Your company has received a Statutory Demand….what to do?

If you have been reading this blog for a while, you will appreciate that we received a lot of calls at Dissolve from directors of companies in various stages of financial distress.  But even though we see it regularly, we are still amazed at the lack of action shown by directors in certain situations.  One of those is when a Statutory Demand has been received.  To be fair, directors will have been receiving an escalating range of Demand letters, each of which has been designed to catch the eye.  So maybe directors have become somewhat immune and fail to appreciate the full significance of a Statutory Demand.

The simple answer to the question of what to do if you get one is “do something” unless you want your company to end up in Official Liquidation.

What is a statutory demand?

A statutory demand is made under section 459G of the Corporations Act. They are easy to spot because, unsurprisingly, they are headed up “CREDITORS STATUTORY DEMAND FOR PAYMENT OF DEBT”!  It is in a set format and must be accompanied by an affidavit or a copy of a Debt Judgement from a court.

Setting aside a statutory demand

If your company is served with a statutory demand, then it must pay the debt within 21 days or make an application to Court to have the demand set aside.

There are a number of factors which could cause a court to set aside a statutory demand.  Most commonly they are:

• a genuine dispute between the debtor and creditor;
• there is an off-setting claim;
• there is a defect in the demand.

What happens after 21 days if no action is taken?

If you ignore a statutory demand and take no action within 21 days after service then:

• a presumption arises under the Corporations Act that your company is insolvent and must be liquidated- so you are giving the person who issued the statutory demand an easy ride in that they can take advantage of the presumption of insolvency to have a liquidator appointed to your company and sell off the assets;
• You will need to commence court proceedings to prove that your company is not insolvent – so you (not them) will need to prove to the Court that the company is solvent; and
• the creditor may make an application to wind up the company.

What to do next

In many of the calls we receive, the situation is that the company has ceased to trade and there are no prospects of creditors being paid.  In that case, a director is probably best off doing nothing.  Yes, nothing.  The outcome will be that the matter will ultimately be heard by a Court and a liquidator will be appointed.  The only consolation for a director in that situation is that at least someone else is paying for the costs of appointing a liquidator to the company.

If, however, a director doesn’t want their company to end up in liquidation  – presumably because it is solvent or the debt being claimed is disputed – the time to act is as soon as the Statutory Demand is received.  Don’t wait for the 21 days to expire.  That won’t work.  And the possible actions are:

• Call Dissolve – if you have a viable business it is possible a Voluntary Administration may be used to save the business;
• Call a lawyer if the debt is disputed.