Debt Recovery Strategies – Using Statutory Demands to Chase Company Debtors
By Lovegrove Smith & Cotton
It is simple, if you are a company owed money you can take legal action to recover it.
More often than not though, unless your company has an in-house legal or debt recovery team, you will be required to spend some money to commence Court proceedings before any of your debt can be reduced.
In a time where companies are increasingly becoming more reluctant to ‘throw good money after bad’, companies need to evolve and deploy different strategies and mechanisms to increase their chances of achieving positive and cost effective outcomes.
Issuing a statutory demand is one of the quickest and least expensive avenues of recovering money owed to you by company debtors. It is also one of the most effective ways of enforcing a judgment of the Courts if the judgment debtor is a company.
A statutory demand notice is a formal, verified demand issued under section 459E of the Corporations Act 2001 (Cth) (“the Act”). If a company is owed a debt of more than $2,000.00, it can serve a statutory demand on the debtor company requiring the debtor company to pay the debt within 21 days. The caveat would be that there should not be an arguable defence to the liability for the debt.
If such a demand is correctly issued and served in accordance with the Act and the debtor company fails to pay the debt within 21 days from the date of service of the demand, or otherwise fails to make arrangements to pay the debt to the creditor company’s satisfaction, the debtor company is presumed “insolvent” and the creditor company can make an application to wind the debtor company up.
Although a statutory demand can be issued with respect to a debt which is not necessarily a judgment debt, a statutory demand can only be issued to a corporate debtor if there is no genuine dispute about the existence of the debt or debts. If a creditor company issues a demand that fails to meet the above test, the demand will fail.
It is the safest option to issue a statutory demand with respect to a judgment debt, because if the debt is a judgment debt, there is an automatic presumption that there is no dispute as to the existence of the debt. If the debt is not a judgment debt, an affidavit setting out why there is no arguable defence is needed.
It can be said that “shots are fired” when a creditor company issues and serves a statutory demand on a debtor company. That is because if the debtor company does not “pay up” or dispute the debt, it could be “wound up”. Whilst the service of a statutory demand is not the only way in which a creditor obtains the right to commence a winding up proceeding, it is the process which is used most often.
However, as a word of warning, the use of statutory demands is a very technical process and there is little scope for error for creditors or company debtors where statutory demands are concerned.
The Act places strict requirements on the form and wording of the statutory demand and the methods of service. Therefore, the Courts have held that creditor companies who use statutory demands must ensure the demand is expressed in clear, correct and unambiguous terms and that it is properly served on the debtor. If a creditor company fails to comply with the Act’s requirements, the creditor company risks having a Court set aside the demand.
If a Court sets aside a statutory demand, usually the creditor company bears liability for the debtor company’s costs in setting aside the statutory demand. That is why it is wise to seek the assistance of a lawyer with detailed knowledge of the procedures, at the very outset.
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© Lovegrove Smith & Cotton 2014