Statutory Demands for Payment of Debt (or Stat Demands for short) are a standard tool in the arsenal of commercial debt collection.
In this article we’ll run you through:
- What a statutory demand is;
- When you can issue a statutory demand;
- When you should (and shouldn’t) issue a statutory demand;
- The consequences of non-compliance; and
- How a company “complies” with the statutory demand.
What is a Statutory Demand?
A statutory demand is a formal document issued under the Corporations Act 2001 to a company (or similar entity). It requires the company to comply with the demand within 21 days, failing which the company will be presumed insolvent. That presumption can then be used as the basis to wind up the company in liquidation.
The demand itself is in a set form. Generally, your lawyers should follow the form quite strictly.
A statutory demand does not need to be filed anywhere, nor is it costly to produce. For this reason, statutory demands are, in the right circumstances, a powerful tool in debt collection because the consequences of non-compliance are so significant.
When Can you Issue a Statutory Demand?
You can issue a statutory demand:
- for a liquidated debt – that is, a particular amount that is due and owing to you and has not been paid;
- where the debt is over $2,000;
- to a company, or another incorporated body that is either mentioned in or covered by the relevant provisions of the Corporations Act. You cannot, for example, issue a statutory demand to a sole trader or a partnership.
If you do not have a Court order for the sum you are demanding, you accompany the demand with a simple affidavit that your lawyer will prepare. That will confirm the debt is owing and that you do not believe there is any genuine dispute.
If you have a Court order though, you don’t even need the affidavit, so the process is even more straightforward.
When you Shouldn’t Issue a Statutory Demand
While the technical requirements above sound reasonably easy, there are times where issuing a demand is simply a bad idea. Here we’ll set out the general principles about when issuing a statutory demand isn’t a good plan.
First and foremost, statutory demands are not the place to run disputes about debts. If there is a dispute about the debt, or your non-payer has a large claim back against you, then issuing a statutory demand is probably a bad idea. Bear in mind what we said above – you’ll need to swear an affidavit confirming there is no genuine dispute.
If there is a dispute you should generally find another way to press the matter.
Next, you shouldn’t issue a statutory demand if there are already Court proceedings on foot. The fact that there are defended Court proceedings is, essentially, a concession that there’s a dispute about the debt. Your demand will get set aside (more on that below).
Finally, you should be cautious about issuing statutory demands as a strategy for commercial leverage. While statutory demands are powerful and bring things to a head quickly, you might soon find yourself on the receiving end of a Supreme Court application to set the demand aside. Costs can then escalate very quickly. If your debt is not particularly high you’ll be quickly trying to find a way to extract yourself, which isn’t always that easy.
Consequences of Not Complying with the Statutory Demand
If the company hasn’t complied within time, the company is “presumed” insolvent.
This is not the same as “deemed” insolvent, which some people insist on saying. It is a presumption, and one that can still be argued.
The company’s main consequence is that your next step can be to apply to the Court to wind it up.
Most directors and boards want to avoid this, for the practical reason that as soon as the application is filed, ASIC gets notified and then all of your creditors, suppliers and trade partners will start getting notifications about the company being in financial distress.
That said, if the company in question is demonstrably solvent (that is, they can pay their debts as and when they fall due) then it is still open to them to rebut the presumption and argue that the company is solvent. This will involve getting expert accounting evidence.
If they can’t demonstrate their solvency, or the winding up proceedings are not resolved through negotiation (which is what typically happens), then in all likelihood the company will be wound up and a liquidator appointed.
How Does a Company “Comply” And Avoid the Presumption of Insolvency?
Once you issue a demand, a receiving company has a few options on how they proceed.
If there is an underlying dispute (which you may or may not have been aware of), then more often than not you can expect to receive a letter setting out that dispute and calling on you to withdraw the demand. You’ll then have a decision to make about how far you press things, or whether you use the opportunity for negotiation.
Otherwise, however, there are a few formal options for the other party to avoid the presumption of insolvency. Each of these would have to be done inside the 21 day period after they are served with the demand:
- Pay the debt.
- Reach an agreed resolution in relation to the debt (the demand form uses the word “compound” which is fairly unhelpful but in practical terms just means a negotiated resolution).
- Apply to the Supreme Court to set the demand aside. You must file AND serve both the application and its supporting material within the 21 days. Setting aside demands and the grounds on which you can do it will be covered in another article.
The 21 day time period is strict and cannot be extended. So if you’ve received a demand, don’t let it sit on your desk.
Is the Statutory Demand Your Next Step?
Statutory demands are a simple and effective debt collection tool. They come with some risks though, so shouldn’t be issued lightly.
The consequences of non-compliance are serious for receiving companies, and often issuing a statutory demand is a way to provoke some kind of negotiations if your demands for payment are falling on deaf ears.
If you need to issue, or have received, a statutory demand – get advice to ensure you can navigate the way ahead.