Statutory Demands – When a debt owed by a company is due and payable

When a company owes a debt to a person, that person or company (the creditor) can serve a statutory demand on the company demanding payment of the debt pursuant to section 459E of the Corporations Act 2001 (Cth) (‘Corporations Act’).

According to the Corporations Act, the debt must be due and payable and at least $4,000, which is the current statutory minimum set out in the Corporations Regulations 2001 (Cth) (‘Regulations’). The statutory demand made by the creditor must contain certain information as set out under the Act, including the specific amount of the debt owed, or, if more than one debt, the total amount of the debts, and must be in the prescribed form, which under the Regulations is Form 509H.

If the debt owed is not a judgment debt (i.e., an order made by the court that the debtor company pay a sum of money to the person or company), then the statutory demand must also be accompanied by an affidavit verifying that the debt is due and payable by the debtor company.

The company receiving the statutory demand (the debtor), once served with the demand, is required to either pay the debt strictly within 21 days after service, or to secure or compound for the amount of the debt to the creditor’s reasonable satisfaction within that time. Alternatively, the debtor company may make an application to the Court to set aside the statutory demand (discussed further below).

What Happens If the Debtor Company Does Not Pay?

If the debtor company fails to comply with the statutory demand and pay the debt within the 21 days, under section 459C(2)(a) of the Corporations Act, a presumption arises that the debtor company is insolvent for three months following that date.

Within those three months, the creditor can make an application to the Court for the debtor company to be wound up in insolvency under section 459P of the Corporations Act. An application to wind up a company based on the debtor company’s failure to comply with a statutory demand must be made by the creditor in accordance with section 459Q of the Act.

What a Debtor Company Can Do if Served with a Statutory Demand

While the failure of a company to comply with a statutory demand appears to be a straightforward way of establishing insolvency, the company served with the demand can make an application to the Court for an order to set aside the statutory demand under section 459G of the Corporations Act.

Any application to set aside the statutory demand must be made within 21 days after the demand is served on the company. An affidavit in support must also be filed and served together with the application on the creditor company.

The grounds for bringing a setting aside application include the following:

• There is a genuine dispute about the existence or amount of the debt set out in the statutory demand;
• The debtor company has an offsetting claim;
• There is a defect in the statutory demand and unless it is set aside, substantial injustice will be caused; or
• There is some other reason for setting aside the statutory demand.

Where there is a defect in the statutory demand, except as above, the Court must not, merely because of the defect, set aside the demand.

Circumstances in Which a Statutory Demand May Be Set Aside

The Court may set aside a statutory demand where there is a genuine dispute between the debtor company and the creditor about the debt, if there is an offsetting claim, or for some other reason such as an abuse of process.

i. Genuine Dispute About the Debt

What forms a genuine dispute was considered by the Court in Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd, where Northrop, Merkel and Goldberg JJ stated (at 464) that:

“In our view a ‘genuine’ dispute requires that: (a) the dispute be bona fide and truly exist in fact; and (b) the grounds for alleging the existence of a dispute are real and not spurious, hypothetical, illusory or misconceived.”

In Re Bastow Civil Constructions Pty Ltd, Black J observed that where there is a genuine dispute or an offsetting claim regarding the debt claimed in the statutory demand, or other reason the demand should be set aside, the demand is often set aside without determining the merits of the debt itself. His Honour noted that in such cases, costs are typically wasted, and the parties must commence proceedings to recover the debt properly in a court of competent jurisdiction.

ii. Abuse of Process

The Court may set aside a statutory demand where it is an abuse of process. What constitutes an abuse of process was considered by the High Court in David Grant & Co Pty Ltd v Westpac Banking Corp, where Gummow J observed that it “may transpire that a winding up application in respect of a solvent company is threatened or made for an improper purpose which amounts to an abuse of process.”

Similarly, the Court of Appeal in Createc Pty Ltd v Design Signs Pty Ltd held that issuing a statutory demand for the improper purpose of enforcing payment of a genuinely disputed debt is an abuse of process.

In Re Zarzar Pty Ltd, Barrett AJA noted that it is an abuse of the statutory demand process to rely on a statutory demand while simultaneously suing for the debt claimed under the demand. His Honour explained that issuing a statutory demand and commencing proceedings to recover a debt serve different purposes — the former seeks to invoke a presumption of insolvency, while the latter seeks to compel payment of the debt.

Key Takeaways

For the Creditor:

• Before issuing a statutory demand, consider whether there is a genuine dispute about the debt. Defending an application to set aside a statutory demand can be costly.
• If the demand is set aside, the creditor may incur legal costs, potentially pay the other party’s costs, and remain in no better position regarding the debt.

For the Debtor Company:

• A company served with a statutory demand must act quickly, as it only has 21 days to pay the debt or apply to set the demand aside.
• Failure to comply or have the demand set aside may result in a winding up application being filed against the company.

For advice regarding issuing or responding to a statutory demand, contact DSA Law – Lawyers & Consultants.