Strategies for costs on a contested statutory demand
Failing to comply with a statutory demand could result in a company being wound up.
Background to statutory demands
A statutory demand can be served by a creditor on a company where the debt claimed exceeds $2,000.
Within 21 days of service, the company must either:
- pay the amount claimed;
- resolve the claim with the creditor; or
- file and serve an application under section 459G of the Corporations Act 2001 to set aside the statutory demand.
The 21 days cannot be extended.
If the company does not comply with the statutory demand within the 21 days, it is deemed to be insolvent and the creditor may proceed to wind up the company.
A company may seek to have a statutory demand set aside if there is a genuine dispute as to the existence or amount of the debt or the company has an offsetting claim.
Because the threshold for establishing a genuine dispute is relatively low, creditors are often ill advised to proceed with a statutory demand once plausible grounds for a dispute are asserted. They risk having an order against them to pay the debtor’s costs on an indemnity basis if they do not withdraw the statutory demand.
Give notice of the dispute before applying to set aside the statutory demand
In considering arguments regarding costs where a debtor is successful in setting aside a statutory demand, the court will scrutinise what happened after the creditor issued the statutory demand and in particular, the correspondence between the parties.
Where there is a genuine dispute or there is an offsetting claim, we recommend that, before the company brings the application to set aside the statutory demand, it gives notice to the creditor about the dispute or offsetting claim and requests that the statutory demand be withdrawn.
The creditor may still refuse to withdraw the statutory demand; however, giving notice to the creditor about the dispute or offsetting claim will assist in the argument as to costs.
The court will look at the reasonableness of the parties’ conduct and, in particular, whether it was unreasonable for the creditor not to withdraw the statutory demand when provided with details of the dispute or offsetting claim.
As an application to set aside a statutory demand must be filed and served within 21 days after being served with the statutory demand, it is important not to delay in giving notice to the creditor setting out in detail the basis on which the company says the statutory demand should be withdrawn.
It is important that the information in the notice is consistent with the matters that will be asserted in the supporting affidavit that is required to be filed with the application to set aside the statutory demand.
It is also crucial that, if your company is served with a statutory demand, you do not delay in engaging solicitors to prepare the application.
If your company receives a statutory demand, it is vital to record the date and details about the manner in which it was received, including whether it was received in the mail or delivered to the registered office. The envelope containing the statutory demand should also be retained.
Implement protocols for receiving documents
Accountants who act as the registered office for client companies should have protocols to ensure the company is notified promptly if a statutory demand is received.
The date of service of a statutory demand will be the date it is received at the registered office and not the date that it is brought to directors’ attention. A statutory demand can be served by post or by leaving it at the registered office.
Particular care needs to be taken if the registered office is a place where the company does not carry on business, such as an accountant’s office.
Where an accountant’s office is the registered office, the accountants should have internal procedures for recording the date, time and method of service of all statutory and other notices and to ensure that the company is immediately informed if a statutory demand has been received.
We recommend that accountants who consent to their office being nominated as a company’s registered office should obtain an authority from the company authorising the accountants to open all mail or other documents addressed to the company so the accountants can promptly advise the company if a statutory demand is received.
Merely forwarding unopened documents by mail could result in the company not having enough time to respond to the statutory demand within the required 21 day period.