Walking the Tightrope: The Balancing Act with Statutory Demands

Women balancing on a tightrope

September 9, 2015

Over the years we’ve dealt with a number of creditors’ statutory demands. The trajectory taken in each case has differed markedly, depending (as always) on the particular facts, but also the resources of the creditor, the solvency of the company at any given time, and the personal attitudes and outlook of the debtor. In some cases though, the use of a statutory demand as an enforcement tool has backfired significantly. The focus of this post is to caution those thinking of using this often highly efficient and effective tool against the potential drawbacks, with a view to avoiding disaster if not used correctly. 

For those who don’t know, in very general and simple terms, a statutory demand is like a bankruptcy notice for companies.In an almost analogous manner, a debtor can serve a statutory demand, in a compliant manner, in relation to one or more debts claimed to be owed by a company, and the legal significance in doing so is high. In one respect, statutory demands are even easier to use than bankruptcy notices, as they do not first require application and approval (or the payment of a corresponding fee). Similarly, a failure to comply with such a demand within strict time limits can have serious consequences with far-reaching implications. It is this seriousnessness and effectiveness, coupled with the relative ease of use in the initial stages, that makes them so attractive. 

If a debtor company fails to comply within the applicable time frame (usually 21 days from the date of service), a debtor company is generally presumed to be insolvent, much in the same way as the failure to comply with a bankruptcy notice is an act of bankruptcy. The creditor can then apply to have the company wound up in insolvency, and have a liquidator appointed to liquidate the company’s assets and repay the debt claimed (perhaps among others). Of course, there are other grounds for making such a winding up application, such as insolvent trading, but most of them require proof that is difficult to substantiate, and requires a lot more in terms of preparation, litigation and money. They are also liable to fail, given the uncertainties of litigation and the various defences open to a debtor company and / or its director(s). As such, a statutory demand brings another obvious benefit from the perspective of efficiency and certainty. However, they are not without their difficulties… 

Specifically, a company may apply to set a statutory demand aside (assuming the company disputes or otherwise will not or cannot pay the debt or negotiate with the creditor). However, the application must be made to the Court. In NSW, the Supreme Court has jurisdiction over such corporations matters, so things are automatically more expensive (for example, application filing fees for corporations are usually $2,886, and that is just to file the application, before doing anything else). While that cost must be incurred by the debtor company, it is relevant to the question of costs, as the loser will generally be ordered to pay the costs of the winner of a given case in matters dealt with in these higher jurisdictions. In other words, if the debtor company is successful in having the statutory demand set aside, the creditor who served the demand may end up having to pay their costs, including filing fees, if they do not withdraw the demand and ultimately lose on defending the application to set it aside. Further, a proper application must be done correctly in the approved form, and be accompanied by a supporting affidavit, which again, will in most cases result in the incurrence of further legal costs that the person serving the demand may end up liable to pay.

When it comes to grounds for applying to set a statutory demand aside, all that is required is the successful illustration of a genuine dispute about the amount claimed, or the existence of an offsetting claim. However, the applicant need not go as far as actually proving the merits of that dispute or offsetting claim, but rather, only has to successfully raise it as being arguable and legitimate. 

While this would amount to an abuse of process, and carry other potential consequences accordingly, what this means is that a smart company could circumvent the process with a creative stretch of an argument in practice, and even end up with a costs order in their favour, with the result that the creditor employing efficiency and costs savings is several months down the track with none of their claimed debt repaid and a huge bill owing to the debtor. We have seen this happen in practice, and it can be disastrous, as you could imagine. 

Ultimately, the point is that people should approach these enforcement tools with extreme caution. While the upfront cost savings and strong non-compliance consequences can be attractive, things are not always guaranteed, and this option could end up in litigation and huge losses. Serious consideration should be given to the strengths, weakness and potential defences in each case before proceedings, to enable a strategic approach. Don’t take these options lightly, and always consult a lawyer with experience.

As always, we welcome anyone who would like to discuss related issues with us, so please do not hesitate to contact us.

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