What is a Statutory Demand?
A Statutory Demand issued pursuant to Section 459E of the Corporations Act of 2001 is known as a Creditor’s Statutory Demand (Cth). It may be issued against a corporation if the creditor issuing it is confident that the debt owed to it by the debtor corporation is undisputed. The utilisation of such a demand as a regular method of debt collection is not appropriate.
An affidavit or a court judgement may be used to support the creditor’s statutory demand. The unpaid invoices that are due should also be listed in an affidavit. In addition, starting on July 1, 2021, the demand must be for an amount equal to or more than $4,000.
What accomplishes a Statutory Demand of a Creditor?
The Demand serves as a warning to the debtor company. A business has 21 days starting from the day the Creditor’s Statutory Demand is delivered to take action. A presumption of insolvency consequently emerges if no action is taken during those 21 days. Courts are quite stringent about following the 21-day deadline, and extensions of time are uncommon.
What is meant by a “Presumption of Insolvency”?
If a business cannot pay its debts when they become due, it is insolvent. As a result, the courts have the authority to issue an order designating a liquidator and winding up a corporation that is bankrupt.
A quick way to demonstrate that a business is insolvent is through the process of a Creditor’s Statutory Demand. Importantly, the legislation states that if the demand is not appropriately reacted to, the corporation is assumed to be bankrupt.
An application for winding up the business can be made by a creditor once there is a presumption of insolvency. The creditor who issued the Creditor’s Statutory Demand or any other creditor who learns that the demand has expired may submit this application.
In order to name a liquidator for the company, a winding-up application is first presented to the court. The company’s assets must then be liquidated (or sold) by the appointed liquidator. The proceeds from the transaction are then divided up among all of the creditors.
What Qualifies as a Debt?
A statutory demand can only be made when a debt is over $2,000 and is past due and overdue. To put it another way, you cannot launch a statutory demand if the debt is, potential, uncertain, or contingent.
The debtor corporation must be able to quantify the demands being made of them in terms of money. You are not required to issue several statutory requests if a debtor corporation owes you money for more than one debt. You may make a single demand outlining the total amount owed to you as well as the circumstances surrounding the debts.
A Statutory Demand: What Form Should It Take?
The Corporations Act lays out the format requirements for statutory demands. A demand may be dismissed by a court if it largely does not comply with the Act’s form requirements or if it intentionally mislead the debtor corporation. Additionally, Form 509H must be used for your statutory demand, and the demand:
- is in writing,
- bears your or your representative’s signature,
- and includes the name of the debtor’s corporation and its registered office.
Before making your statutory demand, you should get a fresh business search for the debtor company. This will reveal the whole amount owing as well as the location in Australia where the debt can be paid. This is typically your office or a lawyer’s office.
Additionally, you may “support” your statutory demand with a court decision or an affidavit. A court will invalidate your statutory demand if it doesn’t include a judgement or affidavit.
How Is a Statutory Demand Served?
A statutory demand may be delivered to individuals or businesses all around Australia. You must be aware of the Service and Execution of Process Act, which offers guidelines for interstate service, while seeking to serve a demand over state lines.
You must deliver the statutory demand in person or by mail to the debtor company’s registered address. The corporate director may also be served with the demand if they have an Australian mailing address. If the business has relocated and you are unsure of its new registration address, you might choose to take this action.
The jurisdiction in which the default judgement is served must also be the address for payment and the address for serving any applications to vacate the default judgement. This means that you must a NSW address in order to issue a statutory demand to a debtor corporation in NSW.
What Dangers May a Statutory Demand Pose?
A debtor corporation may submit a request to have a statutory demand that you served them annulled. If it is successful, they could be able to get their application’s legal fees back. The prospective costs orders are not minor, you should be aware of it.
For a variety of reasons, the court may reject a statutory demand, including:
- It has a legitimate disagreement with the debt amount stated in the statutory demand;
- the debtor company is attempting to offset the debt amount stated in the statutory demand;
- the statutory demand contains a flaw and failure to do so will result in grave injustice;
- or it may be attempting to rely on another ground for the demand’s need to be dismissed.
Genuine Conflict
A debtor has the right to request the statutory demand be set aside under Section 459H(1)(a) of the Act if there is a real disagreement between the respondent and the firm over the existence or amount of the debt that the demand relates to.
Essentially, a genuine dispute must be true and real, provide a convincing argument, be supported by enough factual evidence, pose a serious legal issue, and be brought forth in good faith. It won’t be taken seriously if it’s just a false claim, bluster, or assertion, has sufficient factual support, or is pointless and vexatious.
Contrary to the Claim
In accordance with section 459H of the Act, the claim being offset must be valid and must be a counterclaim, cross-demand, or set-off.
It should be emphasised that a cross-demand made against a creditor does not necessarily have to be for the same amount as the statutory demand or be related to the same transaction.
The requirement for balancing a claim is the same as for a genuine dispute: the claim must be genuine, legitimate, and capable of being litigated by the debtor with a reasonable expectation of success. It also needs to be quantifiable. Lastly, it must be true and not fictitious, hypothetical, illusory, or poorly thought out.
Serious Error
Defect in respect to a statutory requirement is defined in Section 9 of the Act as:
- a mistake,
- an exaggeration of value or quantity,
- a mischaracterization of a debt or other item,
- and an error in describing a person or thing.
The inability to mention that the debt amount is due and payment as well as the misstatement of the debt’s amount are two of the most common flaws in statutory demands. A debtor must be able to precisely identify each and every single debt—or the debt and the date it becomes due and payable—upon which a statutory claim is based. Failure to do so will give reason to contest the legality of the demand.
Similar to this, a mistake in the parties’ names or the debtor’s (or creditor’s) service address can amount to an error in the document, giving the debtor company the right to reject the statutory demand. It is crucial that the debtor’s registered office address and the creditor’s address for service be both located in the same state. Not all inaccuracies will result in the statutory demand being declared invalid, but the court will evaluate whether the error is minor and “does not in a major way impair the legislative provisions relating to this procedure” based on a fair construction of the demand.
Other mistakes, such as omitting to sign the statutory demand itself or an affidavit that supports it, may also constitute a fault in the statutory demand. A statutory demand’s flaw could serve as justification for rejecting a corporation winding-up application.
Compulsory Winding Up
Courts may order the dissolution of a corporation on the grounds that it is insolvent under the Corporations Act. In order to establish a presumption of insolvency, the majority of creditor applications rely on a company’s inability to comply with a statutory demand.
A company is prohibited by the Corporations Act from objecting to a request for insolvency relief based on a failure to satisfy a statutory demand (S459S). Only the court’s permission is necessary to oppose such an application. Since any problems with the statutory demand should have been brought up within 21 days after its delivery, it is uncommon for a court to grant leave.
Conclusion
A declaration of insolvency, which is typically made when a creditor proves that the company has disregarded a statutory requirement, is the most common reason for winding up a business. A business is assumed to be insolvent if it ignores a statutory requirement.
If you receive a statutory demand and you think there may be a legitimate disagreement about the amount demanded, if you have a counterclaim against the creditor, or if the statutory demand itself contains an error, you should seek legal counsel right away so that you can submit an application to have it set aside. After the statutory demand has been served, this application must be submitted