Creditor's Statutory Demand

Statutory Demands and Winding Up

Why is a Creditors Statutory Demand Relevant to Your Business?

Let’s consider the following example: Cattle owned by a company (Smith Pty Ltd) were agisted for grazing purposes on another person’s property (Mr Oxen’s property). The parties have an agreement as to the terms of the agistment (whether in writing or otherwise). As time goes on, Smith Pty Ltd falls behind in paying the agistment fees to Mr Oxen by more than $2,000.

One day, Smith Pty Ltd receives a document from Mr Oxen entitled “Statutory Demand” and thinks to himself “what is this?” “what does it mean?” “what should I do with it?”

The following addresses these questions.

What is a Creditors Statutory Demand?

A Creditors Statutory Demand (Statutory Demand) is a formal demand available to creditors who claim a debt is overdue for payment by one of its corporate debtors.

Whilst a Statutory Demand is available for use by a corporate or non-corporate creditor, the Statutory Demand can only be used in the case where the creditor’s debtor is a corporation.

A corporate debtor of the creditor can take the form of any registered company in Australia, such as a company trading:

• in its own right as a business;
• as a trustee of a family trust; or
• as a trustee of a self-funded superannuation trust.

The Corporations Act 2001 (Cth) permits a creditor, whether an individual or corporation, to serve a Statutory Demand on its corporate debtor where:

• the debt (or the total debts) owed to the creditor amounts to $2,000 or more; and
• the debt is due and payable.

A corporate debtor that receives a Statutory Demand has only 21 days to pay, challenge or  compromise the debt said to be owing by the creditor.

Importance of Responding to a Statutory Demand

Immediately upon receiving a Statutory Demand, the Director/s of the corporate debtor ought to seek legal advice to determine its options, especially in cases where the corporate debtor disputes the debt, the subject of the Statutory Demand.

In the case where a corporate debtor disputes a Statutory Demand, the corporate debtor must, within 21 days make an application to the Court and give reasons as to why the debt, the subject of the Statutory Demand, is not owed to the creditor (Setting Aside the Statutory Demand).

Setting Aside the Statutory Demand

Once the corporate debtor files its application into Court seeking to set aside the Statutory Demand, the Statutory Demand is ‘stayed’.  In other words, the creditor cannot enforce the Statutory Demand until the Court decides finally, whether the Statutory Demand is enforceable.

The Court has power to set aside the Statutory Demand where one (1) of the following four (4) grounds are established:

1. There is a genuine dispute regarding the existence or amount of the debt to which the Statutory Demand relates.
2. The company debtor has an offsetting claim against the creditor.
3. There is a defect in the Statutory Demand which will cause substantial injustice unless the Statutory Demand is set aside.
4. There is some other reason why the Statutory Demand should be set aside.

A successful application by the corporate debtor based on any one of the four (4) grounds above, will be wholly dependent on the evidence presented to the Court.

Let’s consider again, the situation of Smith Pty Ltd falling into arrears with Mr Oxen. Smith Pty Ltd after having a good look at its book keeping records, may ask the Court to set aside the Statutory Demand, on any of the four (4) grounds above.

In the case of Smith Pty Ltd, good book keeping records are gold! If the accounts are in arrears, do not hesitate, pay the arrears. If the accounts are not in arrears and the company can show why it is not in arrears, fight on! Whatever Smith Pty Ltd decides to do, it must not ignore the Statutory Demand.

Care should also be taken by the corporate debtor in circumstances where a creditor seeks to withdraw its Statutory Demand before a final decision of the Court. The creditor is not prohibited from re-issuing a fresh Statutory Demand rectifying the errors or omissions identified by the corporate debtor in the creditor’s initial Statutory Demand.

Conclusion

Upon receiving a Statutory Demand it is crucial that the Director/s of the corporate debtor contact their legal representatives immediately.

The 21 day time frame in which to action the Statutory Demand cannot be extended and therefore, any application to Court must be made within the 21 days.  In the event the corporate debtor does not dispute the debt, the debt stated in the Statutory Demand must be paid in full within the 21 day time frame.

Any registered corporation remains solvent if, and only if, the corporation continues to pay all its debts as and when they fall due, otherwise, the corporation is open to be challenged by a creditor who alleges a debt is owing.  If successful, the creditor could bring about the untimely demise of the corporation that it seeks to attack.