What do you do if a company owes you money and offers no reasonable payment date? You might send a pro forma Letter of Demand demanding payment by a specific date and threatening legal action if it doesn’t happen. You might even have a solicitor write a letter of that type. That will probably do if your debtor is not broke or is likely to do a runner. When is the time to issue a Statutory Demand for Debt against a company that undisputedly owes you money?
But everybody knows that any legal action, even of a minor kind, can be far more costly than if you can negotiate a settlement upfront with the debtor and that even winning a court case isn’t much use when there’s no cash left. And if the company which owes you money goes broke and evaporates overnight, and all its directors and officers take sudden overseas holidays, what then?
The ‘creditor’s statutory demand for debt’ is a quicker, cheaper way to make legal threats against dodgy debtors. It’s called ‘statutory’ not just to make it sound grander, but because it is laid out in section 459E of the statute, the Corporations Act 2001.
Serving a Statutory Demand on a company
If a company owes you more than $2,000, you can serve a statutory demand for payment on the company at its registered office address. Service can be affected by prepaid post, leaving it at the registered office, or serving the document in person on a company director who resides in Australia. You can find the current registered office address of the debtor company by obtaining a current company search from the Australian Securities & Investment Commission (ASIC).
Proving service of the Statutory Demand on the debtor company will involve you or a process server completing an Affidavit of Service, noting the date, time and means of service on the debtor company. Serving the demand by post to the registered office will delay the process by at least four working days. The Commonwealth Evidence Act 1995 (section 160) presumes the addressee receives a document sent by post on the fourth working day after the article was sent by prepaid post. Usually, therefore it is better to arrange for the statutory demand to be served at the premises by a process server, who can complete an Affidavit of Service in the format required for filing in the Court if you end up applying to wind up the company.
From the date of service, this demand gives the company 21 days to comply with the demand by either:
- Paying the debt in full, or
- Securing the debt with collateral or entering into a payment plan “to the creditor’s reasonable satisfaction”.
What happens if the Debtor Company doesn’t pay?
This is a good bit for the creditor anyway. If the statutory demand is not met, the debtor company is deemed insolvent and can be wound up by a court. That should sharpen the mind of the debtor! However, before you get carried away, you should know that making a statutory demand for debt is quite involved, at least if you want it to stick.
Firstly, the debt must be due and payable now, not next week or next month. You also have to follow general rules about serving the documents on the company and the secretary and directors because if you don’t serve documents correctly, then the application to wind up the debtor company, which you may make later will not be valid.
If you already have a court judgement for the debt against the debtor company, then you don’t need to outline your legal claim to the debt in an affidavit attached to the statutory demand. But if you don’t have a judgement, that affidavit is legally required and an essential part of making sure the statutory demand sticks and that any future action will be valid.
The affidavit verifying the debt must be in the form specified in Form 7 of the Federal Court (Corporations) Rules and adequately completed. To lay out your case in that affidavit, you need to know what the company receiving your demand can do in response and how they might get it thrown out.
‘How do I apply to set aside a statutory demand for debt?’
This is the number one question asked by a company when being served with a statutory demand, and the 21 day period has not yet expired.
Section 459 of the Corporations Act 2001 also lays out the defences the debtor can use to get the statutory demand nullified by a court by way of an application to set aside the demand. Those defences are:
- There is a genuine dispute about the debt, or
- The debtor company has an ‘offsetting claim’.
The bar for (1) is relatively low. The debtor company has to outline, with evidence, that there is a genuine dispute about the existence of the debt or its amount. For (2), the debtor company has to show a current debt owed to it by the party making the statutory demand. Suppose the Court finds that either (1) or (2) applies. In that case, it can either nullify the statutory demand or revise the amount of the debt in line with its findings, so long as the debt covered by the statutory demand is still more than the statutory minimum of $2000.
Suppose the Court sets aside the statutory demand. In that case, the Court can order the issuer of the statutory demand to pay the legal costs of the debtor company in bringing the application to set aside the demand. So it is vital to get legal advice to draft the Statutory Demand for Debt, the affidavit verifying the debt, and to assess whether the debtor company could get the statutory demand nullified. Other types of debt recovery processes against the company may be more appropriate where there exists a dispute about the debt.
To keep us all on our toes, the Court also has a broad power to nullify a statutory demand if it has defects that could cause ‘substantial injustice’; in other words, if it fails to identify parties or debts at issue correctly or omits crucial statements. The defects mean the other party is not effectively notified and informed of your case. If no other defence is shown, but the Court thinks that the creditor is playing games, not in good faith, or abusing the court process to harass the debtor company, it can nullify the statutory demand.
So, when would you do it?
The upshot of all this is that a ‘creditor’s statutory demand for debt’ may be a more effective and affordable option than other ways of enforcing payment in certain circumstances. If you suspect a winding-up may be the only way to get your money, it lays the groundwork for that. As soon as the debtor company defaults on the demand, you can apply for a winding-up. Also, consider when you can recover the debt from the Debtor company directors personally, as discussed in our earlier blog article – Directors Personal Liability for the Company’s Insolvent Trading.
Putting a statutory demand together can be pretty complicated, which will survive scrutiny by a court, so legal advice is needed.
Contact us today with any questions you may have about your next step when a company owes you money or what to do when your company has received a Statutory Demand for Debt from a supplier or anyone else.