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 that verifies 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, which is the statutory period under the Regulations, 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 3 months following that date.

Within those 3 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 Corporations 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 fairly simple way of establishing that the debtor company is insolvent, 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 for the reason set out 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 in circumstances 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:

• the dispute be bona fide and truly exist in fact;
• 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 that the demand should be set aside, and the demand is set aside, this ‘will often lead to disappointment’ as the merit of the dispute itself regarding the debt is not determined.

His Honour further noted that where genuinely disputed debts are the subject of a creditor’s statutory demand, and the statutory demand must be set aside, the costs ‘are wasted’, and the parties must commence proceedings to recover the debt in a Court which can determine whether there is a genuine dispute or an offsetting claim, which is the course that should have been taken ‘in the first place’.

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 the decision of David Grant & Co Pty Ltd v Westpac Banking Corp (‘David Grant’). In David Grant, 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’.

The Court of Appeal in the Western Australia decision of Createc Pty Ltd v Design Signs Pty Ltd (‘Createc’), considered the criteria for determining whether there has been an abuse of process. In Createc, Martin CJ (with Owen JA and Miller JA agreeing) noted that issuing a statutory demand for the ‘improper purpose’ of enforcing payment of genuinely disputed debt, ‘is an abuse of process’.

In the case of Re Zarzar Pty Ltd (‘Zarzar’), Barrett AJA noted that ‘the reality is that it is an abuse of the statutory demand process’ to rely on a statutory demand while suing for the debt claimed under the demand at the same time.

His Honour in Zarzar noted that issuing a statutory demand and commencing proceedings to recover a debt ‘have different objectives’. The purpose of serving a statutory demand is ‘to obtain the benefit of a presumption of insolvency’ if the company fails to comply with the demand, with the payment of the debt a ‘welcome by-product’ of that process. Whereas the aim of debt recovery proceedings, is to compel payment of the debt claimed.

Key takeaways:

For the creditor

A creditor owed a debt by a company, before issuing a statutory demand should consider whether there is a genuine dispute about the debt. Defending an application to set aside a statutory demand could be costly. If the demand is set aside, the creditor will have incurred legal costs, may be ordered to pay the other party’s cost, and be in no better position regarding the debt.

For the company served a demand

A company served with a statutory demand will need to act quickly as it will only have 21 days within which to pay the debt, or make an application to set the demand aside. Where the company fails to comply with the statutory demand, or have it set it aside, it may be faced with a winding up application before the Court.

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