While a lot of directors and managers of corporations are becoming more aware of the serious nature of statutory demands served under the Corporations Act 2001 (Cth), many do not appreciate just how dire it is to ignore these documents. There are also the horror stories many lawyers will tell about clients who thought they were too busy to deal with the statutory demand, or that the document was nothing more than a letter of demand.
A statutory demand must be acted on immediately – 21 days from its receipt is the critical time period in this scenario!
A company is deemed to be insolvent if it receives a creditor’s statutory demand and:
- it fails to pay the debt demanded to creditor; or
- fails to apply to the court to have the demand set aside,
within 21 days of receiving it.
A failure to respond to a statutory demand is usually the first step in a creditor seeking to have a company wound-up in insolvency.
What’s worse – because the failure to comply with (or set-aside) the statutory demand creates a presumption of insolvency, the company bears the onus of proving its solvency (with the debt demanded in the statutory demand taken to be an uncontested, present liability). Proving solvency is not an easy (or cheap) task – it may require expert evidence from a specialist accountant.
So what does a statutory demand look like?
- be for a debt or debts of $2,000 or more;
- be in a prescribed form;
- be in writing;
- be signed by the creditor;
- correctly state the debtor’s company name and its registered office; and
- specify a place in Australia where the debt can be paid.
What does a company need to do to set aside a creditor’s statutory demand? It will need to convince a court that:
- there is a defect in the demand (i.e. the demand was incorrectly served, details are incorrect etc);
- there is a genuine dispute about the alleged debt (the bar is quite low – all that needs to be established is a serious question to be tried about the size or existence of the debt); or
- the company has the right to offset the amount in the demand.
The key take away here is that if you do ever receive one of these creditors statutory demands, you must seek legal advice immediately.