I have been served with a Creditor’s Statutory Demand – What should I do?

You have just finished packing the car, the kids are waiting for you inside and just as you head out the door to escape on your well-deserved and much needed holiday, you are greeted by somebody who hands you a document.

You open it, and it’s addressed to one of your companies and the letter is titled ‘Creditor’s Statutory Demand for payment of Debts’ and comes with the following warning:

“A failure to respond to a statutory demand can have very serious consequences for a company. In particular, it may result in the company being placed in liquidation and control of the company passing to the liquidator of the company”.

So what is a creditor’s statutory demand and what should I do?

The most important factor to consider is that YOU SHOULD NOT IGNORE IT!

A Creditor’s Statutory Demand is a formal demand made by a Creditor under Section 459 of the Corporations Act 2001 for the payment of debts over $2,000 owed to the Creditor by a company. A Creditor’s Statutory Demand must only be served for debts that are due and payable, and not in dispute. If a Creditor of a company serves a Statutory Demand where the debt is not due and payable or is in dispute, the company served with the demand may apply to the Court to have it set aside. If successful, the Creditor will generally be required to pay the company’s legal costs.

The most important thing to remember when receiving a Creditor’s Statutory Demand is that you have 21 days to take appropriate action. This should not be ignored or neglected, irrespective of your holiday arrangements and other commitments – even if you do not agree that your company owes the debt. Failure to act within the 21 days will mean that your company will be deemed insolvent and that would allow the creditor to make a further application to have your company wound up.

Even if you dispute the debt, if you don’t take action within that timeframe, you will later have to prove solvency in a subsequent winding up proceeding – which may prove difficult.

You should first examine the Statutory Demand and the Affidavit verifying the Debt within the Statutory Demand to identify what exactly is being claimed. Any defects in the affidavit which result in the debt not being verified (acknowledging the debt is due and payable), can lead to the demand being set aside: Zhen Yun (Aust) Pty Ltd v State Bank of South Australia (1994) 13 ACSR 801, and defects in the Statutory Demand that cause substantial injustice can be relied upon to set aside the Statutory Demand. For example, if the Affidavit is made by a person other than the one prescribed, the demand may be set aside.

Further, if an Affidavit is executed before a Statutory Demand, it cannot verify the demand: Wildtown Holdings Pty Ltd v Rural Traders Co Ltd (2002) 172 FLR 35; [2002] WASC 196.

I have read the creditor’s statutory demand, now what?

Generally, you have three options:-

1. Accept it and pay – if you acknowledge the debt is due and payable, and the amount demanded is not in dispute, then you should consider paying the debt before the 21 day period has lapsed. If you are unable to do so, you should attempt to negotiate with the Creditors or provide security for the debt “to the reasonable satisfaction of the creditor”. It is important to note that a Statutory Demand cannot be extended, and therefore you will need to make sure that the demand is withdrawn before the 21-day time-frame otherwise your company is deemed to be insolvent.
2. Reach a compromise or negotiate – a Creditor will rarely want to proceed to wind up a company if a debtor is willing to make arrangements to pay the outstanding debt. Whether by entering into a payment plan or otherwise, this is generally seen as a preferred outcome.
3. Fight the statutory demand – this can be done a number of ways, but more commonly if you dispute the debt, and want to save on legal costs you should try contacting the Creditors or their solicitors and request that they withdraw the demand, and provide valid reasons. If that fails, or if you do not have the time to negotiate because the 21-day deadline is fast approaching, then you will need to make an application in the Supreme Court to set-aside the Statutory Demand. There are 4 grounds to set aside the demands, which are outlined below.

NOTE: If you do not intend to pay the full amount or are unable to pay the full amount claimed in the Creditor’s Statutory Demand, you should seek legal advice immediately after being served with the demand to ascertain if and how any of the grounds to set aside the Statutory Demand may apply to your scenario.

I want to fight it – what should I be aware of?

• You have a strict 21 days to make an application to set aside the Statutory Demand.
• This will require you to file and serve the application within the 21-day time-frame, along with an affidavit in support which will verify that the debt is due and payable. Problems often arise when a demand has been filed within the 21 days but has not been served – as Section 459G(3)(b) of the Corporations Act 2001 also requires it to be served within the 21-day time-frame, not just filed.
• Service on a company may be affected by Section 109X of the Corporations Act 2001, which provides that a document may be served by leaving it at, or posting it to, the company’s registered office or delivering the document personally to a Director of the company who resides in Australia.
• Some lawyers wait until the last day to make the application and then find themselves unable to serve the application on that day. This is fatal to an application to set aside the Statutory Demand, as the Court will not have jurisdiction to hear your application once the 21-day time frame has lapsed if you are unable to prove service.
• Despite what the Creditor may assure you, the Statutory Demand cannot be extended unless you make an application to set it aside and that application must be made within the 21-day timeframe. Do not be misled into believing you have more time unless you have made an application to the Court.
• Pursuant to section 459S of the Corporations Act 2001, if a company has not made the application to set aside the Statutory Demand, a company cannot later contest a winding up application, without leave of the Court, on any of the grounds that it could have relied on to set aside the Statutory Demand.
• Your only way out at the subsequent winding up proceedings would be to rebut the presumption of insolvency. However it should be noted that this is not a simple task, as the Court will want real evidence of solvency, and it has been emphasised that the application should present the Court will the fullest and best evidence of its financial position.  The Courts will be reluctant to accept statements of solvency or unaudited accounts.

On what grounds can I set aside the demand?

A Statutory Demand can be set aside by the Court if it is satisfied that:-

1. There is a genuine dispute about the existence or amount of the debt(s) to which the demand relates;
2. The company has an offsetting claim against the creditor; (Note: generally this only reduces your liability under the Statutory Demand by the amount of the offsetting claim)
3. Because of a defect in the demand, a substantial injustice will be caused unless the demand is set aside;
4. There is some other reason the demand should be set aside;

It is also important to note that any ground that you intend to rely on to set aside the Creditor’s Statutory Demand, should be identified in your Affidavit, satisfying the Graywinter principle.

For more information on the grounds to set aside a Creditor’s Statutory Demand and if they apply in your particular circumstances, feel free to contact the experienced team of Lawyers at Rockliffs Lawyers who are ready to assist you.

NOTE: Part 2 of this Article will expand on the grounds to set aside a Statutory Demand, so stay tuned!