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Managing Trade Debtors - Statutory Demands

Managing Trade Debtors, Statutory Demand, winding up application, appointing a liquidator, liquidation, court ordered liquidation, Grauf O'Brien Lawyers

Statutory Demands

A statutory demand is only appropriate if;

  1. The debtor is a company (ie, “Pty Ltd”);

  2. the debt is “due and payable” immediately;

  3. the debt is greater than $4,000.00;

  4. there is no “genuine dispute” over the liability for the debt; and

  5. there is no overriding “offsetting claim” by the debtor against the creditor that would reduce the balance of the debt to less than $4,000.00 (“the substantiated amount”).

If there is a “genuine dispute” (as to the debtor’s liability for the debt) or if there is an overriding “offsetting claim” (that the debtor alleges against you) that would reduce the “balance of the debt” to less than $2,000.00 then it would be better to sue for the debt in the relevant Court instead.

The legal concepts of “genuine dispute” and “offsetting claim” are explained below.

Before deciding whether to issue a Statutory Demand, please consider the following advice as to the possible outcomes and effects of serving a Statutory Demand pursuant to section 459E of the Corporations Act 2001 (Cth) (“the Corporations Act”).

When to Issue a Statutory Demand

The process of issuing the Statutory Demand is very simple. A standard form of document (“the Statutory Demand”) is prepared according to the Corporations Act and the Corporations Regulations 2001 (Cth) made pursuant to the Corporations Act.

If the debt being claimed is not a “judgment debt”, owed pursuant to an existing Order of the Court, then the Creditor, or an authorised officer of the Creditor Company issuing the Demand, must swear a simple Affidavit “verifying the debt” (“the Accompanying Affidavit”) and the Accompanying Affidavit must be served with the Statutory Demand. Again, there are rules prescribing the form of the Accompanying Affidavit.

The Accompanying Affidavit is a solemn statement made under oath that the debt is of a particular amount, that it is presently due and payable and that there is no “genuine dispute” about the existence of the debt.

If the Creditor, or its lawfully authorised agent (such as a solicitor), cannot swear to the truth of these matters from their own knowledge, then no Statutory Demand should be issued.

Effect on the Debtor Company

A Debtor Company that has been served with a Statutory Demand must, within twenty-one (21) days of service on the Company of the Demand:

  1. “ to the Creditor the total of the amounts of the debts; or

  2. ... secure or compound for the total of the amounts of the debts to the Creditor’s reasonable satisfaction.”

If the Debtor Company fails to do one of these things then the Creditor may rely upon that failure as grounds for an Application to the Supreme Court, or to the Federal Court, for the “winding up” of the Company. The Winding-up Application process is discussed further below.

There is a “statutory presumption of insolvency” of the Debtor Company. This presumption is very hard to overcome and significant costs are required to be incurred should this be necessary.

The “statutory presumption of insolvency” arises pursuant to section 459C Corporations Act. The presumption lasts for three months, commencing upon the date of “failure to comply” with the

Statutory Demand (which in turn is twenty-one (21) days after the Statutory Demand is served).

The Debtors Response

A word of caution is appropriate. Section 459G of the Corporations Act provides that a Company served with a Statutory Demand may apply to the Supreme Court, or to the Federal Court, for an order setting the Statutory Demand aside.

Any such Application must be made within 21 days after the Statutory Demand is served and, within that same period:

  1. “an affidavit supporting the application must be filed with the court; and

  2. a copy of the application and a copy of the affidavit must be served on the person who served the demand.”

Again, these are the words used in the Statutory Demand. They serve as a warning notice to the Debtor Company to take prompt action in relation to the Statutory Demand, if it takes the view that there is a “genuine dispute” regarding the existence of the debt or the amount claimed or if the Debtor Company has an “offsetting claim” (section 459H Corporations Act).

A Statutory Demand may also be “set aside” if the Court is satisfied that either (section 459J Corporations Act):

  1. because of a defect in the demand, substantial injustice will be caused unless the demand is set aside; or

  2. there is some other reason why the demand should be set aside.

Setting the Statutory Demand Aside

The Court will set aside the Statutory Demand if it is satisfied that the Debtor Company can establish any of the following:

  1. that there is a “genuine dispute” about the existence or amount of the debt to which the Statutory Demand relates, (under section 459H(1)(a) Corporations Act);

  2. the Debtor Company has a “genuine offsetting claim” (under section 459H(1)(b) Corporations Act); or

  3. there is a “defect” in the Statutory Demand itself or “some other reason”, such as “oppression” or an “abuse of process” against the Debtor Company – (under section 459J Corporations Act - eg service of the Statutory Demand was not properly made or the Statutory Demand does not properly identify the Debtor Company, etc).

