So, you are owed money and not sure how to go about recovering it.
The first and most effective way to effect debt recovery is to maintain a strong relationship with your customers and debtors. A strong and respectful relationship enables either party to feel more comfortable picking up the telephone and speaking to the other party in times of financial difficulty or grievance.
However, sometimes–for whatever reason–this is not an option. If you have exhausted other diplomatic approaches such as reminder notices and letter of demands, a useful means of collecting an uncontested debt is a statutory demand.
What is a statutory demand?
A statutory demand (stat demand) is a demand made to a debtor company by a creditor under the Corporations Act (the Act). It is often used when a liquidated uncontested debt is owed to a creditor by a debtor company.
There are certain statutory requirements that must be complied with under the Act, such as the debt must be greater than $2,000 and cannot generally be in dispute, otherwise, an application may be made seeking to set the statutory demand aside by the debtor.
To put it simply, a stat demand is basically a formal notice to pay a debt made by a creditor under the Corporations Act on a debtor company.
What are the requirements for making a stat demand?
The requirements for making a Statutory Demand are set out in s459E of the Corporations Act. Relevantly, the demand:
(a) must relate to a debt or debts that are due and payable and total at least $2,000
(b) must specify the debt and its amount
(c) must be in writing, in accordance with the prescribed form, which is Form 509H
(d) must require compliance with the demand within 21 days after the demand is served on the company
(e) must be signed by or on behalf of the creditor, and
(f) if relying on a debt that is not a judgment debt, the demand must be accompanied by an affidavit.
What are the advantages of a statutory demand?
- It instigates action;
- It is a quick and effective means of collecting a debt;
- It is cost-effective;
- It does not need to be filed in Court;
- It is a precursor to an application to have the company wound up;
- It can be an alternative to litigation;
- It can be served even without obtaining a Court judgment;
- The debtor must respond within 21 days upon being served, otherwise, it can be quite difficult to set aside.
- If no action is taken by the debtor, an application may be made to the Court to wind up the company.
- It can be served on the debtor company by leaving it at their registered office address, sending it by post to that office, or delivering it to a director of the company residing in Australia.
How to Stop a Statutory Demand
If you are a company director and have received a statutory demand, do not ignore it. If there is no genuine dispute over the debt, you may be able to negotiate a resolution. Commercially speaking, most creditors would rather accept a payment plan than have to pursue legal proceedings to recover smaller debts.
A debtor may have suitable grounds to set aside the statutory demand, for reasons such as a genuine dispute over the debt. In the event a debtor company wishes to have the statutory demand set aside, it must apply to the Court and serve the application to set aside and supporting affidavit on the person who made the demand, within 21 days of service of the statutory demand.
A court may set aside the demand if there is:
- a genuine dispute over the debt;
- an offsetting claim;
- the demand is defective in the sense that it would cause injustice if not set aside; and
- any other good reason why it should be set aside.
Given the serious nature of winding up proceedings, the threshold on the merits of a dispute is not very high and it is not for the Court to assess the likelihood of the dispute’s success. The dispute merely needs to have substance and be bona fide.
Risks to the Parties of a Statutory Demand
- Once the time for compliance with a statutory demand has expired, unless a valid application has been filed and served to set aside, there is little opportunity of contesting the demand (assuming it has been validly served).
- The Act provides a presumption of insolvency if, after 21 days of being served the statutory demand, the debtor company fails to pay the debt or is not successful in having the demand set aside.
- A statutory demand may not be the most appropriate solution if you wish to retain a commercial relationship with the debtor company. Often, when lawyers are involved, there is a commercial breakdown in the relationship.
- There is a risk that a costs order can be made against the creditor if the statutory demand is successfully set aside by the debtor company.
There are several ways you may wish to recover a debt. A statutory demand is an option worth considering, although it may not always be appropriate for your circumstances.
Whether you wish to serve a statutory demand or have recently been served with one, we are here to help.
For all your enquiries regarding statutory demands and other aspects of insolvency or debt recovery, contact us on either (03) 9052 3214 or via our Contact Us form.