Debt Recovery – Creditor’s Statutory Demand

We aim to deliver Just, Redemptive Outcomes®

In today’s uncertain economic environment, it may be useful for you to know that there may be a relatively straight forward and inexpensive avenue open to you to recover debts owed by companies. That avenue is a Creditor’s Statutory Demand.

What is a Creditor’s Statutory Demand?

The Corporations Act 2001 (Cth) allows creditors who are owed more than $2,000 to deliver to a company what is known as, a Creditor’s Statutory Demand.

A Creditor’s Statutory Demand must be in the prescribed form (referred to as a Form 509H). The Form 509H is fairly simple to complete and must be accompanied by an Affidavit from or on behalf of the creditor verifying that the debt is due and owing.

A company who is served with a Creditor’s Statutory Demand has a period of 21 days to either:-

  1. pay the amount demanded; or
  2. bring an application in the Supreme Court to have the Creditor’s Statutory Demand set aside.

The 21-day period must be strictly complied with and cannot be extended even by a Court.

What happens if the company does not comply with the Creditor’s Statutory Demand?

If the company does not comply with the demand, section 459C(2)(a) of the Corporations Act 2001 (Cth) provides that the company is deemed insolvent. The company is then at a very real risk of a court later ordering a liquidator to be appointed to wind up the company.

If a company is subject to any financial arrangements it is not uncommon for the loan agreements to contain provisions defining an “act of default” to include situations where the company is served with a Creditor’s Statutory Demand or is subject to a winding up application. Accordingly, not only is the company at risk of a liquidator being appointed, it may be that the financiers will independently call up any outstanding loans and/or appoint their own external receivers and managers.

For those reasons, if you are a director of a company and you receive a Creditor’s Statutory Demand, it is vitally important that you immediately consult a lawyer.

What does a company need to prove in order to convince a court to set aside a Creditor’s Statutory Demand?

A company that is served with a Creditor’s Statutory Demand may bring an application to set aside the Statutory Demand for a number of reasons including:-

  1. there is a defect in the Creditor’s Statutory Demand which causes substantial injustice to the company (eg. it might include that the demand was served at an incorrect address or the accompanying affidavit contained errors);
  2. that the company has a genuine dispute about the existence or amount of a debt to which the demand relates; or
  3. the company has an off-setting claim.

What constitutes a “genuine dispute”?

Whether you are a creditor trying to decide whether to issue a Creditor’s Statutory Demand or a company director considering how to respond to a demand, a primary consideration is whether the company has a genuine dispute to the claimed debt.

Importantly, in order to demonstrate to the Court that a genuine dispute exists, a company wishing to set aside a Creditor’s Statutory Demand does not need to prove that it has a successful defence to the alleged debt. The company merely has to point to the facts and circumstances in an Affidavit which, if proven at a trial, might give rise to a defence, even a weak defence.

The Court is not concerned with who is or might eventually be proven to be right or wrong. The Court is only concerned if there is a genuine dispute. The Full Federal Court in Spencer Construction Pty Ltd -v- GAM Aldridge Pty Ltd (1997) 76 FCR 452, 464 stated that a dispute will be genuine if it is “real and not spurious, hypothetical, illusory or misconceived.” In the recent case of TR Administration Pty Ltd -v- Frank Marchetti & Son Pty Ltd [2008] VSCA 70 Dodds-Streeton JA held that “no in depth examination or determination of the merits of the alleged dispute is necessary, or appropriate ….”.

The point is, the threshold for demonstrating whether a genuine dispute exists is set very low. A company that can put the “whiff” of even a potential weak defence before a court might successfully have the Creditor’s Statutory Demand set aside. If that happens, you, the creditor, will be faced with the likelihood of being ordered to pay the company’s legal costs of the court proceedings.

It is for that reason we recommend proper consideration is given to the question of whether a genuine dispute might exist between a creditor and a company before a Creditor’s Statutory Demand is issued. A Creditor’s Statutory Demand is usually a reasonable avenue to take in straightforward cases of companies that have failed to pay an invoice for goods or services rendered.

Have a specific question about debt recovery?

If you’d like to speak with a lawyer about issuing a Creditor’s Statutory Demand (or receiving a demand), give us a call and ask to speak with one of our Business Development Officers. They’ll set up an appointment with a lawyer who’ll be able to provide you with legal advice.

[xyz-ihs snippet=”Call-Us—Australia”]