Business can be highly rewarding. Equally, it can often be challenging. Know when to use a statutory demand to recover debt, and what to do if your company is served with a demand.
What is a statutory demand?
A statutory demand is a notice issued under Section 289 of the Companies Act 1993 demanding repayment of a debt from a company. A statutory demand must be for an amount that is more than $1,000 and the debt must be due.
When should a company or organisation consider issuing a statutory demand?
A statutory demand can be an effective tool to obtain payment for a debt owed by a company. The demand is relatively easy to prepare and inexpensive for the demand itself. A statutory demand can have serious consequences not just for the company itself but also for individuals involved with the company such as directors, and potentially other related parties.
While the statutory demand itself is simple and quick to prepare and serve, there are a number of complicating factors to consider, such as strict time limits and the possibility of increased costs awards if it is used inappropriately. It is always preferable to obtain legal advice about your best options to recover debt. Although the courts have said that using the statutory demand procedure is a legitimate debt collection tool, it is equally inappropriate to use the procedure where there is a genuine and substantial dispute about whether the debt is owing or due. The court will often award increased costs against a party issuing a statutory demand where there is a substantial dispute about whether the debt is owing and there is an application to set aside the statutory demand.
What happens if you receive a statutory demand?
When a debtor company has been served with a statutory demand, it has 15 working days take one of the following three courses of action:
- Pay the debt;
- Enter into a compromise with creditors under the Act; or
- Provide security to the reasonable satisfaction of the creditor.
If the debt is not paid within the 15 working day limit, the creditor can apply to the Court to put the debtor company into liquidation using the unpaid statutory demand as a basis to say the company is insolvent and unable to pay its debts as they fall due. An unpaid statutory demand is probably the most common basis on which companies are liquidated by creditors.
If you have been served with a statutory demand, you should seek legal advice immediately.
How do I dispute a statutory demand?
If a company served with a statutory demand disputes that it owes the debt it can apply to the Court to set aside the statutory demand. That application must be made within 10 working days of service of the statutory demand and is a strict time limit. The Court may grant the application to set aside if it is satisfied there is a substantial dispute whether the debt is owing or is due, or if the company appears to have a counterclaim, set-off or cross-demand that exceeds the claim, or if it considers the demand ought to be set aside on other grounds.
The most common ground of challenging a statutory demand is that there is a substantial dispute about whether or not the debt is owing or is due. The court has examined this issue many times and has set out principles by which it will determine whether there is a substantial dispute:
- The onus is on the applicant seeking to set aside the statutory demand to show that there is arguably a genuine and substantial dispute as to the existence of the debt;
- The Court’s task is not to resolve that dispute but to determine whether there is a substantial dispute that the debt is due;
- To be successful, the Applicant will need to do more than simply allege a dispute exists. It will need to provide evidence of that dispute, although it does not need to go as far as resolving the dispute itself. If a counterclaim, cross-demand or set-off is raised, the applicant must establish that this is reasonably arguable in all the circumstances;
- It is not usually possible to resolve disputed questions of fact on affidavit evidence alone, particularly when issues of credibility arise, unless the evidence is contrary to the available documents or earlier statements made by the parties. However, the Court is not required meekly to accept without question whatever unvarnished statements may happen to be made on affidavit. The Court is entitled to act in a more robust and commonsense manner.
If sufficient evidence of a dispute is available, the dispute should normally be resolved first in ordinary civil proceedings before any statutory demand is issued.
