Does a company owe you money? Do you have an agreement they are dishonouring? How are they affecting your cashflow?

Under the Corporations Act 2001, a creditor is entitled to make a statutory demand for payment of a debt that is due and payable. This can be the most compelling tool for a creditor to obtain payment from a delinquent debtor.

A company that is served with a statutory demand has only 21 days to do one of three things:

  1. Pay the debt;
  2. Reach a compromise or settlement with the creditor;
  3. Apply to Court to have the demand set aside.

Failing to do these things results in a presumption the company is insolvent. This allows the Creditor to apply to the Court to wind up the company.  Failing to respond properly to a statutory demand can have catastrophic outcomes for a company.

A statutory demand can be the most cost-effective legal means to recover an unpaid debt.  However, the courts have clearly warned that using a statutory demand to recover a debt from an insolvent company may constitute an abuse of process.  While the process can be useful, it needs to be used carefully and strategically.

Risks for Creditors

Getting it wrong with a statutory demand exposes the Creditor issuing the demand to an order to pay court costs if the Court sets the demand aside.  Those costs can be substantial and, in some cases, exceed the amount of the debt claimed.

To be deemed valid, a statutory demand must, among other things:

  • Relate to a debt of more than $2,000 which is due and payable, not a contingent or prospective debt, and which is not subject to a genuine dispute;
  • Be accompanied by a judgment or affidavit.

If the demand does not satisfy these requirements it will be set aside by a Court.  In that case the Creditor will have to pay not only its own costs, but also those of the company.

A statutory demand can be served by posting or personally delivering it at the registered office of the debtor or delivering a copy of the demand to a director of the company residing in Australia. The creditor must do all that is reasonably necessary to bring the demand to the notice of the company by way of serving it at their known address or personally to the director.

A failure to serve the demand correctly will also mean it has no effect.

Should I Serve a Statutory Demand?

There are a number of issues to balance when deciding to issue a Statutory Demand.

It can be an efficient and cost effective tool if a debt is clearly not disputed.  The threat of liquidation can sometimes encourage recalcitrant debtors to prioritise those payments they have been putting off.

However, if the Company is genuinely insolvent, it will not force payment.  In that case the Creditor needs to consider the viability of incurring the additional costs of going through with a winding up application to appoint a liquidator and give it the best chance of recouping part or all of the debt before the Company’s assets are wasted entirely.  If you think the Company is unable to pay the debt, you need to be willing to see through the winding up process to make it worthwhile issuing a demand.

Receiving payments from a Company after issuing a statutory demand can also create potential issues for the Creditor if the Company later goes into liquidation.  Care needs to be taken about receiving a payment after issuing a statutory demand to avoid liquidators recovering those payments.

It is vital to understand when the use of a statutory demand is warranted and permissible and when issuing a statutory demand can create more problems that it solves. Ensuring your statutory demand meets the formal legal requirements is also critical.

What can you do?

Chasing debts is one of the most unpleasant aspects of business.  Fortunately, our commercial litigation team has the experience and know-how to ensure that all of the right steps are taken to recover a debt owed to you in the most timely and cost-effective manner possible. Contact us today on (07) 3211 2233 to see how we can set about chasing your money.

Article prepared by Stephanie Philippou and Conor Gillam