In response to the economic impacts of COVID-19, the Federal Government introduced measures to act as a safety net to assist businesses in surviving the crisis and returning to normal business operations. As a result, many creditors have withheld from chasing payments for debts that are now well and truly overdue. In this article, Susan Moran, Principal of our Dispute Resolution and Litigation practice, explores how a statutory demand can be used to recover money owed.
What is a statutory demand?
A statutory demand is a formal demand for payment of a debt made by a creditor of a company. The statutory demand must specify the amount of the debt (or total amount of the debts), be in a prescribed form and signed by or on behalf of the creditor.
The debt (or total of the debts) being demanded must be at least the statutory minimum. At the time of writing, the statutory demand is $4,000. The Corporations Regulations 2001 were amended on 1 July 2021 to increase the statutory minimum from $2,000 to $4,000.
Compliance with a statutory demand
The recipient of a statutory demand must comply (or put on an application to set aside the statutory demand) within the statutory period. At the time of writing, the statutory period is 21 days.
Failure to comply with a statutory demand creates a presumption that the company is insolvent. A creditor can make an application to wind up a company if it fails to comply with a statutory demand.
Due to the serious consequences of failing to comply with a statutory demand, in our experience the recipient will generally seek to come to a settlement arrangement with the creditor. Due to the short time required to respond, this can mean that a response and settlement is achieved relatively quickly when compared with proceeding to litigation to pursue payment of a bad debt.
Application to set aside a statutory demand
The recipient of a statutory demand may apply to the Court for an order setting aside a statutory demand, however the avenues are limited, and any such application must be made within 21 days of receipt of the demand. A recipient may seek to set aside a statutory demand for one of the following reasons:
- there is a genuine dispute about the existence or amount of the debt;
- the company has an offsetting claim; or
- because of a defect in the statutory demand (but only where a substantial injustice will be caused unless the demand is set aside).
The most controversial area is in the area of ‘genuine dispute’. Unfortunately, the bar for the establishment of a ‘genuine dispute’ is not high, however, we often find these allegations only arise after a demand has been served. In those circumstances, the Court will look very closely at the allegation that a ‘genuine dispute’ exists to determine if there is a real issue between the parties as to the debt in issue, or whether the application is merely an attempt by the recipient to avoid the implications of the demand.
Temporary relief due to COVID-19
As mentioned above, due to the ongoing COVID-19 pandemic, the statutory minimum for the issuing of a statutory demand was increased to $20,000. The intention of lifting the minimum was to lessen the threat of actions that could push businesses into insolvency. The time to respond to a demand was also increased from 21 days 6 months, in turn providing companies with more time to respond to demands from creditors.
These temporary measures have now ceased and creditors once again have recourse to what can be a cost effective, time efficient way of recovering bad debts.
If you require assistance regarding a debt owed to you, please don’t hesitate to contact us.
This article was co-written by Lawyer, Emma Sheen.
This article is not legal advice. It is intended to provide commentary and general information only. Access to this article does not entitle you to rely on it as legal advice. You should obtain formal legal advice specific to your own situation. Please contact us if you require advice on matters covered by this article.