The statutory demand is a formidable card up a creditor’s sleeve that can result in a company being deemed to be insolvent if it does not pay the creditor’s debt within 21 days of service of the demand. Whether a statutory demand served on an incorporated body other than an Australian company will be effective largely depends on the State or Territory in which the incorporated body is based and whether it is served pursuant to the correct section of the Corporations Act 2001 (Cth) (Corporations Act).
What is a statutory demand?
Pursuant to section 459E of the Corporations Act, a creditor may serve a statutory demand on a company when the company owes it a liquidated debt of at least $2,000 that is immediately due and payable at the date of the demand.
In order to be effective, the statutory demand must comply with the formal requirements under section 459E. Accordingly, it must:
- Be in writing and in the prescribed form;
- Be signed by or on behalf of the creditor;
- Specify the debt and the amount;
- Require the company to pay the debt within 21 days; and
- Be accompanied by either an affidavit in support or, in the case of a judgment debt, a copy of the judgment.
A defect in any of the formal requirements will render the statutory demand ineffective (this includes where it specifies an incorrect amount owing). Furthermore, statutory demands cannot be issued with respect to unliquidated debts or debts that are contingent on the occurrence of some prior event.
Effect of noncompliance with a section 459E statutory demand
The company is presumed to be insolvent if it fails to pay the amount owing, make arrangements for payment to the creditor’s satisfaction, or apply to the Court to have the demand set aside within 21 days of service.
If the company takes no action within 21 days, the creditor can make an application to wind up the company. In those circumstances, the company is precluded from raising in defence to that application that there was some defect in the statutory demand, that the amount was disputed or that it was entitled to offset the amount owing. The only means by which the company can successfully oppose a winding up application in these circumstances is if it can prove its solvency at the time of the hearing.
In this way, a statutory demand is by no means proof of the insolvency of the company – its function is nothing more than to create a presumption in favour of such insolvency and thus define where the burden of proof lies in winding up proceedings.
So far this article has been dealing with statutory demands in circumstances where the debtor is a company. But what about when the debtor is an incorporated association?
Incorporated associations and section 459E statutory demands
The incorporated association is a common form of business structure used by charities and other not-for-profit organisations. Like companies, incorporated associations have their own legal personality and thus are able to incur debts and sue and be sued in their own name. However, unlike companies, there is no national legislation that governs incorporated associations. Rather, the legislation exists at the State and Territory level.
On face value, section 459E only applies where the debtor is a company and this is certainly the case in most instances. For example, a section 459E statutory demand that is served on an association that is incorporated in New South Wales will be of no effect. However, the legislation governing incorporated associations in some states (for example, Victoria) gives effect to section 459E in relation to incorporated associations within those jurisdictions. In this way, a statutory demand that is served on an incorporated association in Victoria purportedly under section 459E will be effective.
Therefore, depending on the State or Territory in which an incorporated association is incorporated, a statutory demand served on it pursuant to section 459E may be effective.
Part 5.7 bodies and section 585 statutory demands
Under section 585 of the Corporations Act there is another statutory demand procedure that exists separately from that provided with respect to debtor companies under section 459E. Section 585 statutory demands apply to what are known as “Part 5.7 bodies”.
Part 5.7 bodies are defined under the Corporations Act to mean:
- Registered Australian bodies;
- Registrable Australian bodies that are unregistered but conduct business in a State or Territory outside that in which they originated;
- Registered foreign companies;
- Unregistered foreign companies that conduct business in Australia; and
- Other business types that have more than 5 members and are not registrable bodies.
However, Part 5.7 bodies do not include Aboriginal and Torres Strait Islander corporations.
There are a number of ways that an incorporated association could fall under this definition.
Section 585 is cast in substantially the same terms as section 459E. Section 585 provides a means by which a creditor of a Part 5.7 body that is owed an amount of at least $2,000 can serve the Part 5.7 body with a statutory demand that requires the body to pay the debt. There is a presumption that the Part 5.7 body is insolvent if it does not pay the debt within 3 weeks of service.
While section 585 does not require the statutory demand to be in any prescribed form, the courts have held that a statutory demand that is purportedly served under section 459E is not effective for the purposes of section 585. If a Part 5.7 body is served with a section 459E statutory demand, it can seek a declaration from the courts that the demand is not a statutory demand or it can simply take the point at any purported winding-up application.
Take home points
The statutory demand is a powerful tool in a creditor’s arsenal that can shift the burden of proof in winding-up proceedings onto the respondent body to prove that it remains solvent.
Statutory demands may be served on Australian companies or other bodies, including associations and certain foreign companies. However, they will only be effective if they are served in accordance with the appropriate section of the Corporations Act. Australian companies are to be served under section 459E, whereas associations along with a number of other incorporated bodies are to be served under section 585 of the Corporations Act.