Statutory Demands and Insolvency

Corporations in Australia must comply with the Corporations Act 2001. Section 95A of the Corporations Act 2001 defines trading insolvent as operating whilst being unable to repay debts as and when they become due. Under section 588G of this legislation, trading while insolvent is a criminal offence for the directors of companies. Courts have the power to wind up companies that are trading insolvent.  This article deals with statutory demands and insolvency.

Statutory demands

A statutory demand is an official document that a creditor can serve on a company where debt is owing but has not been paid. Creditors can serve statutory demands on debtors under section 459E of the Corporations Act 2001. Some certain requirements and formalities need to be complied with for the statutory demand to be properly constituted. These include:

• The debt owed must be for than $2,000;
• The statutory demand must detail the debt that is owed;
• The statutory demand must state that the debt is to be owed within 21 days of service;
• The statutory demand must be written;
• The statutory demand must be in the required format which can be found in the Corporations Regulations 2001 Schedule 2 – form 509H;
• An affidavit must be attached outlining the details of the debt and evidence for the debt unless a judgement relating to the debt has already been obtained.

It should also be noted that due to the COVID-19 pandemic, some changes to the above requirements and formalities have been made.

After a statutory demand is served

Suppose the company upon which a statutory demand is served does not pay the debt within 21 days of the date of service and does not successfully lodge a defence, proving that there are reasons for the statutory demand to be set aside. In that case, the company upon which the statutory demand was served is deemed to be insolvent.

Statutory demands leading to insolvency

If a debtor does not comply with a statutory demand, the creditor seeking the demand can apply to the court to have the debtor company wound up on the basis of insolvency. A creditor can apply to wind up a company in this circumstance in accordance with section 459P of the Corporations Act 2001. Under section 459A of the Corporations Act 2001, the court has the power to wind up the company.

Contesting a statutory demand

The debtor upon which a statutory demand for debt is served can apply under section 459G of the Corporations Act 2001 to have it set aside. Some of the grounds upon which such an application can be made include:

1. The debtor disputes the debt. The applicant will need to establish that there is a “serious question to be tried” about the debt for the application to be successful on this ground;
2. There is an off-setting claim against the party that served the statutory demand. This means asserting that the party who served the statutory demand owes something that off-sets the claim made in the statutory demand;
3. The statutory demand has a defect and a substantial injustice would be done if it were not set aside. An example of a defect that has the potential to cause a substantial injustice is if the statutory demand did not properly identify the debt.

Defending a winding-up action

The party who served the statutory demand has three months after non-compliance to apply for court orders to have the debtor company wound up on the basis of insolvency. The debtor company can oppose this action, and the most common reason for doing so is on the ground that the company is, in fact, solvent. However, it may be difficult to successfully prove this is the case as a court will require a significant amount of evidence to prove that the company is solvent despite non-compliance with a statutory demand.

Company directors may also, as an alternative, appoint a voluntary administrator and work towards a “Deed of Company Arrangement”. On this basis, directors can apply for an adjournment of the winding-up application.

Generally, it is much easier to successfully have a statutory demand set aside rather than successfully defend an order to have a company wound up. Therefore, it is advisable to seek legal advice as soon as possible when you have been served with a statutory demand and either oppose or cannot comply with it.

If you require legal advice or representation in any legal matter please contact Armstrong Legal.