In today’s uncertain times after the GFC many companies are experiencing financial troubles. More and more often the response to an unpaid debt is the service on a debtor by a creditor of “Statutory Demand” by passing the usual course of filing a debt complaint in the Magistrates or County Court.
So what can you do if a statutory demand is served upon you? This depends on a number of factors such as “do you owe the outstanding amount demanded?” Do you have any monies owed to you by the creditor for any reason and is there a “genuine dispute” between you and your creditor? Is the statutory demand valid i.e. is there a defect in the demand? An answer of yes to any of these questions would mean that you should seek to set aside the statutory demand or the chance to raise any dispute you may have will be lost to you and the only question left will be whether your company is insolvent. Insolvency may also raise the question of a director’s personal liability if the company is proved to have been trading insolvent.
A statutory demand is not a court order and if the debtor agrees with the demand then the debtor need do nothing further and in 21 days the Notice will have crystalised. Unless there is a further application to the Federal Court for a winding up of the company no further action by the debtor need be taken. However, as indicated in the previous paragraph, if there is a dispute or defect in the statutory demand then unless an application to set aside the demand is made with the 21 day period you cannot raise your dispute to prevent the winding up process.
There are four grounds for an application to set aside a statutory demand under sections 459H and 459J of the Corporations Act 2001:
- that a genuine dispute exists between the company and the creditor about the existence or amount of a debt to which the demand relates,
- the company has an offsetting claim,
- there is a defect in the demand which would cause a substantial injustice if the demand is not set aside, and
- there is some other reason why the demand should be set aside.
The procedure to set aside a statutory demand is to file an originating motion and accompanying affidavit(s) in support substantiating the grounds put forward by the company as to why the demand should be set aside.
There is a large amount of case law on the subject of setting aside a statutory demand. Two recent cases below are examples of an abuse of process which would raise indemnity costs against the creditor:
Case 1) Rite Flow Pty Ltd v Nahas Construction (NSW) Pty Limited  NSWSC 553. In which recovery of a debt of $336,190.73 for water damage by that company was resisted on the facts that Rite Flow denied the damage and established a genuine dispute. His Honour stated that the demand did not relate to the debt but was in substance a claim for unliquidated damages and therefore the statutory demand was not properly used.
Case 2) Deputy Commissioner of Taxation, Re ABW Design & Construction Pty Ltd v ABW Design & Construction  FCA 346. This involved a winding up application following the non-compliance with a creditor’s statutory demand for $254,576.65. The commissioner relied on the posting of the demand to the debtor’s registered office. The demand was not properly addressed as the postcode was obscured on the envelope and his Honour found that proof of service had not been established and the winding up application was dismissed.
If you have reason to seek the setting aside of a statutory demand you should immediately seek the advice of a solicitor and if appropriate an application to the Federal Court should be made with the 21 day period after service of the demand.