What is a Creditor’s Statutory Demand?
A Creditor’s Statutory Demand is a technical letter of demand, issued under Section 459E of the Corporations Act 2001 (Cth). It may be issued against a company in circumstances where the issuing creditor believes that there is no dispute in relation to the debt owed to it by the debtor company. However, such a demand is not and should not be used as an everyday debt collection tool.
The Creditor’s Statutory Demand can be supported by either a judgment of a court or an Affidavit. Furthermore an Affidavit should also include the outstanding invoices due. In addition, the demand must be for a sum equal to or more than $2,000.
What does a Creditor’s Statutory Demand do?
The Demand puts the debtor company on notice. A company has 21 days in which to act from the date the Creditor’s Statutory Demand is delivered. Consequently if no action is taken within those 21 days, a presumption of insolvency automatically arises. The courts are extremely strict about compliance within the 21 days and extensions of time are rare.
What does a ‘Presumption of Insolvency’ mean?
A company is insolvent if it cannot pay its debts as and when they fall due. Therefore if a company is insolvent, the courts can make an order to appoint a liquidator and wind the company up.
The Creditor’s Statutory Demand process provides a shortcut to proving that a company is insolvent. Importantly, the law says that the company is presumed to be insolvent if the demand is not answered properly.
Once the presumption of insolvency has arisen, a creditor can file a winding-up application against the company. This application may be filed by the creditor who issued the Creditor’s Statutory Demand or any other creditor who becomes aware of the expired demand.
Firstly, a winding-up application is made to the court to appoint a liquidator to the company. Thereafter the appointed liquidator is tasked to liquidate (or sell) the company assets. Finally, money raised from the sale is then disbursed between all the creditors.
Real life case study – 1
Person X was owed $22,500 by Company Y. Person X had DBL Solicitors issue a Creditor’s Statutory Demand in March 2019. Company Y did not respond within 21 days. DBL Solicitors on behalf of Person X filed a Winding up application in the court in May 2019 and served it on Company Y. The Hearing was listed for June 2019.
Company Y contacted DBL Solicitors to negotiate a settlement and avoid being wound up. Company Y paid Person X the full amount of the debt, PLUS 92% of the out of pocket costs incurred by Person X . In conclusion, Person X was ultimately only $1,000 out of pocket and the debt recovered within 10 weeks.
Real life case study – 2
Couple C had obtained judgment against Company Z in January 2019 and was owed $21,532. Couple C’s then acting solicitors advised against winding up Company Z. DBL Solicitors considered the situation and recommended issuing a Creditor’s Statutory Demand in May 2019. Company Z did not respond within 21 days. DBL Solicitors on behalf of Couple C filed a Winding up application in June and served it on Company Z. The Hearing was listed for July 2019.
Company Z’s solicitors contacted DBL Solicitors to negotiate a settlement and avoid being wound up. Company Z paid Couple C the full amount of the debt, PLUS 97% of the total out of pocket costs incurred by Couple C. In conclusion, Couple C was ultimately only $1,300 out of pocket and the debt recovered within 7 weeks.
Our next publication in this series covers the process of a winding-up application.
If a company owes you a debt greater than $2,000 you may be able to use this process. Please contact us to discuss whether the use of a Creditor’s Statutory Demand would be appropriate in your particular situation.