WHAT IS A STATUTORY DEMAND AND HOW BADLY CAN IT AFFECT MY BUSINESS?

WHAT IS A STATUTORY DEMAND AND HOW BADLY CAN IT AFFECT MY BUSINESS?

In the same way that an individual can become bankrupt for failing to pay money when due, a company can be brought to a commercial end by being wound up for failing to pay its debts so it is vitally important if you run a company that you are aware of what a statutory demand is, and the severe implications that they can have on your company or business if you are served with one.

A creditors statutory demand is a very powerful mechanism prescribed under the Corporations Act 2001 (Cth) that allows anyone who is owed money by your company (a creditor) to make a statutory demand for payment of that money (provided that the debt is immediately due and payable) which could result in your company being wound up if the statutory demand is not dealt with appropriately and within the stipulated time frame.

Companies that are served with a statutory demand have a very strict time frame in which to either pay the debt in full, or apply to a Court of competent jurisdiction to have the statutory demand set aside, failing which the company is presumed to be insolvent, and the creditor is able to apply to the Court to have the company wound up.

Affinity Lawyers notes that in light of the current Corona virus pandemic, temporary changes are being made to the provisions of the Corporations Act 2001 (Cth) to lighten the burden on struggling companies which increases the minimum threshold debt amount for which a statutory demand can be issued from $2,000 to $20,000, and also increases the debtor companies response time frame from 21 days to 6 months.  Changes have also been made to relieve the risk to directors of personal liability for insolvent trading (which can result from a company trading insolvently) for a temporary period of six months, but is subject to a variety of strict terms and conditions that must be complied with.

Despite these changes however, the receipt of a statutory demand is still a very serious and time sensitive matter and legal advice should be sought immediately if your company receives one. Our litigation team is on hand to guide you through the process, and provide you with experienced and professional advice during this time.

For example, if a creditor is owed (or believes that they are owed) more than $20,000 by a company, they are entitled to serve a statutory demand on that company, demanding payment of same within 6 months.  The company must then either pay the debt in full or make an application to a Court of competent jurisdiction to have the statutory demand set aside within the six month period.

A Court will consider four grounds to determine whether to set aside a statutory demand, as follows:

  1. A Genuine Dispute – if there is a genuine dispute between the parties in respect of either the existence of, or the amount of the debt relating to the statutory demand;
  2. An Offsetting Claim by the Company;
  3. If there is a defect in the Statutory Demand which would cause substantial injustice if the demand was not set aside; or
  4. Some other reason why the Statutory Demand should be set aside.

A company cannot bring an application to set aside the statutory demand just because it cannot pay the amount owing to the creditor.

The Application to set aside the statutory demand must be in the prescribed form, accompanied by an affidavit in support and must be filed and served on the creditor. The Court will then make a determination in respect of the application.

If the company doesn’t pay the debt or make an application to the Court to set aside the statutory demand, then the company is presumed to be insolvent, and the creditor is able to apply to the Court to have the company wound up.

There may be options available to a company to oppose an application for the winding up of the company, however this area of law is inherently complex and turns on the facts of each individual matter.

If the company is ordered to be wound up, there will likely be irreversible damage to the reputation of the company, not to mention serious consequences for the directors/shareholders, the employees, the customers, the suppliers and bankers/creditors related to the company.

The threat of the statutory demand should not be downplayed by the extended timeframes in the current climate.  The receipt of a statutory demand should put you on high alert, and you should contact one of the experienced litigation Lawyers at Affinity lawyers on 5563 8970 immediately in circumstances where your company is in receipt of one.