The Court can also make a finding that part of the claim ought to be “set aside” as being subject to genuine dispute, or if there is a partially offsetting claim in favour of the Debtor Company.

The Court will then order that the Statutory Demand remains effective but only for the reduced amount, known as the “substantiated amount”. The Debtor Company is usually then given a further 21-days to comply with the reduced terms of the Statutory Demand (under section 459F(2) Corporations Act).

In the event that the Debtor Company makes a wholly successful Application to the Court to set the Statutory Demand aside, then the Statutory Demand is of no further effect, and more importantly, the Court will make a “costs order” against the Creditor that served the Statutory Demand.

If the Statutory Demand is wholly set aside then this means that the Creditor has to pay its own lawyers’ fees for the work done in preparing and issuing the Statutory Demand, and for any work done in the course of the Court proceedings to set aside the Statutory Demand.

The Creditor will ordinarily also be ordered to pay a proportion of the legal costs of the Debtor Company to compensate the Debtor Company for its own legal costs in having to make the Application.

If the Debtor Company makes an Application to set aside the Statutory Demand without good reason (that is, if the Application is dismissed or the substantiated amount of the Statutory Demand exceeds $2,000.00), then the situation is very different.

The Statutory Demand then remains valid and the Debtor Company is presumed to be insolvent. The Debtor Company is effectively deemed to be liable for the sum of the debt claimed in the Statutory Demand (or alternatively for the “substantiated amount”) and the Debtor Company is liable for its’ own legal costs and a proportion of the Creditor’s legal costs.

Issuing a Statutory Demand when it is inappropriate can result in an “adverse costs order”. It is possible that the costs order can amount to a serious amount of money.

It is for this reason that careful consideration must be had prior to issuing a Statutory Demand.

A Genuine Dispute?

The Courts have recognised that it is entirely legitimate to use a Statutory Demand to test the evidence of the Debtor Company in relation to an alleged debt.

The Creditor may believe that there is no dispute, or at least no “genuine” defence to your claim for payment of the debt. In that circumstance it is appropriate to put the Debtor Company to proof of its alleged defence.

For example, the Creditor may see the matter as a simple debt and a refusal to pay. The refusal may well be the result of the pending insolvency of the Debtor Company. The Creditor might issue an ordinary letter of demand against the Debtor Company, only to be met with a feeble excuse for non-payment. The feeble excuse may not be consistent with the Creditors version of the facts.

However, if the Debtor Company wishes to contest a Statutory Demand, then it must commit itself to a sworn statement of its “defence”, which must be filed in Court - all within a period of 21-days of receipt of the Statutory Demand.

A Statutory Demand can substantially reduce the expense that would otherwise be involved in an ordinary Court proceeding. It can also substantially reduce the time that it takes to reach the ultimate outcome, irrespective of what that might be.

If the Creditor is quite clear from the outset that there are no grounds for having the Statutory Demand set aside, that is to say, before the Statutory Demand is issued, then complications should not arise.

However, you may issue a Statutory Demand even if you expect the Debtor Company to raise false allegations of fact in order to set aside the demand in Court. Your use of a Statutory Demand in this situation is entirely legitimate.

Application for A Winding Up Order

An application to the Supreme Court, or to the Federal Court, for a winding up order is made when a party has grounds for proving that a company is insolvent. It is the rough equivalent to “bankrupting” a natural person.

One of the grounds that the Court will accept as proof of insolvency is the failure to comply with a Statutory Demand.

The winding up application is made and supported by affidavits attesting to the service and non-compliance with a properly served Statutory Demand. There is also a requirement to advertise the fact that an application has been made to wind up the company.

Before a winding up application is made, it is usually best to have obtained the consent of a liquidator to act. This payment is usually made from the assets of the Debtor Company.

It is important to note that, as with any other application, the application for the winding up order can be opposed by the Debtor Company.

Failure to comply with a Statutory Demand results in the creation of a statutory presumption of insolvency against the Debtor Company (section 459C Corporations Act). That presumption is “rebuttable” by positive proof of the Debtor Company’s solvency.

Things start to get very technical at that point. Essentially, the Debtor Company will require expert evidence as to the financial position of the company in order to be successful. They cannot rely on any dispute of the Statutory Demand, which could have been raised in an application to set the demand aside (as discussed above).

If the winding up application is successful, then the Court usually orders that a proportion of the costs of the application be borne by the Debtor Company and paid first out of its unsecured assets. In that way you recover some of the legal costs associated with the recovery of the initial debt.

If you are having difficulty managing trade debtor, please contact Grauf O'Brien Lawyers so that we can advise you as to the best course of action to facilitate a recovery.

Alternatively, if you have been served with a Statutory Demand or a Winding-up Application, you should immediately seek legal advice as to its enforceability given the significant implications set out above. Grauf O'Brien Lawyers are able to assist in this regard.

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