Where a company owes a creditor at least $4,000.00, the creditor can elect to issue the company with a statutory demand, pursuant to section 459E of the Corporations Act 2001 (Cth) (The Act). The demand requires the company to either make payment of the debt within 21 days after service of the demand or apply to the Court for an order setting aside the Demand.
To issue a statutory demand, creditors must ensure they follow the strict requirements set out in the Act, namely:
If a company has been served a statutory demand and wishes to seek an order of the Court to set aside the Demand, the company must be able to demonstrate there is a genuine dispute over the debt. In this instance, the genuine dispute can relate to a dispute over the debt itself or on the basis of an inadequate or insufficiently particularised demand.
If a company does not respond within 21 days of service of a statutory demand, either by complying with the demand or applying for an order to set aside the demand, the company is presumed insolvent. The presumed insolvency of the company opens the door for the creditor to apply to the courts to have the company wound up. Therefore, the consequences of not acting swiftly upon service of a statutory demand are significant.
As already mentioned, a company can apply to the courts to set aside a statutory demand where there exists a genuine dispute over the debt. In these applications, a genuine dispute is likely to be found by the courts where there is plausible contention over the debt, requiring investigation.
Where the company has already expressly accepted liability for the debt, it may be more difficult for the company to show there is a genuine dispute. The converse applies where the company has made the creditor aware of their dispute over the debt prior to the issuing of the demand, the courts will more readily accept there is a genuine dispute.
Therefore, in circumstances where a creditor is aware that there is a potential dispute between the parties about the debt (which could be over the amount of debt, when it is due and payable or any other dispute), it is not appropriate to serve a statutory demand.
The courts have the power under the Act, to order creditors who have issued statutory demands which have subsequently been set aside on application from the company, to pay the company’s costs in bringing that application. It is for this reason that creditors should take caution when considering serving a statutory demand and avoid utilising these demands as a means of standard debt collection.
Further, if a creditor issues a statutory demand but subsequently becomes aware of a genuine dispute over the debt, they should act promptly to withdraw the demand. This is because if the company files an application to set aside the demand and the creditor does not withdraw the demand in a timely manner and the courts find there is a genuine dispute, the courts may still award the company costs, even though the creditor did eventually withdraw the demand. This is based upon the principle reiterated in Progressive Projects Pty Ltd v McCullough Robertson Lawyers,[1] the courts have an overarching discretion to order costs.
Statutory demands can have significant consequences, both for companies who don’t respond to such demands within 21 days of service and for creditors who issue demands where there exists a genuine dispute. This is why it is imperative to be fully aware of your obligations as companies and creditors and act promptly.
If you’ve been served with a statutory demand or are seeking recovering of a debt from a company, please reach out to our team of experts for a confidential discussion. None of the above information is intended to be used as legal advice and you should always speak to a legal practitioner to seek advice where necessary.
[1] [2024] QSC 39, at [16].
