Statutory Demands – The Importance of Acting Fast
A Statutory Demand is a demand made in the prescribed form by a creditor to a company pursuant to section 459E of the Corporations Act which demands payment of a debt within 21 days. A failure to comply with a Statutory Demand, creates a rebuttable presumption of insolvency pursuant to section 459C of the Corporations Act, which then allows for a creditor to apply to wind up the company.
Statutory Demands are relatively inexpensive to prepare and serve on a company. Service of a Statutory Demand on a company merely requires posting it to the registered office of the company.
If you are a director of a company it is important to ensure that the registered office (as listed with the Australian Securities and Investments Commission) ASIC is up to date and that all mail posted to that address is checked regularly. Often companies only find out that they have not complied with a Statutory Demand once the company is served with an application brought by the creditor to have the company wound up.
What do you do if your company is served with a Statutory Demand?
If a company is served with a Statutory Demand, it has 21 days from the date of deemed service (not the date of receipt) to:
(a) pay the debt or secure or compound the amount of the debt to the creditor’s reasonable satisfaction; or
(b) Apply to a court of competent jurisdiction (in Queensland it is the Supreme Court or the Federal Court of Australia) for an Application to set aside the Statutory Demand.
A failure to undertake either of the above will result in the company being presumed insolvent and will allow a creditor to apply to the Court to wind up the company.
Application to set-aside a Statutory Demand
Pursuant to section 459G of the Corporations Act a company may apply to the Court to set aside a Statutory Demand that has been validly served on the company.
The application to the Court together with an Affidavit in support (usually sworn by the director) must be filed and served on the creditor within the 21 day period from when the Statutory Demand was served on the company. If the company’s response to the demand falls outside of that time period, the Court will not have jurisdiction to hear the application and it will likely be dismissed.
Grounds to set aside a Statutory Demand
There are four grounds in which a Court may set aside a Statutory Demand in an application pursuant to section 459G of the Corporations Act as follows:
- There is a genuine dispute between the company and the creditor about the existence or amount of the debt to which the Statutory Demand relates;
- The company has an offsetting claim;
- Because of a defect in the demand, substantial injustice would be caused unless the demand was set aside; or
- There is some other reason why the demand should be set aside.
A company cannot merely bring an application because it cannot afford to pay the debt owing to the creditor.
Winding up Application
If the Company is does not bring an application pursuant to the power granted in section 459G to set aside the statutory demand and the creditor may proceed to apply to the Court to have the company wound up.
If the company pays out the creditor that served the Statutory Demand before the date of the hearing will it all go away? No.
If a company pays out the creditor that served the Statutory Demand, other creditors will still have the ability to rely on the presumption of insolvency to substitute themselves in as the applicant at the winding up hearing pursuant to section 459B of the Corporations Act.
If the company is not willing to payout all of the substituting creditors, and obtain a consent order discontinuing the proceeding, the company must provide enough evidence to the Court to rebut the presumption of insolvency. In other words, you will need to prove the company is solvent.
If I don’t apply to have the Statutory Demand set aside, can I rely on issues with the Statutory Demand such as a defect, a genuine dispute or an offsetting claim at the winding up hearing? No, not without leave.
Pursuant to section 459S of the Corporations Act, the Company is unable, without leave of the Court to oppose the application for winding up on a ground which could have been raised to apply to set aside the Statutory Demand. The Court is unable to provide leave unless it is material to proving the solvency of the Company. Therefore, issues involving genuine disputes, offsetting claims, defects in the Statutory Demand (as discussed above) need to be raised in the application to set aside the Statutory Demand and not at the winding up hearing.
The longer you wait to respond to being served with a Statutory Demand your options become more limited.
Get the right advice
It is important to act fast if your company has been served with a Statutory Demand. Each company and creditor relationship is different and it is imperative that you obtain the right advice in protecting a solvent company from being wound up.
We regularly act for companies that have been served with a Statutory Demands in negotiating a withdrawal of the Statutory Demand, bringing applications to set aside the Statutory Demand and defending winding up applications.
We also act for creditors seeking to issue Statutory Demands over a debtor companies who they believe to be insolvent.
The area of law in respect to Statutory Demands, applications to set aside Statutory Demands and winding up applications is complex and requires specialised legal advice to allow you to know the correct steps to take. We offer a complementary 45-minute consultation to all new clients.
Please contact our office, so we can assist you through this process.