Statutory Demands: The Importance of Compliance

In 2018
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The recent Supreme Court of Western Australia decision of Professional Services of Australia Pty Ltd v Lean [2018] WASC 28 (Decision) emphasised the importance of understanding the legal requirements regarding statutory demands.

What is a statutory demand?

As its name suggests, a statutory demand is a demand for the payment of a due and payable debt. The Corporations Act 2001 (Cth) (Act) allows a party to issue a debtor company with a statutory demand where the amount claimed is more than $2,000 so long as the debt is not contingent or prospective.[1]

The Act also outlines specific requirements for the form of the demand. Importantly, it must be in writing, signed by or on behalf of the creditor, specify the debt and its amount and require the debtor to pay the amount owing within 21 days after the demand is served on them.[2] Failure to comply with the requirements may, in extreme cases, provide grounds for setting aside the demand.[3]

A party who is served with a statutory demand can also apply to set aside the demand where they convince the Court there is a genuine dispute between the parties about the debt or that they have an offsetting claim.[4]

Failure by a party to either pay the debt claimed or apply to have the demand set aside within 21 days of service leads to a presumption of insolvency. Once this presumption arises, the creditor can apply to have the debtor wound up.[5]

When should it be issued?

A party should cautiously consider issuing a statutory demand, preferably after thorough consideration of the potential for the debtor to prove there is a genuine dispute as to the debt or an offsetting claim.

In the Decision, Acting Justice Smith dismissed PSA’s application to set aside a statutory demand after they failed to pay into the court the judgment debt previously awarded against them. Importantly, Smith AJ noted that an application to set aside a statutory demand relating to a judgment debt cannot be upheld. This is because it cannot be considered a genuine dispute if the dispute has already been decided by the Court.

The Court has also made it clear that issuing a statutory demand is not to be used as a debt recovery mechanism by applying commercial pressure on a debtor.[6] Instead, its purpose is to provide a way by which the insolvency of a company may be established for a wind up application. Any collateral purpose may be deemed an abuse of process by the Court.

If you are interested in a more in depth discussion on insolvency matters, you should attend the upcoming Piddington Insolvency Masterclass held at Pragma Legal’s office. Tickets can be found here.

[1] s 459E(1).

[2] Ibid s 459E(2).

[3] 2020 Construction Systems v Dryka & Associates [2010] WASC 21

[4] Ibid s 459H(1).

[5] Ibid s 459C.

[6] Createx Pty Ltd v Design Signs Pty Ltd [2009] WASCA 85.

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