Statutory Demands – How To Issue And Set Aside

by Greg Carter, Commercial Litigation Lawyer in Perth

A statutory demand is a formal demand made by a creditor under the Corporations Act 2001 to recover a debt owed by a company.

If the company fails to comply with a statutory demand it is presumed to be insolvent. An application can then be made to the Court to wind up the company.

To avoid this the company must comply with the statutory demand (pay the debt), reach agreement with the creditor regarding the debt, or apply to the Court to set aside the statutory demand. 

Requirements to issue a statutory demand

Under section 459E of the Corporations Act a statutory demand:

  • must be in writing, and be in the prescribed form (Form 509H)
  • must specify the debt and its amount, or if there are 2 or more debts, specify the total amount of the debts
  • must require the company to pay the amount of the debt, or to reach agreement to pay that amount or some other amount to the creditor’s reasonable satisfaction, within 21 days after the demand is served on the company
  • must be signed by or on behalf of the creditor
  • must, unless the debt is a debt owed pursuant to a judgment of a Court, be accompanied by an affidavit which verifies that the amount of the debt, or the total debt, is due and payable by the company. 

What can the company do if served with a statutory demand?

The company can:

  • pay the amount claimed in the statutory demand
  • negotiate an agreed compromise of the amount claimed; or
  • apply to the Court for an order setting aside the statutory demand, but only within 21 days after the statutory demand is served on the company. The 21 day period cannot be extended.

To set aside a statutory demand, the company must, within the 21 day period:

  • file with the Court an application together with an affidavit supporting the application; and
  • serve a copy of the application and supporting affidavit on the person who served the statutory demand.

When can the Court set aside the statutory demand?

The Court must first determine whether:

  • there is a genuine dispute between the company and the applicant about the existence or amount of the debt to which the statutory demand relates
  • the company has an offsetting claim. An offsetting claim means a genuine claim that the company has against the applicant by way of counterclaim, set-off or cross-demand – even if it does not arise out of the same transaction or circumstances as the debt claimed under the statutory demand.

The Court will then determine the ‘substantiated amount’ of the statutory demand in accordance with the following formula: 

Substantiated Amount = Admitted Total less Offsetting Total

Admitted Total’ equals:

  • nil ($0.00), if the Court determines that there is a genuine dispute about the existence of the debt
  • if there is a genuine dispute about the debt, the amount the Court determines is not subject to a genuine dispute
  • otherwise, the amount of the debt

Offsetting Total’ equals the amount(s) of any offsetting claims.

If the Substantiated Amount is less than the statutory minimum (currently $2,000), the Court must set aside the statutory demand.

If the Substantiated Amount is $2,000 or more, the Court may make an order varying the amount of the statutory demand to that amount.

Examples

  • If the debt claimed under the statutory demand is $100,000, but the Court determines that there is a genuine dispute about $50,000 of that amount, and the company has an offsetting counterclaim for $20,000, the substantiated amount will be $100,000 less $50,000 less $20,000 = $30,000. In this example, because the substantiated amount is more than the statutory minimum of $2,000, the Court must not set aside the statutory demand, and may vary the amount of the statutory demand to $30,000.
  • If the debt claimed under the statutory demand is $100,000, but the Court determines that there is a genuine dispute about $50,000 of that amount, but the company has no offsetting counterclaim, the substantiated amount will be $100,000 less $50,000 = $50,000. In this example, because the substantiated amount is more than the statutory minimum of $2,000, the Court must not set aside the statutory demand, and may vary the amount of the statutory demand to $50,000.
  • If the debt claimed under the statutory demand is $100,000, but the Court determines that there is a genuine dispute about $99,000 of that amount, and the company has no offsetting counterclaim, the substantiated amount will be $100,000 less $99,000 = $1,000. In this example, because the substantiated amount is less than the statutory minimum of $2,000, the Court must set aside the statutory demand.
  • If the debt claimed under the statutory demand is $100,000, the Court determines that there is no genuine dispute about that amount, but the company has an offsetting counterclaim of $110,000, the substantiated amount will be $100,000 less $110,000 = ($10,000). In this example, because the substantiated amount is less than the statutory minimum of $2,000, the Court must set aside the statutory demand.

