What do you do when a company owes you money? Or a creditor issues a statutory demand on your company?

This article discusses what a statutory demand is and the risks and benefits of issuing a statutory demand to recover your money.

It is important to remember that a statutory demand is not a means of debt collection, but a step in the process of commencing winding-up proceedings against a debtor company. A creditor can use a statutory demand to establish grounds to commence winding-up proceedings. However, in practice, a statutory demand creates a powerful incentive for a debtor to pay its debts, as commercially it is undesirable for a company to be presumed insolvent (particularly where it is not actually insolvent) and then have winding up proceedings commenced against it.

What is a statutory demand?

A statutory demand is a demand made by a creditor on a debtor company to pay a debt within 21 days (section 459E of theCorporations Act 2001 (Cth)). The debt must be due and payable (not contingent or prospective), and be for an amount greater than $2,000.

If the debt is not paid or satisfied or if an application to set aside the statutory demand is not filed and served within 21 days of service of the demand, the debtor company is presumed to be insolvent. Once a presumption of insolvency arises the creditor can commence winding up proceedings against the debtor company in either a State Supreme Court or the Federal Court of Australia. The debtor company only has 21 days from the date of service of the statutory demand to take steps to set aside the statutory demand, but even then, the results are not always guaranteed.

Benefits of issuing a statutory demand

  1. It can be an effective way for a creditor to recover an undisputed debt.
  2. It will also provide a creditor with a quick and efficient way to bring winding up proceedings against a potentially insolvent debtor company.
  3. From a commercial perspective, the presumption of insolvency that arises when a debtor company fails to comply with a statutory demand or the commencement of winding up proceedings is a highly risky situation for a debtor company to be in. This can act as a very powerful motive for the debtor company to pay its debts.

Risks of issuing a statutory demand

  1. The debtor might seek to set aside the statutory demand, and if successful, may be entitled to recover its legal costs of that application. A statutory demand may be set aside for reasons that include the debtor company having a genuine dispute about the amount or existence of the debt or having an offsetting claim against the creditor. The threshold for setting aside a statutory demand is low, which increases the risk of an adverse costs order. If the statutory demand is set aside the creditor must then commence debt recovery proceedings against the debtor company.
  2. The only enforcement remedy available to a creditor if the debtor company fails to comply with the statutory demand is to commence winding up proceedings against the debtor company. Whereas a creditor with a judgment debt has other enforcement remedies open to it (such as issuing a writ of execution).
  3. If the debtor company fails to comply with a statutory demand, and the creditor decides to commence winding up proceedings, the debtor company has the right to oppose the winding up proceedings. A debtor company usually opposes the application on the basis that it is solvent. If the debtor company satisfies the Court that it is solvent, the proceedings will be dismissed and the debtor company may be entitled to recover its legal costs of defending the winding up proceedings.
  4. Even after spending the time and expense of issuing a statutory demand, followed by winding up proceedings there is still no guarantee that the creditor will receive payment of its debt. If the debtor company is wound up or voluntary administrators are appointed, in all likelihood, the creditor will not receive payment of its debt in full or at all.

Take a commercial approach when considering whether to issue a statutory demand and consider all these factors before doing so. Conversely, if you are served with a statutory demand, it is important to seek legal advice as soon as possible as the consequences may be very serious.