In our previous article, “What is a Statutory Demand?” we outlined what a statutory demand is and the high-level impact of not complying with it according to the Corporations Act 2001 (Cth). In this article we will explore the impact of a statutory demand from a creditor’s perspective and a debtor’s perspective.
Creditor's Perspective
A statutory demand is often used as part of a debt recovery strategy. Commonly a letter of demand is sent out and if there is no response, the statutory demand is then prepared and served on the debtor.
This does return the debt in many cases, but the creditor needs to be prepared to go the whole way if there is no compliance by the debtors.
Using the above strategy, a creditor would need to commit to do the following:
- Send a Letter of Demand;
- Serve a Statutory Demand;
If the Statutory Demand is not complied with then:
- Commence winding up application;
- Obtain orders;
- Liquidator appointed and winding up of company instigated.
A creditor must accept the spend of money to recover the debt. It is an expensive process to recover debt through a statutory demand. For example, the filing fee for a corporation is $4045 in the Federal Court and $3040 in the Supreme Court.
Although it is likely that the creditor will receive a return of debt from the winding up process, it can be risky. If the debtor company is insolvent or does not have any assets, then it is spending good money to chase bad money.
While a statutory demand can be a great tool for a creditor to recover funds from a debtor, it is a tool that needs to be used carefully and strategically. A creditor must be prepared to ‘go the whole way’ to recover the sums.
Debtor's Perspective
A debtor company must take a statutory demand very seriously.
If a statutory demand is not complied with it the debtor company is presumed to be insolvent. To have that overturned is an extremely expensive and risky process. This can have devastating impacts on a debtor company.
If a company is served with a statutory demand, they need to speak to their lawyers immediately. The debtor needs to be clear on:
- When the company was served with the statutory demand
- What the demand is in relation to
- If there a genuine dispute in relation to the debt
- If the debtor company solvent
- If the debtor company have funds to pay the demand
If the debtor believes that there is a genuine dispute, then the debtor company must immediately:
- Advise the creditor that there is a genuine dispute;
- Put them on notice that if the statutory demand is not withdrawn then the debtor will apply to have the statutory demand dismissed and seek costs; and
- Apply to have it set aside if the debtor does not comply with the removal of the statutory demand.
It is crucial that any application to have the statutory demand set aside is filed within the 21-day period. If it isn’t then the presumption of insolvency applies, and the debtor company would have to rebut the presumption. This can be a lengthy and expensive process.
It is crucial that if a company is served with a statutory demand the directors take it extremely seriously. If the company is wound up, a liquidator will be appointed, and the proper examination of the company and the affairs of the directors will take place. This can give rise to directors being pursued for insolvent trading under 588GA.
Conclusion
Whether you are a creditor seeking to use a statutory demand as a debt recovery tool or a debtor who has been served with one, a statutory demand needs to be given urgent consideration. In all cases time is of the essence and a proper strategy is necessary.
The Takeaway
For a creditor, a statutory demand is like going for a swim. You need to be prepared to get your hair wet.
For a debtor, a statutory demand is like a bonfire. If unattended it will spread and will have devasting results.
If you have been served with a statutory demand or have debtors that you would like to recover funds from, please contact James Frank at jfrank@franklaw.com.au.
This is not legal advice.
