Statutory Demand process and the strict legal requirements

A Statutory Demand can be a useful way to apply pressure to a company to force it to pay a debt about which:-

1.     the amount is certain; and

2.     there is no dispute about whether or not the debt is due.  

A creditor using the Statutory Demand process to recover a debt can run into trouble if they don’t comply with the strict legal requirements regarding the form and wording of the Statutory Demand.

Defects in Statutory Demands have regularly prevented creditors from obtaining winding up orders against debtor companies and frequently result in the creditor suffering an adverse costs order.

In this article we provide a practical guide as to the form of a Statutory Demand and drafting issues to avoid.

What is a Statutory Demand?

A Statutory Demand is a formal, verified demand issued under section 459E of the Corporations Act 2001.

A creditor can make a Statutory Demand for payment of a debt as long as there is a debt which is due and payable.

Companies which are served with a Statutory Demand have 21 days to either:-

(a)     pay the money owed; or

(b)     apply to the Supreme Court to set aside the statutory demand.

If a debtor company fails to comply with a Statutory Demand or apply to the Court to have the demand set aside, there is a presumption that the debtor company is insolvent and the creditor who issued the Statutory Demand (or any other creditor of the debtor company) can apply to the Court to have the debtor company wound up.

Defects in a Statutory Demand

The Act places strict requirements on the form and wording of a Statutory Demand. In particular, a statutory demand must:

(i)     specify the debt;

(ii)     require the company to pay the debt within 21 days after service of the demand;

(iii)     be in writing;

(iv)     be drafted in accordance with the prescribed Form 509H; and

(v)     be signed by or on behalf of the creditor.

An application to the Supreme Court to set aside a Statutory Demand can also be made if there is a defect in the demand and a substantial injustice will be caused to the company served with the demand if it is not set aside.

A defect is defined as an irregularity, a misstatement of an amount or total, a misdescription of a debt or other matter, or a misdescription of a person or entity.

For a Statutory Demand to be set aside on the basis of a defect, the defect must be in the Demand itself, rather than any other document … such as a supporting affidavit. Minor defects (such as the omission of a signature from the Demand) will not usually form the basis for setting aside a Statutory Demand. 

Examples of defective Demands

In Townview Holdings Pty Ltd v Sunstate Design and Construct Pty Ltd, Townview applied to the Court to wind up Sunstate because of Sunstate’s failure to comply with a Statutory Demand.

The Demand used by Townview failed to comply with requirements in that it did not have a “warning notice” as contained in the prescribed form. The warning notice states that a failure to respond to a Statutory Demand can result in a company being placed in liquidation.

The Court found that the warning notice was central to the operation of the Demand and the failure to incorporate the warning notice was fatal to the validity of the Demand.

But, that decision was not followed by the Court in Poolrite Australia Pty Ltd (In Liq) v Structural Pools Aust Pty Ltd. In that case, the Court found that the creditor’s failure to include the warning notice was not fatal to the validity of the Demand because there was no evidence of a substantial injustice to the debtor.

The decision in Poolrite shows that Courts are inclined to disregard technical deficiencies in order to facilitate the efficiency of the winding up process. However, if a substantial injustice can be shown to have been caused by the omission of the “warning notice”, a debtor will have good grounds to argue that a Demand should be set aside.

Examples of other defects which have been found to cause a substantial injustice include:

(A)     misdescribing the nature of the debt (IFA Homeware Imports Pty Ltd v Shanghai Jerrys Candle Co Ltd [2003] FCA 533);

(B)     failing to describe individual debts, where a Statutory Demand relates to more than one debt; and

(C)     where a debt is owed to two creditors, but the demand is only signed by one of the creditors (Gone Farming v Long [2001] NSWSC 816).

Conclusion

Challenges to the validity of a Statutory Demand can result in increased costs for a creditor seeking to recover a debt. Extra care must be taken when drafting a Statutory Demand to ensure that the demand meets the strict requirements as to form.

If you or someone you know wants more information or needs help or advice, please contact us on (07) 5443 4866 or email brendanb@gwlaw.com.au.

 

Brendan Bathersby

Partner

(07) 5443 4866

bbathersby@gwlaw.com.au

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