Statutory demands are a powerful way to recover debts from companies without going through the courts and have a strict 21-day compliance time limit. A failure to respond to a creditor’s statutory demand can carry significant consequences for an indebted company (including being wound up)– and directors need to be especially vigilant with their record keeping and monitoring of emails (including junk emails!) now that legal notices can be served electronically through email, writes Attwood Marshall Lawyers Commercial Litigation Partner, Charles Lethbridge. Charles is also a NSW Law Society Accredited Specialist in Dispute Resolution.
A slowing economy has caused a hike in debt recovery
Having only just recovered from the economic upheaval associated with the Covid-19 pandemic, the International Monetary Fund has said the Australian economy is still in for a “rocky road” due to issues associated with high inflation, higher interest rates put in place to curb inflation, blocked supply chains and “financial sector turmoil.”
In its latest World Economic Outlook, the IMF has predicted Australia’s GDP growth will slow to just 1.6 per cent this year, followed by a 1.7 per cent rise in 2024.
With the economy slowing, individuals and companies are struggling to pay their debts as and when they fall due, resulting in many of them being on the cusp of insolvency, or they may in fact already be insolvent. If a company is insolvent, it must be placed into liquidation by law.
During the Covid-19 pandemic, the Federal government rolled out legislation to help individuals and companies avoid insolvency due to the impacts of government lockdowns on business.
One such measure was that the minimum threshold for issuing a creditor’s statutory demand was raised from $2,000 to $20,000. Another gave the debtor company six months instead of 21 days to respond to the demand. These measures took the sting away from the power intended of creditor’s statutory demands.
However, that legislation has now been repealed and statutory demands are back to being the robust instruments they were designed to be in recovering debts and lessening the amount of litigation in the Court system.
Attwood Marshall Lawyers has since received a flood of enquiries from people who are owed money by struggling companies and who wish to issue creditor’s statutory demands.
Whether a business is sending a statutory demand or is on the receiving end of one, directors should also be aware of legislative changes that have allowed notices to now be served by email, which has raised the stakes of the whole process.
Statutory demands – an alternative to Court debt recovery proceedings
If a company in Australia owes you more than $2,000, you can serve that company with a creditor’s statutory demand under the Corporations Act 2001 (Cth). The debtor company then has to pay the debt within 21 days. If it does not pay the debt (or apply to the Court to have the statutory demand set aside) within the 21 day time limit, that company will be deemed insolvent under the Corporations Act and the creditor will have grounds to commence winding up proceedings against it.
Going through the Courts to recover a debt can be an expensive, time-consuming and stressful process requiring Court pleadings, evidence, and interlocutory fights.
However, a creditor’s statutory demand is a far cheaper and quicker way to recover a debt. It comprises a two-page document in the prescribed form under the Corporations Rules and a one-page affidavit by the creditor.
Generally, companies that own assets will pay the debt because the directors will not want their company to go into liquidation – where liquidators assume control and ownership of company assets for sale and distribution of proceeds to creditors.
Creditors can now serve statutory demands by email
The Corporations Act was amended in 2020 to expand the scope of electronic communications, allowing creditor’s statutory demands (and applications to set them aside) to be served via email.
However, it wasn’t until the Federal Court delivered judgment in Bioaction Pty Ltd v Ogborne [2022] FCA 436 last year that the requirements around doing so were confirmed.
The ruling covered:
- Serving a creditor’s statutory demand by email, and
- Serving an application to set aside a creditor’s statutory demand by email.
The ruling found that a receiving party is not required to open an electronic document for service to be deemed effected. Rather, the email attaching the statutory demand or an application to set it aside needs only to have arrived at the nominated electronic address.
Accordingly, companies must systematically and regularly check their email inboxes for notices such as statutory demands. Failure to do so may carry significant consequences for a company.
What if my company is served with a creditor’s statutory demand?
If your company is served with a creditor’s statutory demand, you must not put it aside to deal with later.
If you do nothing and 21 days pass after your company is served with a creditor’s statutory demand, your company is considered insolvent, and the person or entity that issued the creditor’s statutory demand can start winding up proceedings against your company.
When served with a creditor’s statutory demand, you must either:
- Pay the debt, or
- Write to the issuing party demanding the creditor’s statutory demand be withdrawn in writing (you must have grounds for seeking the withdrawal), or
- Apply to the Court to have the statutory demand set aside.
If your company owes the debt but cannot pay it within the 21-day timeframe, you might consider negotiating a payment plan with the issuing party.
If there is a genuine dispute about the debt, your company has grounds to seek an order from the Court that the creditor’s statutory demand must be set aside. If you are successful in obtaining that order from the Court, ordinarily you will obtain a costs order against the issuing party, which means the issuing party will have to pay a portion of your legal costs incurred in setting aside the statutory demand.
Winding up a company on grounds of deemed insolvency
If a company fails to comply with a statutory demand at the end of 21 days after the date of service, it is deemed insolvent, and the issuing party can commence Court proceedings to put the company into liquidation.
Under section 459C (2) of the Corporations Act, the presumption of insolvency lasts only three months after the demand is served and before an application to wind up is filed in the Court. After three months, the statutory demand cannot be relied upon.
Attwood Marshall Lawyers – helping business owners navigate difficult times
At Attwood Marshall Lawyers, we aim to support businesses and individuals that are facing difficult times. Our dedicated litigation and dispute resolute team can help companies and their directors understand their options and what processes they need to follow to either get their business through financial uncertainty or to wind-up a business as cost effectively as possible. We work closely with specialist insolvency accountants in this area to ensure you get the right advice on all aspects of this complex area of law.
If you are involved in a dispute, need advice about debt recovery, or options for your business facing liquidation and bankruptcy, please contact our Commercial Litigation Department Manager, Amanda Heather, on (07) 5506 8245, email aheather@attwoodmarshall.com.au or free call 1800 621 071 to find out where you stand.
