Article by Ben Schefe, Michael Mapp, Conor Harvey,
Debt recovery can often be a tricky exercise, as debtors are adept at avoiding and/or delaying payment where there is a debt outstanding.
A cost-effective avenue for debt recovery, where the debtor is a company, is by way of a statutory demand.
A statutory demand is a formal demand for payment under the Corporations Act where the debt is $4,000.00 or more. To be able to issue a statutory demand, proof that an undisputed debt is owing is sufficient; a court judgment is not required (although a court judgment will certainly assist). In the appropriate circumstances, we would recommend serving a statutory demand for the following reasons.
- A statutory demand usually brings matters to a head more quickly as you only need to allow the company debtor 21 days to pay or dispute the debt. Court proceedings usually take much longer, and at a much greater cost.
- if the company debtor does not pay or dispute the debt within 21 days after receiving the statutory demand, you may apply to the Supreme Court or the Federal Court for an order that a liquidator be appointed to the company debtor. The threat of a liquidator being appointed will often give you enough leverage to reach a reasonable settlement.
Potential Drawbacks
However, there are some downsides and matters you need to be aware of before serving a statutory demand – those downsides and matters are as follows.
- If the company debtor disputes part or all of the debt claimed in the statutory demand, then the debtor will have a basis to apply to the court to have the statutory demand set aside. If this happens, the debtor only needs to prove that there is a genuine dispute to succeed, so you will likely be advised to withdraw the statutory demand to avoid an order that you pay the debtor’s legal costs. If you have to withdraw the statutory demand because the debt is disputed, your only option will be to commence court action to sue for the debt. It is important to be aware that, even if you are unaware of any dispute from the debtor, it is not a high bar to set aside a statutory demand. Debtors will often try to dispute the debt on any grounds, even baseless or trivial, that may prevent you from pursuing payment.
- If company debtor fails to take any action at all in response to the statutory demand within 21 days, then to apply the maximum possible pressure on the company debtor you would need to commence Supreme Court proceedings, seeking an order that a liquidator be appointed to the company debtor on the grounds that it failed to comply with the Statutory Demand. The cost of those Supreme Court proceedings will often be at a high cost, of which you may only be able to recover part or, in a worst case scenario, none at all, so it is imperative that you are properly advised as to whether it is commercial to pursue this option. Moreover, if the company debtor then steps in at the 11th hour and defends the court proceedings, the costs would increase further.
Defending a Statutory Demand
By way of example, in the matter of Australia and New Zealand Banking Group Limited v Thomson [2022] QSC 18, Justice Williams considered, inter alia, an application to set aside a statutory demand.
The applicant debtor contended that there was a “genuine dispute” about the claimed debt, such that the statutory demand should be set aside, even though the respondent creditor claimed there was a settlement agreement to pay the debt. Her Honour noted that the onus of establishing the existence of a genuine dispute was on the applicant debtor, but also quoted from SGR Pastoral Pty Ltd v Christensen (2019) 2 QR 334, where it was said that: “The threshold is not high or demanding; a genuine dispute means there must be a plausible contention requiring investigation; and it is only if the applicant’s contentions are so devoid of substance that no further investigation is warranted that the applicant will fail.”
The applicant debtor pointed to various contemporaneous correspondence, which it said put into question whether there was a concluded settlement that could give rise to the alleged debt. The correspondence was crucial since there was “no evidence of any agreement being evidenced in a deed or agreement”.
Having reviewed the correspondence, Williams J considered that it showed only that there had been “ongoing negotiations” about a settlement, and not that any settlement had been agreed. Her Honour concluded that there was a “clear and genuine dispute between the parties as to whether there is a debt that is due and payable as claimed in the statutory demand”. Accordingly, the demand was set aside.
Whilst this is more an extreme example, it shows the ability of the courts to set aside statutory demands, showcasing the necessity that if you are to proceed, you must be appropriately advised to ensure that you are not opening yourself up to liability.
Where We Can Assist?
When you have a debt outstanding to you, it is important that you receive advice on how to commercially, and effectively recover debts owing to you. If you would like further advice on statutory demands, or debt recovery in general, MDL’s experienced commercial litigation team can assist.
