A statutory demand is normally the first step that is taken by a creditor in the winding up of a company on the grounds of insolvency.
The process of serving a statutory demand, and any subsequent winding up proceedings, can be an effective and legitimate process used by creditors to recover amounts owed by a debtor company (company).
However, a statutory demand should only be used to recover a debt after considering whether there are more effective ways of recovering a debt. The end result of this process is that the company may be wound up, and the creditor will rank equally with other creditors in payment of the debt.
There are also mechanisms whereby the statutory demand can be set aside, and the party that served the statutory demand ordered to pay costs if the process is used (or threatened) by creditors in an inappropriate way, such as placing pressure on solvent companies to pay undisputed debts (or where the debtor has an offsetting claims).
What is a statutory demand?
A statutory demand is a demand made under section 459G of the Corporations Act 2001 (Corporations Act). The statutory demand must be in a prescribed form and accompanied either by an affidavit or a copy of a judgement from a court, which can be the Magistrates Court, District Court or Supreme Court.
The statutory demand procedure can be used for only certain types of debts. The debt must be:
- owed by a company;
- be for an amount of $2,000 or more; and
- it must be for a liquidated sum of money that is immediately due and payable at the date of the statutory demand.
A statutory demand can be served where the company has more than one debt owing to the creditor that total $2,000 or more.
A contingent debt, which relies on something else taking place, cannot be the subject of a statutory demand.
The statutory demand should not be used where:
- there is a genuine dispute about the debt;
- there is an off-setting claim; and
- it is being used to recover a debt from a company that is clearly solvent.
The debt must be undisputed
Where there is no judgment, it is generally best practice to first send a letter of demand to the debtor. This letter should set out the nature of the debt, the amount, and demand payment by a certain date. A failure to respond to the formal demand, or an inadequate response, will provide a basis for the person swearing the affidavit to state that the debt is due and owing, and that there is no genuine dispute.
Sometimes, only part of a debt is disputed. In this case, a statutory demand may be served for the undisputed part of the debt. This does not affect your rights with regard to the balance.
Form of statutory demand
For the statutory demand to be valid it must:
- be in the prescribed form (Form 509H);
- specify the debt and the amount claimed;
- be signed on behalf of the creditor or the creditor’s solicitor;
- must specify an address for service in the state or territory in which the demand is served; and
- be accompanied by an affidavit from the creditor, or if there is a judgment of the court, a copy of the judgment.
Can the company served with the statutory demand set it aside?
If a company is served with a statutory demand, then the company must within 21 days either pay the debt or make an application to either the Supreme Court or Federal Court to have the statutory demand set aside. The courts have the power to extend the time for making the application, but only if the application to extend time is made before 21 days has passed.
There are a number of grounds upon which the court will set aside a statutory demand. These are:
- there is a genuine dispute between the parties as to the existence of the debt;
- there is an off-setting claim;
- there is a defect in the demand, and because of that defect substantial injustice will be caused unless the demand is set aside; or
- there is some other reason (which only arises in unusual situations).
What happens after 21 days if no action is taken?
If the company fails to comply with a statutory demand, either by paying the debt or by making a successful application to set the statutory demand aside, then the company is presumed insolvent. You may then commence proceedings to wind up the company on the basis of the failure to comply with the statutory demand. The proceedings to wind up the company must be made within 3 months from the last date for compliance with the statutory demand.
In order to prevent its winding up, the company must prove to the court that it is solvent. This generally involves putting into evidence the company’s audited accounts, and verified valuations of assets. Unaudited financial statements, unverified claims of ownership, and assertions of solvency will generally not displace the presumption of insolvency.
In opposing a winding up application, a company may not, without leave of the court, rely on any matters that could have been used to set aside the statutory demand. For example, the company cannot, without leave of the court, rely on the grounds that the debt was disputed, or the statutory demand was defective. The court will only grant leave in limited circumstances, and if it is satisfied that the relevant ground is material to proving that the company is solvent.
What happens if the company wants to pay the debt after the winding up proceedings have commenced?
It is common after winding up proceedings have been commenced for the company to offer to pay the debt, and you may agree to settle the matter on the basis that the whole, or part of the debt will be paid. In these circumstances, the application may be discontinued by consent.
However, if the company is in financial distress, there may also be other creditors who want to be paid. The court has the power to substitute another creditor who is owed a debt, and who could also have applied for the company to be wound up. The court may only make such an order if it thinks it is appropriate to do so because the winding up application has not been proceeded with diligently enough, or for some other reason.
The risk for the first creditor is that if the company is wound up and a liquidator appointed, any disposition of property (unless exempt), which includes payment of money, made after the commencement of the winding up proceedings will be void.
Payment of costs
An order for the winding up of a company operates in favour of all the creditors and contributories as if it had been made on the application of all the creditors and contributories. This means that the creditor that commenced the proceedings does not get priority in payment of the amount owed.
However, the creditor is entitled to be reimbursed the costs of the winding up (as taxed or assessed as reasonable by the court) out of the property of the company.