Receiving a Statutory Demand
A Statutory Demand is very different to a standard letter of demand issued by a creditor. It has the potential to create irreparable damage to a business if it is not dealt with quickly (the Government’s COVID-19 stimulus package included an extension of stat demands to 6 months and temporarily upped the threshold to $20,000).
A Stat Demand is often used in the ordinary course of business (and often litigated). It forms part of the statutory procedure to collect on a debt greater than the statutory minimum of $2,000.
It is a specified legal form and is served with a supporting affidavit verifying that the debt is due and payable. When a business is facing cash flow difficulties, key staff must be briefed about Statutory Demands in order that these can be flagged for urgent attention. Directors already have significant risks where they can be held personally liable. A stat demand shouldn’t be ignored.
Responding to a Statutory Demand
If a company does not comply with the law and regulations of the statutory demand within 21 days of service, the company is presumed insolvent. Where cash flow is tight, this can have terminal consequences. Ultimately, this can lead to the debtor company being put into liquidation.
The debtor company serving the Statutory Demand must respond within 21 days using the following possible methods:
1. Paying the debt owed to the creditor;
Upon paying the debt within the demand’s 21 days of service, the statutory demand will no longer be in effect.
2. Come to a suitable arrangement regarding the payment to the creditor’s satisfaction;
Where there is mutual agreement regarding a compromise between the debtor company and the creditor. This is completed to the creditor’s reasonable satisfaction.
Consequently, if the creditor rejects the debtor’s proposal, a court may decide whether a reasonable person(s) in the same circumstance would reject the proposal.
3. Make an application to set the stat demand aside;
A statutory demand may be set aside if the debtor company pursues it and the court is satisfied with either of the following:
~ Genuine Dispute: Corporations Act 2001 – Sect 459H(1)
(a) there is a genuine dispute between the company and the creditor about the existence or amount of a debt to which the statutory demand relates; or
(b) that the company has an offsetting claim
~ Defect: Corporations Act 2001 – Sect 459J(1)
(a) because of a defect in the demand, substantial injustice will be caused unless the demand is set aside; or
(b) there is some other reason why the demand should be set aside.
Stat Demand Dangers
Once a company is presumed insolvent, an application to wind the company up can be made by any of its creditors – not only by the creditor who served the Statutory Demand. Such an application is extremely hard and costly to resist.
A winding up application cannot be opposed using arguments that could have been used in an application to set aside the Statutory Demand. It is therefore ideal that action be taken immediately to negotiate with the issuing creditor.
Given the complexities that present in times of financial distress, it is crucial that professional advice is sought as soon as possible. Our Turnaround Practitioners are experts in negotiating with creditors to achieve the best possible outcome for struggling businesses.