of the consequences of non-compliance with a statutory demand.  In this Alert, Partner Paul Betros and Solicitor Nastassia Tognini consider the recent decision of the Supreme Court of Victoria in Dual Homes Victoria Pty Ltd & Ors v Moores Legal Pty Ltd & Anor[2016] VSC 86, which highlights the need for companies to seek the right advice without delay when served with a statutory demand. 

In this case, Dixon J of the Supreme Court of Victoria found the solicitor negligent for:

  • failing to properly advise his corporate client regarding the legal consequences of non-compliance with a statutory demand within the 21 day time limit;
  • failing to properly prepare an application to set aside a statutory demand, including failing to bring this application within the 21 day time limit; and
  • failing to appear at the winding-up application brought on the back of the non-compliance with the statutory demand, which resulted in the winding up of the company.

In response to two statutory demands, the solicitor in question failed to:  

  • advise of the timeframes for compliance with the demands;
  • take proper instructions; and
  • address that the demands would result in a presumption of insolvency and that defending a winding up application could be a difficult, expensive and time consuming process carrying significant risk. 

Dixon J found that the solicitor did not have an adequate grasp of practices and procedures in insolvency law concerning statutory demands, the operation of the presumption of insolvency and winding up applications.  The solicitor’s failure to appropriately advise his client about how to deal with the statutory demand resulted in the company being wound up in insolvency over a debt that it was at all times able to pay.  It was a disaster that should never have happened.

This case serves as a warning for both legal practitioners and companies alike as to advising and seeking advice about statutory demands.  Companies served with a statutory demand should look to seek prompt advice from legal practitioners who hold genuine expertise in insolvency law. 

Once served with a statutory demand, the company has 21 days from when it is served to:

  • pay the amount demanded;
  • reach an agreement with the creditor for the payment of the amount demanded; or
  • apply to set aside the  statutory demand. 

The third option requires the company and its lawyer to work up a Court application in a very fast and comprehensive manner.  It is essential for all potential grounds of defence to be considered and analysed in a matter of days.  Additionally, the company and its lawyer must quickly prepare sufficiently detailed affidavit material to prove the company’s arguments to the appropriate standard so that it can be presented to a Supreme or Federal Court Judge if need be.  

If the company does not take one of the above options within the 21 day timeframe, then it will be presumed to be insolvent and the creditor who served the demand can apply to the Court to have the company wound up.  Statutory demands are an existentialist threat to the company and must become its directors’ absolute top priority.