Statutory demand: a double edged sword.

20 February 2017 | Reading time: 2 minutes

Statutory demands can be a handy tool in recovering a debt. However, their associated risks are often overlooked in the heat of the moment. Indeed, paying the other side’s legal costs and not even recouping the original debt, even if successful, are some of the potential consequences that ought to be considered before calling in any chits in this way.

What is a statutory demand?

A statutory demand is a document that is served on a company which owes you a ‘due and payable’ debt of at least $2,000[1]. Once validly served on the debtor company, payment must be made by the debtor company within 21 days of service of the demand[2].

Under Part 5.4 of the Corporations Act 2001 (Cth), if the payment is not made within time nor set aside by a court, the company is presumed to be insolvent. This then allows the creditor to apply to the court to wind-up the company, but it does not result in a court order to pay the debt.

How sharp is this sword?

If the court views the statutory demand as merely a scare tactic (eg to attempt to force a solvent company to pay its debt), the court may consider this an abuse of process.

Not only could the company apply to have the amount in the demand reduced, it could also have it set aside completely. If successfully set aside, the demand is of no effect. This leaves little option except debt recovery proceedings.

Further, adverse costs orders could flow from the setting aside of a demand[3]. The unsuccessful creditor who issued the demand may be ordered to pay for the company’s costs and time in relation to applying to set it aside.

Don’t forget that the company could also oppose the winding-up proceedings and, if successful, the creditor could, once again, be up for further costs.

A pyrrhic victory.

Assuming that the statutory demand is not set aside and the creditor successfully proceeds with a winding-up petition, the company will likely be liquidated. Nevertheless, this too could prevent recovery of the debt in full (or at all), since all creditors of the same class share equally – meaning that other ‘better’ creditors of the company (such as secured creditors) would have first bite of the cherry, leaving the creditor with only the leftover morsels (if any).

Before rushing into a statutory demand like a bull with a red rag in its sights, creditors should consider their options, or otherwise risk ending up on the wrong side of the sword.

[1] Corporations Act 2001 (Cth) s 459E.
[2] Corporations Act 2001 (Cth) s 459F(2)(b).
[3] Corporations Act 2001 (Cth) s 459N.