Statutory Demands

The most common applications for winding up a company in financial distress is made by creditors on the ground that the debtor company has not paid its debts as and when they fall due and payable, meaning that it is insolvent. A straightforward way to show that a company is presumed to be insolvent is when that company is served with a statutory demand and it fails to comply with this statutory demand.

A statutory demand is a creditor’s formal request which requires a debtor company to make payment of a debt within 21 days. If the company fails to make payment of this debt or commence proceedings to set aside this statutory demand within this timeframe, the company will be presumed to be insolvent pursuant to section 459C of the Corporations Act 2001 (Cth) (Act). This presumption of insolvency can be used as a basis to commence winding up proceedings against that company.

Since the end of the COVID-19 pandemic, the statutory threshold in order to issue a statutory demand is currently $4,000 (which is double of the pre-pandemic statutory limit of $2,000). This statutory demand is required to be in writing in accordance with the prescribed form, and it must specify the debt(s) which comprise the total amount of the debt claimed by the creditor (see section 459E of the Act). This statutory demand is required to be executed by the creditor, and unless this debt arises from a judgment, it must be accompanied by a supporting affidavit which verifies the amount of the debt(s) and that it is due and payable by the debtor company. It is important to note that if the creditor is a corporation, it must be executed by the director, secretary or an executive officer of the corporation or by a person who is duly authorised by the corporation to execute the statutory demand.

In order for the statutory demand to be considered valid, it must be addressed to the proper entity (including the correct ACN number) at the registered office address of the debtor company. These details can be verified by conducting a fresh organisation search via ASIC. Failure to meet these requirements can have significant consequences for the creditor, including having the risk of an adverse costs order against the creditor. In the case of Re Willes Trading Pty Ltd [1978] 1 NSWLR 463, at statutory demand being

issued to ‘Willis Trading Pty Ltd’ instead of ‘Willes Trading Pty Ltd’ was considered to be defective. In the case of Mills Oakley v Asset HQ Australia Pty Ltd [2019] VSC 98, a statutory demand was addressed to ‘1 Pacific Way’ instead of ‘1 Pacific Highway’ on the envelope used to serve the debtor company at its registered office address. In circumstances where there was no way of proving that the debtor company did in fact receive the statutory demand at the correct address, the Court ruled that this minor typographical error meant that the debtor company could not be wound up.

This article was prepared with the assistance of Neil Bookseller.

 

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