Statutory Demand – Frequently Asked Questions

The coronavirus or COVID-19 virus is starting to affect businesses Australia wide.  The economic slowdown is unfortunately resulting in reduced cash flows for businesses, which in turn are looking at their debtor lists in an attempt to collect outstanding debts.

One of the methods for collecting debts is to issue a statutory demand for the debt.  We hope this article will help answer some of your questions in relation to statutory demands. 

Contact our team at Corney & Lind Lawyers if you are thinking of serving a statutory demand on a debtor or have been served with one yourself.

What does the term “winding up a company for insolvency” mean?

The term “winding up a company” refers to the process of dissolving a company, causing it to cease doing business. The company is de-registered and ceases to exist after being wound up.

A company can be wound up for a number of reasons, one of which is insolvency.  A company is determined to be insolvent when it has insufficient assets to discharge its liabilities. In other words, the company is unable to pay all of its debts, as and when they become due and payable[1]

Winding up of a company due to insolvency ensures an orderly and fair distribution of the company’s assets to its creditors taking into account the priority of each creditor’s claim to the insolvent company’s assets.  Liquidators are appointed under the Corporations Act 2001 to insolvent companies and replace the board of directors as persons to administer the company’s property.

Practical steps taken to achieve orderly and fair distribution of insolvent company’s assets include:

  1. Collection of all the company’s property not subject to a secured creditor’s claim;
  2. Recovery of property transferred by the company subsequent to it becoming insolvent;
  3. Stay of proceedings against the insolvent company;
  4. A process by which claims against the company can be asserted and quantified; and
  5. The determination of creditor priorities for distribution of the insolvent company’s assets.

How much do I need to be owed before I can issue a statutory demand?

As of 23 March 2020, a bill[2] was passed in both Houses of Parliament temporarily increasing:

  • The minimum threshold for which creditors can issue a statutory demand form $2,000 to $20,000; and
  • The time a debtor has to respond to a statutory demand and/or pay the debt from 21 days to 6 months.

Once the new debt limit of $20,000 has been established, a creditor may serve the company with a statutory demand in the approved form 509H under the Corporations Act 2001 (the “Act”) requiring the company pay the debt within 6 months of being served with the statutory demand. Please note that this increased threshold is not indefinite and will revert back to normal after 6 months of the bill officially commencing

Note, the statutory demand must properly describe the debt that is due and payable and will more than likely include an affidavit verifying that the debt is due and payable by the company unless the debt is a judgement debt[3].

It is also important to note that there is no requirement that a demand for the debt has been made, prior to serving a statutory demand.

What if a company owes me a number of debts?

A separate statutory demand should be issued for each separate debt.  Note the new limit of $20,000, as opposed to $2,000, will be the minimum value of a debt for which a statutory demand can now be issued. An application to wind up a company can be made on any one of the statutory demands.

Who can serve a statutory demand?

The following entities or persons can serve a statutory demand:

  • An individual creditor;
  • A secured creditor;
  • Joint creditors must all be joined in the demand;
  • A liquidator; and
  • An assignee of the debt (special considerations apply).

Can I serve a statutory demand on an organisation other than a company?

The majority of statutory demands will be served on companies, however section 585 of the Actprovides for the service of statutory demands on other bodies called “Part 5.7 bodies” which include:

  • Registrable Australian bodies that are unregistered but conduct business in a State or Territory outside that in which they originated;
  • Registered foreign companies;
  • Unregistered foreign companies that conduct business in Australia; and
  • Partnerships, associations or other non-registrable bodies including charities with more than 5 members.

What form do I use for a statutory demand?

Statutory demands need to be in the prescribed form 509H.  Strict compliance with the form is required and the Act contains the requirements that need to be included in the form[4].

How do you serve a statutory demand?

Service of the statutory demand on a company can be made by[5]:

  1. Leaving it at, or positing it to, the company’s registered office; or
  2. Delivering a copy of the statutory demand personally to a director of the company who resides in Australia; or
  3. If a liquidator has been appointed to the company, leaving it at, or posting it to, the address of the liquidator’s office; or
  4. If an administrator of the company has been appointed, leaving it at, or posting it to, the address of the administrator.

It should be noted that ineffective service is not a reason for setting aside the demand. The address for the creditor must also be in the same state or territory as that in which the demand is served on the company.  It is therefore important to engage solicitors with an address for service in the same state as the debtor.

I’ve been served with a Statutory Demand what do I do next?

The obvious answer is to pay the debt if it is due and payable.  It should be noted, that if the company provides payment by way of valid tender for the full amount demanded, the debt will not be eliminated merely because the demandant refuses that tender for whatever reason, and the demandant will not lose the status of creditor and may still be able to apply for a winding up order under s 459P of the Act.  Before the debt can be considered to be eliminated, there must be a continued readiness to pay, followed by an actual payment into court.

If payment is not an option, you can apply to set a demand aside, the only grounds for doing so are those provided for in the Act which include[6]:

  1. A genuine dispute exists between the parties about the existence of the debt or the amount of the debt to which the demand relates[7];
  2. An offsetting claim exists, being a genuine quantifiable claim that the company has against the person who served the demand[8] by way of counter claim, set-off or cross-demand even it does not arise out of the same transaction or circumstances;
  3. A defect in the demand which will cause substantial injustice unless the demand is set aside; or
  4. “Some other reason” why the demand should be set aside, for example where a statutory demand is served for a judgment debt and that judgement is subject to appeal.

