If your company owes a debt over $2,000 to a creditor, and you’ve failed to pay on time, your company might be served with a creditors statutory demand.
The worst thing you can do is ignore a statutory demand. It’s a forceful step by the creditor to get paid, and you need to deal with the demand within an absolute timeframe of 21 days to avoid court proceedings being commenced to wind up your company.
Here’s a run-down of what you should do.
What’s a statutory demand?
It’s a document issued under the Corporations Act 2001 (Cth) to a company by a creditor demanding payment of a debt greater than $2,000. It doesn’t necessarily matter how the debt came about, whether by a court judgment or because of an outstanding invoice, but the debt must be due and payable at the date the demand is served on the company.
Once the demand has been served, the company only has 21 days to pay up, or secure or compound payment of the amount in the demand (for example, come to another payment arrangement with the creditor), or apply to the Federal Court or a State or Territory Supreme Court to have the demand set aside.
Pay attention to where and when the demand is served
A statutory demand can be served on your company by leaving it at or posting it to your company’s registered office as recorded with the Australian Securities and Investments Commission (“ASIC”). The demand can also be delivered personally to you as a director of the company. It can’t be posted to your company’s business premises or left with an employee.
In our experience, many companies have their registered address at their accountant’s office, which means the date of service is typically the date the claim arrived at the accountant’s office and not the date the accountant handed documents to you as the company director.
Also in our experience, the ASIC record can be wrong because the company has changed accountants or the accountant has moved and ASIC’s records have not been updated. If the ASIC-recorded registered address is wrong, that’s your fault and doesn’t stop the clock for the time in which you must deal with the demand.
If your company fails within 21 days of service of the demand to:
- pay the full amount demanded;
- secure the payment of the amount in the demand; or
- file and serve on the creditor a court application to have the demand set aside and dealt with,
then your company will be deemed insolvent.
Once your company is deemed insolvent, the creditor can apply to a court for an order that your company be wound up and a liquidator appointed.
How can you get a demand set aside?
Your company can make an application to the court to have the demand set aside if:
- there’s a genuine dispute about either the amount or existence of the debt on which the demand is based;
- your company has a counter-claim or set-off against the creditor that’s equal to or greater than the amount in the demand;
- the demand is defective such that it will cause substantial injustice unless the demand is set aside; or
- there’s some other (good) reason why the demand should be set aside.
But what if your company can’t pay or have the demand set aside?
Often, paying the full amount of the demand within the statutory 21-day timeframe is not achievable for a company, for example if the sum demanded is large.
If your company doesn’t have the money to pay in full, or no grounds to apply for the demand to be set aside, or missed the deadline and is perfectly solvent, your options to deal with the demand might include:
- negotiating with the creditor to pay by instalments, or pay a lesser sum, or pay out of time, and the creditor agreeing to withdraw the demand with no further action;
- appointing an administrator to your company; or
- contesting the winding up application if bought by the creditor.
Get legal advice as quick as you can
If your company can’t pay or hasn’t paid the full amount demanded by the creditor within 21 days of being served with the demand, you should get to a lawyer pronto for advice about the company’s options.
You should take to your lawyer whatever records you have in your possession about the demand, including how the debt came about and correspondence between your company and the creditor, and be ready to spend time properly instructing your lawyer about the facts, the issues arising and what outcome you ideally want.
A creditors statutory demand is a strong step by a creditor to recover a debt, and can potentially forcibly bring your company to an end. For this reason, we recommend you don’t scrimp on getting good legal advice, or outsource it to someone without knowledge of the facts or authority to make binding decisions (like a junior employee or your accountant).
The talented team at Meyer Vandenberg can assist you with any of the issues discussed above, just call…
For more information contact the Commercial Dispute Resolution Team: