Statutory demands are one of the most effective legal recovery tools available to trade creditors.
The consequences of not complying with a statutory demand, liquidation, could not be more serious.
Serving a statutory demand has the effect of asserting significant pressure which often results in full payment of the outstanding debt. There are, however, significant consequences of improperly issuing a statutory demand. For this reason, it is important to be aware of the circumstances where a statutory demand is at risk of being set aside, to ensure that they are only issued in appropriate circumstances.
The court will set aside a statutory demand if there is a genuine dispute or offsetting claim in respect of the indebtedness.
The threshold test for a debtor to apply to set aside a statutory demand on this ground is fairly low.
It is not necessary for a debtor to establish that they have a defence which would succeed at trial. The issue to be determined is whether there is a “genuine dispute in respect of the indebtedness”.
The courts have given the following judicial guidance as to how the term “genuine dispute” is to be determined.
- “A plausible contention requiring investigation.”1
- “A serious question to be tried.”2
- “... must establish that the dispute is a bona fide and truly exists in fact, and that the grounds
alleging the existence of the dispute are real and are not spurious, hypothetical, illusory or misconceived.”3
While the above judicial interpretations are useful, it is important to bear in mind that the concept is not a particularly difficult one. At a practical level, there are two considerations.
1. Is there a dispute?
2. If so, is the dispute genuine? If a genuine dispute is established, the court will make an order setting the statutory demand aside. In these circumstances, the court will almost always award (substantial) costs against the creditor who issued the statutory demand.
At a practical level, it is important that care is taken to confirm that there are no genuine grounds for a dispute prior to issuing a statutory demand.
If potential grounds for a dispute exist, it is important that they are brought to the attention of your solicitor when you provide instructions to issue the statutory demand. This will allow your solicitor to provide advice as to whether the alleged dispute is likely to meet the threshold requirement of “genuineness” and/ or give consideration to alternative strategy options for pursuing effective legal recovery action.
Partially disputed debts
It may be possible to issue a statutory demand if a debt has been partially disputed. If a debt is partially disputed, the court will only make an order setting the statutory demand aside if the undisputed portion of the debt is less than $2,000.
The entitlement to issue a statutory demand for the undisputed portion of a debt was verified in the decision of Commonwealth Bank of Australia –v– Garuda Aviation Pty Ltd4. In that case, the Commonwealth Bank claimed an amount of approximately $4.5 million from Garuda. Garuda raised offsetting claims and disputed a significant portion of the debt. Notwithstanding, even after those matters were taken into account, a balance of approximately $2 million remained outstanding.
The court in this case verified that the Commonwealth Bank's actions in issuing a statutory demand for the undisputed portion of approximately $2 million were both valid and appropriate.
If a dispute or offsetting claim is raised by a debtor, it is important to consider whether it applies to the entire debt, or only a portion. If the dispute or offsetting claim only relates to a portion, an appropriate strategy option may be to issue a statutory demand for the undisputed balance of the debt. In these circumstances, your rights in respect of the disputed portion of the debt will remain unaffected and separate legal recovery action may still be pursued at the appropriate time.
Abuse of process
It is an abuse of process to use statutory demands for an improper purpose. It has been held by the courts that it is an improper purpose to use statutory demands as a debt recovery tool to coerce someone into paying a disputed debt.
A statutory demand which has been issued as an abuse of process, will be liable to be set aside.
The abuse of process rule reinforces the importance of determining whether any grounds for dispute exist prior to issuing a statutory demand.
There are significant consequences associated with issuing a statutory demand. In particular, when a debtor company fails to comply with a statutory demand, the onus of proof is reversed. This means that on the hearing of an application to wind up, the debtor company will be presumed to be insolvent unless it can prove otherwise.
It is not, therefore, surprising that the court is conscious to ensure statutory demands are issued in the proper form and in accordance with the prescribed requirements of the Corporations Act. If there is a defect in the statutory demand which may cause substantial injustice, the statutory demand will be set aside.
The following is a series of examples where statutory demands have been set aside based upon technical defects.
- The statutory demand outlined a claim for a principal debt and a claim for interest. The amount of the claim for interest was not specified and the source of the interest was not particularised.5
- The debt was owed to two creditors, but the demand was only signed by one of the creditors.6
- The statutory demand specified one debt amount on page 1 and a different debt amount on page 2.
- The affidavit verifying the demand did not effectively verify either of the debt amounts.7
- The statutory demand was issued in Australian Dollar amounts, whereas the original debt was quantified in a foreign currency. The statutory demand did not provide an explanation as to how the Australian currency amount was converted.8
Statutory demands are a very valuable legal recovery tool, but only if they are technically correct. If a statutory demand is set aside because of a technical defect, a costs order will almost certainly be made against the creditor who issued the demand.
Securing payment from a debtor is often about creating pressure. Where the debtor is a company, one of the most effective ways to apply pressure is through issuing a statutory demand.
While statutory demands can be a very valuable tool for creditors, the consequences of getting it wrong and having a statutory demand set aside can be significant.
Prior to issuing a statutory demand, it is important to conduct proper internal investigations to ensure that no grounds for a dispute exist. If a genuine dispute as to debt exists, the statutory demand will be set aside. If a debt has been partially disputed, it may still be possible to issue a statutory demand. So long as the undisputed portion of the debt exceeds $2,000, creditors are still within their rights to issue a statutory demand for the undisputed portion of the debt and pursue an alternative form of legal action (such as issuing proceedings) to recover the disputed balance.
Finally, it is important to remember that there can be significant consequences if there is a technical defect in the form or content of a statutory demand and/or affidavit in support. This risk is best managed by ensuring that the person entrusted with preparing and issuing statutory demands on your behalf is an appropriately qualified solicitor specialising in insolvency law.
The statutory demand process can be a very valuable tool for trade creditors in pursuing their legal rights to secure payment of outstanding debts. Ensuring that statutory demands are issued appropriately limits the risk of an adverse costs order, while allowing trade creditors to effectively adopt strategies which maximise their net return.
Karl Hill is Managing Director of Results Legal.
Ph: 07 3234 3200 www.resultslegal.com.au
1. Eyota Pty Ltd –v- Hanave Pty Ltd  12 ACSR 785
2. Eyota Pty Ltd –v- Hanave Pty Ltd  12 ACSR 785
3. Spencer Constructions Pty Ltd –v- G & M Aldridge Pty Ltd  76 FCR 452 at 464
4.  WASCA 61
5. Topfelt Pty Ltd –v- State Bank of New South Wales Ltd  120 ALR 155
6. Gone Farming Pty Ltd –v- Long BC200105594
7. Sewmail (Aust) Pty Ltd –v- Booby Traps Pty Ltd  23 ACSR 339 8. MEC Import Sales Pty Ltd –v- Iozzelli SRL  29 ACSR 229