Creditor’s statutory demands; debt collection tool? - Chad Gear

Debt recovery series: Debt recovery should be a fast and inexpensive process.  For many businesses that are owed debts, issuing a “statutory demand” will often be the first avenue which is explored for the purpose of recovery.  In this article, I explore in brief the basics of a statutory demand, and whether it can be used as a debt recovery tool.

Creditor’s statutory demands; debt collection tool?
Creditor’s statutory demands (commonly referred to as Statutory Demands or Stat Demands) are written demands pursuant to section 459E of the Corporations Act 2001 (the Act), in which a creditor makes demand for payment of a debt within 21 days.  If the debtor does not pay the debt or otherwise comply with the Statutory Demand, the recipient will be deemed insolvent, and the party who issued the Statutory Demand can rely upon this presumption in applying to the Court to have the debtor wound up in insolvency.

In certain circumstances a Statutory Demand can be issued without first obtaining a judgment.  As such, they are often liable for use as a debt collection tool (dealt with in more detail below).

If you have received a Statutory Demand, we recommend that you seek legal advice immediately. 
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How do they work?
A person who is owed a debt which is due and payable, and which is at least the statutory minimum (ie. $2,000 or more[1]) may serve a Statutory Demand on a debtor company.  Schedule 2 of the Corporations Regulations 2001 provides the prescribed form.  Because a defect in a Statutory Demand can provide grounds for having a Statutory Demand set aside, we recommend that legal assistance be obtained to issue a Statutory Demand. 

A debtor who is served with a valid Statutory Demand must either:

1. pay the debt/s which are the subject of the Statutory Demand;[2]
2. secure[3] or compound[4] for the amount of the debt/s, to the creditor’s reasonable satisfaction[5] (ie. negotiate a settlement); or
3. apply to have the Statutory Demand set aside.[6]

If the debtor company fails, within 21 days of receiving a Statutory Demand, to comply with the demand (as set out above), the debtor company will be presumed to be “insolvent”.[7]  This means that the creditor can apply to the Court for an order that the debtor be wound up in insolvency (ie. placed into liquidation).[8] 

The presumption of insolvency which arises when a debtor fails to comply with a Statutory Demand can be rebutted by evidence that the company is solvent.  However, this can be a costly and difficult exercise.

Why issue a Statutory Demand?
The main reason a creditor may choose to issue a Statutory Demand is because it can be an inexpensive process to recover a debt quickly (compared with the usual Court process). 

Practically speaking, a creditor who issues a Statutory Demand will quickly ascertain (ie. within 21 days) whether a debtor can pay a debt, or whether the debtor is content for a presumption of insolvency to arise.  In the latter circumstances, the logical conclusion is that the debtor may face an application to be wound up in insolvency.  However, the purpose of Part 5.4 of the Act is to:

1. discourage or prevent insolvent companies from continuing to trade and incur further debts which it will be unable to pay;[9] and
2. provide a means whereby the insolvency of a debtor company may be established for the purposes of an application to wind up that company.[10]

As such, the purpose of a Statutory Demand is to facilitate proof of insolvency to assisting in a winding up application.

Debt collection tool?
It is a settled position at law that that a Statutory Demand is not merely a debt collection device.[11]  In this regard, the Court has explicitly held that “the statutory demand is not provided by the law as a mechanism for the recovery of debt.”[12]

As such, issuing a Statutory Demand will be an abuse of process if the purpose of the party issuing the demand is not to pursue the Statutory Demand to wind up the debtor company on the ground of insolvency, but rather is to use the process as a means:

1. of obtaining an advantage for which the process is not designed; or
2. to obtain some collateral advantage beyond what the law offers, such as the application of pressure to compel payment of a disputed debt.[13]

The Courts have long held that when a company is solvent, the appropriate course is to commence Court proceedings for recovery of the debt, on the basis that to pursue winding up proceedings may be an abuse of process of the Court.[14]

However, Statutory Demands are undoubtedly a fast and inexpensive means of testing the bona fides of a debtor who disputes payment, and to recover payment.  While there is some judicial comment to the effect that service of a Statutory Demand may appropriately be used to assist in testing whether a dispute is genuine[15], the overwhelming view is that Statutory Demands do not provide a means to avoid commencement of proceedings for recovery of a disputed debt, by the application of commercial pressure.[16]

Further action
While Statutory Demands may provide an inexpensive and effective debt recovery tool, care must be taken not to use such a tool merely as a debt collection device, or for an improper purpose.  As such, they may be liable to be set aside.

