As a director of a corporation, it is imperative you understand what a statutory demand is, and the grounds on which it can be set aside. Read this Legal Kitz blog to find out all about statutory demands.
What is a statutory demand?
A form 509H Statutory Demand is a written demand served by a creditor to a company for an outstanding debt they owe. This demand can only be issued when a debt is over $4,000 and is due and payable, which does not include prospective, contingent and unliquidated debts. This document can specify a total debt owed which may include more than one outstanding debt. It is issued pursuant to Part 5.4 of the Corporations Act 2001 (Cth) and can be an alarming, legal document to a company struggling with their payments.
What do I do if I receive a statutory demand?
If a creditor has served you with a statutory demand, you have 21 days from the date you receive the demand to respond in one of three ways:
- You can pay the debt in full if possible;
- You can come to some other suitable payment arrangement with your creditor; or
- You can make an application to set aside the creditor’s statutory demand.
If you fail to respond in the 21 day window, your company can be deemed insolvent pursuant to Section 459C of the Corporations Act and the creditor will progress to wind up your company. In order for the creditor to do this, the demand must be valid and meet all of its legal requirements including its form, what it includes, where it is communicated and how it is supported. If it is defected, it is important that you argue against it so that your company is not treated unfairly.
This Legal Kitz blog will be elaborating on four grounds of reason which can be used to set aside and defend your company from a statutory demand so that your business does not end up insolvent!
What are the four grounds of reason which can set aside a statutory demand?
1 – Genuine dispute
The most common reason used to set aside a demand is a company holding a genuine dispute against the existence or the amount listed as an outstanding debt under Section 459H(1)(a). If you believe this reason is applicable to you, it will be your obligation to convince the court that this is genuine and true.
Do not stress though! All you need to do is show that there is a credible or believable dispute which requires some investigation which does not include proving that you will be successful. This can be shown through a sufficient amount of factual documents and will then usually move through a legal hearing to reach a suitable conclusion. You should naturally make this application in good faith and with more support than your opinion alone.
2 – Offsetting claim against the creditor
It is also common for a business to argue that they have an offsetting claim against the creditor such as counter claims, set-offs and cross-demands. These options are defined under Section 459H(5) of the Corporations Act but will include some form of ‘mutuality’ of credits, debts or other dealings which already exist between the two entities. Again, you do not need to prove you will be successful, but you will need to show enough reason to start an investigation into a genuine claim. This is usually considered reasonable for the same reasons as a genuine dispute which is as long as it is backed up with real, factual evidence.
3 – Defect in the demand and substantial injustice
You may also seek to set aside a statutory demand if you can reasonably show that there are formal defects in the document and this will cause you substantial injustice. Section 9 lists a few defects you may find including an irregularity, incorrect statements and wrong descriptions of amounts, matters and entities. Please note that under Section 459J(2) a court cannot set aside a demand because of a defect alone. It is very important that your business shows the negative effects that your business would endure through any present defect pursuant to Section 549G to make an order under Section 549G(1)(a).
These negative effects do not have to always be specific. For example, a demand may be set aside if it is claiming interest without specifying how this will be calculated. It is reasonable to argue that this demand is not clear enough and may be used to claim more than what is necessary by law causing it to be set aside.
A demand could also be set aside if it is asking you to fulfil something that you cannot reasonably do due to a lack of information. Your business may argue that it has already requested this information clearly, but the crediting company has failed to respond. Therefore, a defect can be a clear error or an unachievable request which in either case, will need to be argued with support from your business.
4 – Are there any other sound reasons?
This article has covered some of the most common reasons for setting aside a claim, but some other sound reasons can also arise in an unfair demand including:
- A failure to include a supporting affidavit with the demand. This is used to confirm the validity of the claim through oath and affirmation.
- A failure to verify the amount of debt which is due and owing in the affidavit. This may create some ‘grey area’ on what the company expects from you.
- A failure to sign the affidavit and statutory demand at the same time.
- Anything else which reasonably arises and satisfies Section 459J(1)(b). The court has a general discretion to consider other circumstances which argue against a demand. If you believe that your business may have an ‘other’ reason then you should seek legal advice on how to support it effectively.
Well, what should I do first?
Alongside preparing one of these reasons, your business should always write to the creditor informing them that you will be applying to set aside their statutory demand. In this letter, you should outline your supporting evidence and you may invite the creditor to voluntarily withdraw their demand prior to filing and serving your application. If the creditor sees that you have a genuine reason against their demand and chooses to withdraw, it will save both of you the costs of an investigation and hearings. This would be the best option as well, as you will avoid accumulating significant costs on top of any existing debts.
Legal advice
It can be tricky to navigate the Corporations Act and know what to do to protect your business. If you require assistance drafting a letter to a creditor or need guidance around the process of setting aside a demand from start to finish, you should seek legal advice. Legal Kitz is passionate about protecting small businesses against unfair demands placed on them and can ensure you feel supported in achieving the steps required! Click here to book a FREE consultation with one of our highly experienced solicitors today, or contact us at [email protected] or by calling 1300 988 954.