Most people in business are aware that the Corporations Act includes a procedure whereby the creditor of a company can, in certain circumstances, serve a Statutory Demand on the company and, if that Statutory Demand is not appropriately dealt with within the confines of that procedure, the company is DEEMED to be insolvent, and the Court can make orders to wind it up.

It is that "deeming" step which gives this approach so much power.

Some Creditors want to use this Statutory Demand approach as a quick debt collection process - but that can be risky, especially without good advice and careful thought.

In many instances the Debtor companies have defences to some or all of the amount claimed - but simply fail to respond in the manner, and within the time, allowed for such purposes - and get wound-up.

In a couple of recent decisions (2007 and 2008) the Courts have confirmed that they will apply the requirements of the Statutory Demand regime strictly.

If you are a Creditor, be aware that the strict requirements apply to both parties, and getting it wrong could be an expensive and embarrassing mistake.

If you are a Debtor company, ignore these procedures and requirements at your peril.

In these days of higher interest rates and higher finance, we can expect to see more instances of Statutory Demands - so you might as well be familiar with them.

Regards,

David Heidtman

Commercial Group
Heidtman & Co Lawyers

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Creditors' Statutory Demands

20th February 2008

If your company is served with a Creditors' Statutory Demand which is disputed (meaning that some or all of the alleged debt is disputed in some respect), it is ESSENTIAL that APPROPRIATE steps are taken SWIFTLY to avoid the company being wound-up on the ground of deemed insolvency.

Under the Corporations Act, a company which is served with a Statutory Demand has 21 days from the date of service to settle the claim or to apply to the relevant Supreme Court to have it 'set aside'. The process of setting aside a Statutory Demand is somewhat technical, and involves the preparation and service of an appropriate application (to 'set aside' the Statutory Demand) and affidavit (to set out evidence which establishes a 'genuine dispute' regarding the debt).

Two recent cases highlight the need to properly and strictly comply with the procedures for the Debtor company to establish a dispute.

In Austar Finance v Campbell the Debtor disputed the amount claimed, and sent an unfiled application and affidavit to the Creditor within the necessary 21 day period. Those documents came to the attention of the Creditor but, because they had not been first "filed" (with the Court), it did not constitute effective "service".

The actual application and affidavit were subsequently filed and purportedly served on the Creditor – by facsimile and email - also within the 21 day period. That subsequent service was not in accordance with the relevant requirements - and the Court found that those documents (to set aside the Statutory Demand) did not come to the actual notice of the Creditor until after the 21 day period (when the hard copies of the documents were physically received by the Creditor).

So, even though the details of the debt dispute were known to the Creditor within the 21 day period, and an unfiled copy of the documents to set aside the Statutory Demand had actually been received and seen by the Creditor within that period, it was not sufficient to satisfy the strict technical requirements for effective service.

Therefore the application to set aside the Statutory Demand was dismissed and the Creditor was allowed to proceed to have the Debtor company wound-up.

In the 2008 decision of Millerview Constructions Pty Ltd v Palmer Plumbing Pty Ltd the Debtor sought to set aside a Statutory Demand by sending its documents by facsimile to the Creditor and by post to the post office box of the Creditor’s solicitor. Unfortunately for the Debtor, these documents were not served as required. The Court said there was no evidence that sending the documents to the Creditor by facsimile or posting them to the post office box of the Creditor's solicitor was effective in bringing the documents to the attention of the Creditor within the necessary 21 days of the service of the Statutory Demand.

The application to set aside the Statutory Demand failed, and the Debtor company was wound up as a consequence.

Conclusion

If a Debtor company wants to dispute a Statutory Demand, it MUST strictly comply with all appropriate steps - and do so within the 21 DAYS allowed.

Directors of companies who fail to properly and promptly deal with a Statutory Demand run a great risk of having their companies wound-up.

Statutory Demands are NOT to be taken lightly – as either the Creditor or the Debtor.

If you have a matter involving a Statutory Demand (as either the Creditor or the Debtor) or would like to discuss Statutory Demands in greater detail, please contact David Heidtman, Elizabeth Lee or Michael Tzirtzilakis of our Commercial Group or Alan McMurran of our Litigation Group.

Author: Philippa Clingan - Commercial Group

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