If you wish to explore issuing a Statutory Demand, or have been served with a Statutory Demand, contact Chad Gear on (07) 3229 9800, or by email at c.gear@taylor-david.com.
 
While attempts have been made to ensure the currency of information contained in this publication, it is not guaranteed.  This publication is intended to provide only general information on matters of interest.  It is not intended to be comprehensive and does not constitute and must not be relied upon as legal advice.  You should seek legal or other professional advice which is specific to your circumstances.
© Chad Gear
[1] Section 9 of the Act.
[2] Section 459F of the Act.
[3] The debt which is “presently due” must be secured.  In Forsayth NL v Juno Securities Ltd (1991) 4 WAR 376, the Court held that a bank guarantee conditional upon the creditor establishing the existence of the debt by obtaining a judgment could not result in the debt being “secured” for the purposes of the section.
[4] “Compounding a debt” means entering into an arrangement for payment of the debt or a different amount; Commonwealth Bank of Australia v Parform Pty Ltd (1995) 13 ACLC 1309 per Sundberg J at 1311.  In Kema Plastics Pty Ltd v Mulford Plastics Pty Ltd (1981) 5 ACLR 607, an alleged arrangement to pay by instalment was held to be “compounding” for the sum due.
[5] Section 459F of the Act; the recipient of the demand need only secure or compound for the debt to the “reasonable satisfaction” of the creditor. Reasonableness is an objective test, to be determined by the Court and not the creditor, having regard to all the circumstances of the case: Commonwealth Bank of Australia v Parform Pty Ltd (1995) 13 ACLC 1309 per Sundberg J at 1311.  In this regard, it is more insightful to ascertain what is reasonable, by the Court’s analysis as to whether a creditor has acted “unreasonably”.  For example, when a cheque was tendered without explanation, and without payment of legal costs: Owners — Strata Plan No 17572 v Nomak Holdings Pty Ltd [2009] NSWSC 1412.  See also Forsayth NL v Juno Securities Ltd (1991) 4 WAR 376 and Kema Plastics Pty Ltd v Mulford Plastics Pty Ltd  (1981) 5 ACLR 607.  A history of failure to meet commitments may provide grounds for a reasonable refusal of an offer: K C Parksafe (Vic) Pty Ltd v Dallbrook Pty Ltd (1998) 87 FCR 509.
[6] Section 459G of the Act.
[7] Section 459C of the Act.
[8] Section 459P of the Act.
[9] Scolaro’s Concrete Construction Pty Ltd v Schiavello Commercial Interiors ( Vic) Pty Ltd (1996) 62 FCR 319 per Sheppard J.
[10] Createc Pty Ltd v Design Signs Pty Ltd (2009) 71 ACSR 602, per Martin CJ, cited with approval in Lifese Pty Limited v Lee Crane Hire Pty Limited [2012] FCA 302.
[11] Re QBS Pty Ltd [1967] Qd R 218 at 224 per Gibbs J; Re Bond Corp Holdings Ltd (1990) 1 WAR 465; Re Badja Pty Ltd [2000] QSC 441 (99/1143); Poonon Pty Ltd v DCT [1999] NSWSC 1121 Per Austin J at [21]; Muller and McIntosh (as joint and several liquidators of Arafura Equities P/L (in liq)) v Academic Systems P/L [2007] QCA 218.
[12] Equipped Constructions Pty Ltd v Form Architects Pty Ltd [2006] NSWSC 500 at [24].
[13] Williams v Spautz (1992) 174 CLR 509; 107 ALR 635; [1992] HCA 34; David Grant & CoPty Ltd v Westpac Banking Corp (1995) 184 CLR 265; 131 ALR 353; 18 ACSR 225; [1995] HCA 43.
[14] Niger Merchants Co v Capper (1877) 18 Ch D 557.
[15] Redglove Holdings Pty Ltd v GNE & Associates Pty Ltd (2001) 165 FLR 72.
[16] Createc Pty Ltd v Design Signs Pty Ltd (2009) 71 ACSR 602 at 2 per Martin CJ, with whom Owen and Miller JJA agreed.