Statutory demands – when are they appropriate?

Statutory demands are not always an appropriate solution to unpaid debt. The courts have been quite clear on when a statutory demand should and should not be used. And watch out – if a statutory demand is made inappropriately, it will be to the claimant’s detriment.

Some legal insight – why were statutory demands created?

  • The Corporations Act introduced statutory demands in order to stop companies delaying payments to creditors, and to prevent insolvent companies from continuing to trade.
  • Statutory demands give the recipient company the opportunity of paying the sum required or giving security for the debt owing.
  • If the recipient company cannot show a genuine dispute about the claim, then a presumption of insolvency arises if the debt is not paid – a powerful motive for a company to pay its debts.

When is a statutory demand the right legal pathway?

If you are owed a debt or debts that are due and payable to you, a statutory demand may be the right way to go.

The debt or debts must be for at least $2000, and may…

  • Include certain tax liabilities;
  • Be debts based on court judgements;
  • Be debts for goods or services supplied for ascertained amounts;
  • Be debts based on contractual rights to liquidated damages;
  • Include interest;
  • Be expressed in foreign currency if this is appropriate to the transaction giving rise to the debt.

Statutory demands are only appropriate in circumstances where there is no genuine dispute about, and no offsetting claim in respect of, the amount claimed.

They may also be used as notice of assignment of a debt if the demand includes material that satisfies that there has been an assignment as alleged.

Who can issue a statutory demand?

Only the person to whom a liquidated sum in money presently due, owing and payable may issue a statutory demand.

The courts have been very clear that statutory demands should not be used as a way to force debt collection…

And if they are used for this purpose, the debtor company can apply to have the statutory demand set aside (and if they are successful they will be entitled to recover their legal costs of the application, which means a very expensive and unsuccessful outcome for you).

Even if a company fails to comply with a statutory demand or have it set aside, there is no right created for you to enforce your debt. The company may choose to pay the debt or be wound up.

Basically, the courts are trying to demonstrate that statutory demands are not to be used as a substitute for commencing substantive proceedings to pursue a claim or recover a debt.

Other situations when statutory demands are inappropriate…

Statutory demands should not be brought in situations where:

  • The claim is for unliquidated damages (including claims against insurers and reinsurers, and prospective future liabilities);
  • The amount claimed is so unclear that the debtor cannot comply with it;
  • The claim is for debts due under complex or staged contracts where there will often be grounds for a dispute or offsetting claim (note that it is easy for a debtor to establish a genuine dispute or offsetting claim – it is only necessary for them to establish that their claim is deserving of a hearing);
  • The claim is for contingent debts.

If you are in the situation where a substantial debt is due and owing to you, what should you do next?

It is advisable to pursue legal advice before issuing a statutory demand, as in some circumstances it is best to move directly to substantive proceedings for recovery of your debt, rather than issuing a statutory demand that ends up being set aside.

If you are uncertain about your legal options in pursuing the debt, have a quick chat with us at Sinclair + May and we can discuss an appropriate solution for you.

This is general advice only. Liability limited by a scheme approved under Professional Standards Legislation. 

Published Oct 2, 2018

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