Defects in demands which may lead to them being set aside include, but are not limited to[9]:

  • Irregularities;
  • Misstatement of the amount or total of the debt, for example a debt which includes an unspecified amount of interest;
  • Misdescription of the debt (excluding minor misdescriptions); and a
  • Misdescription of a person or entity (excluding minor misdescriptions).

Failure to attach a verifying affidavit to the demand may also be grounds to set it aside. However, a defect in the affidavit may not be grounds per se for setting aside the demand.  Defects in affidavits which have resulted in demands being set aside include:

  • Failure to state the source of the deponent’s knowledge for the debt;
  • Failure to state the deponent’s belief that there is no genuine dispute as to the amount or existence of the debt; or
  • Signing of an affidavit before signing of a statutory demand.

It is important to note that proving that your company is solvent is not a ground for having a statutory demand set aside.  This ground will need to be proved at an application for winding up.

There are also strict timelines with respect to service of the application to set aside a demand.  The application and affidavit must be served on the demandant within 21 days of filing the application to set aside the demand.  The application and affidavit can be served separately so long as they are both within 21 days.

The court can extend the time frame for complying with a statutory demand to 7 days after the application to set it aside has been determined or otherwise disposed of[10].

Will a claim for offset definitely result in the statutory demand being set aside?

A claim for offset is one of the most common grounds used for setting aside a statutory demand.  However, where the offset amount is less than the amount for the statutory demand and the amount deft to be paid after subtracting the offset is greater than the new limit of $20,000, the court may vary the demand and declare the demand to have effect for the smaller varied amount[11]

Should you wish to have the demand set aside it is best therefore to prove a genuine dispute exists rather than claiming a lower offset amount.  It should be noted that a court may order that the party alleging the dispute commence proceedings within a certain time frame and provide security for payment of the debt.

How long do I have to comply with the statutory demand?

The period for compliance with a statutory demand is[12]:

  1. now 6 months (temporarily increased from 21 days) from the day the demand is served on the company; or
  2. if the company has made an application in accordance with s 459G of theAct to set aside the demand:
    1. and the court extends the period for compliance with the demand, the period specified in the order; or
    1. 7 days after the application is determined or disposed of.

The debtor hasn’t paid the debt after service of the demand, what is my next step?

The creditor in this instance can make an application under s459Q of the Act to wind of the company. 

The application must:

  1. Include particulars of the service of the demand on the company;
  2. Attach a copy of the demand and any varying orders made on the demand; and
  3. Unless the debt is a judgement debt, be accompanied by an affidavit verifying the debt is due and payable by the company.

A creditor who applies to wind up a company must prove the company is insolvent (unable to pay its debts) at the time of the application[13] and at the winding up hearing[14].

Where a creditor has served a company with a statutory demand which a company has failed to comply with, the company is presumed insolvent by a court[15].  The court must presume a company is insolvent if, during or after 3 months ending on the date the application was made, the company has failed to comply with a statutory demand[16]. In other words a creditor has 3 months from the last day for compliance with the statutory demand to make an application to wind up a company.  Should it fail to do so within this time frame, a creditor will need to seek leave, prior to making a winding up application.

The presumption of insolvency can be rebutted by the company providing sufficient evidence as to its solvency. The onus of rebutting the presumption of insolvency is strict, requiring the “fullest and best” evidence of the financial position of a company.  Proving solvency is best done by way of audited and verified financial accounts provided by independent accountants, however where it is oppressive to order a small company to engage external accountants and auditors, the court may in exceptional circumstances have regard to internally prepared accounts[17].

Conclusion

The decision to serve a debtor with a statutory demand should be made after careful consideration and due care needs to be taken to ensure the statutory demand complies with legal requirements under the Act.  This will ensure the statutory demand is less likely to be the subject of a setting aside claim. 

Being served with a statutory demand is serious, and you should seek legal advice as a matter of urgency to ensure you comply with the strict timeframes mentioned above. Whether you are thinking of serving a statutory demand or have been served with a statutory demand our team at Corney and Lind is here to help.  Contact us today for further advice and assistance.

This article was written by Barry Klopper.


[1] s95A Corporations Act 2001

[2]  Coronavirus Economic Response Package Omnibus Bill 2020(Cth).

[3] Remuneration Data Base Pty Ltd v Pauline Goodyer Real Estate Pty Ltd [2007] NSWSC 59; s459E of Corporations Act 2001

[4] Section 459E Corporations Act 2001

[5] Section 109X Corporations Act 2001

[6] s459H and s459J Corporations Act 2001

[7] s459H(1)(a) Corporations Act 2001

[8] s459H(1)(b) Corporations Act 2001

[9] s459E(2) Corporations Act 2001

[10] s459F(2)(a)

[11] s459H(4) Corporations Act 2001

[12] s459F Corporations Act 2001

[13] Syd Mannix Pty Ltd v Leserv Constructions Pty Ltd [1971] 1 NSWLR 788

[14] Ace Contractors & Staff v Westgarth Development Pty Ltd [1999] FCA 728

[15] s459C Corporations Act 2001

[16] s459C Corporations Act 2001

[17] Commonwealth Bank vs Begonia (1993) 11 ACSR 609, Georgiou Building Pty Ltd v Perrinepod Pty Ltd (2012) 86 ACSR 713. Bank of Wester Australia Limited v Scotia Downs Pty Ltd (2011) 87 ACSR 42



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