The Court may also set aside a statutory demand if it is satisfied that:

  • because of a defect in the demand, substantial injustice will be caused unless the statutory demand is not set aside; or
  • there is some other reason why the demand should be set aside.

What if the Court does not set aside the statutory demand?

If the Court does not set aside the statutory demand, it must be complied with, no later than 7 days after the Court has made its decision, or a longer period if the decision is appealed or the Court makes an order extending the period.

5 traps for creditors

There are many traps for creditors. Here are 5 of them:

  • The statutory demand will be set aside if it does not clearly, correctly and unambiguously describe the claimed debt, so that the company can assess whether there is a genuine dispute about the existence or amount of the debt.
  • If the alleged debt is not “due and payable” the statutory demand will be set aside. This means that the debt must be ascertainable, immediately payable and presently recoverable or enforceable by legal action.  So a contingent or prospective liability cannot be the subject of a statutory demand.  Nor can a claim for unliquidated damages (for example a claim for damages for breach of contract).
  • The supporting affidavit must be in accordance with Form 7 of the Corporations Rules, must properly depose to certain matters, and should be sworn or affirmed on the same date as the statutory demand.
  • Not properly considering whether there is a genuine dispute about the existence or the amount of the debt, which may defeat the statutory demand or reduce the amount claimed. To prove a genuine dispute all that the company has to show is that there is a “plausible contention requiring investigation” about the existence or amount of the dispute.  This is not hard to show, for example, if the contractual terms giving rise to the debt are ambiguous, or where there is no contract in writing and the parties are in dispute about what they agreed to.
  • Not properly considering whether the company has an offsetting claim, which may defeat the statutory demand or reduce the amount claimed. An offsetting claim is any counterclaim, set-off or cross-demand the company has against the creditor, and is not restricted to debts that are due and payable. An offsetting claim can be for liquidated and unliquidated damages, for example, a claim of misleading and deceptive conduct. An offsetting claim can also be independent of the amount claimed in the statutory demand.  To prove an offsetting claim all that the company has to show is that there is an authentic or bona fide offsetting claim.  This test is not hard to satisfy.

5 traps for companies

There are also many traps for companies. Here are 5 of them:

  • Not filing with the Court the application to set aside and supporting affidavit and serving copies of those documents on the creditor within 21 days after the statutory demand is served on the company. If this is not done the application to set aside will be invalid, and the company will be presumed insolvent.
  • Not calculating the 21 day period correctly. There are laws under the Corporations Act and Acts Interpretation Act 1901 regarding the calculation of time.
  • Not ensuring that the application sets out all of the grounds of objection to the statutory demand. The Court will not permit new grounds of objection to be raised outside the 21 day period, unless the supporting affidavit contains evidence which supports the new grounds of objection.
  • Not ensuring that the supporting affidavit contains adequate evidence to support all of the grounds of objection to the statutory demand. An insufficient affidavit cannot be supplemented by evidence outside the 21 day period.
  • Not making an application to set aside in the name of the company. For example an application in the name of a director will be defective.

Conclusion

In certain circumstances statutory demands can be an effective means of recovering a debt owed by a company.

However there are numerous ways in which a statutory demand can be set aside, some of which are not obvious.

Accordingly legal advice should be sought if you are thinking about issuing a statutory demand, or wish to make an application to set aside a statutory demand.

 

Greg Carter is a freelance litigation lawyer based in Perth, specialising in fixed-fee commercial dispute resolution.

Greg offers a FREE consultation and a ‘no obligation’ quotation.

For more information please call Greg on 0422 406 929 or email gc@gregcarter.com.au.

Or see his website www.gregcarter.com.au.



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