Part 3: The Creditor and the Statutory Demand

This third instalment in our six-part Statutory Demands series explores the issues that can render a Statutory Demand invalid. The article highlights common pitfalls and frequent mistakes that lead to non-compliance, offering valuable insights for those navigating this complex area.

Part 3: The Creditor and the Statutory Demand

Are you really obligated to the creditor when you receive a Statutory Demand?

As we have covered in the first articles in this series, the purpose of the Statutory Demand is to confirm, with binding endorsement of the law, that the debtor must fulfil their financial obligation to a creditor. Once this demand is issued, it acts as strong evidence suggesting the debtor may be insolvent. Provided an application is made to the High Court before the demand becomes stale, 30 working days after it becomes mature, this evidence can be used as grounds for achieving a liquidation order.

However, it’s crucial to ensure the creditor’s claim meets all legal criteria of the Demand. Often the process is initiated by an overzealous creditor who just wants to get the matter dealt with, but legal compliance is essential. Given the significant powers granted to creditors, the law requires them to follow all procedures correctly and thoroughly.

Understanding the common pitfalls of Statutory Demand compliance

There are common issues that can occur during this process:

• The wrong legal entity is named
• The amount is not due
• The amount is incorrect
• The amount is disputed

Statutory Demand Issue: The wrong legal entity is named

The demand against the company must be for an amount greater than $1,000 and be a debt due to the claiming creditor. The separate legal entity principle is relevant here, noting that proceeding against the wrong company will not satisfy the requirements of the law.

Statutory Demand Issue: The amount is not due:

An amount can be owed but not due. Typically, goods and services are supplied on the basis that the amount will be due on the 20^th day of the month following. Frequently suppliers and service providers will spell that out in their terms of trade. This date will need to have passed for it to be due. The debtor can rely on the terms of the arrangement as the earliest date for when the amount is to be paid.

A more common situation is where debt is owed but term loan arrangements are in place for repayment. A demand can only be made for any due portion of the loan. Take caution, though, because loans can be on demand or can be accelerated for reasons provided for in the contract – for example, default, judgement entered or indeed insolvency.

Statutory Demand Issue:  The amount is not correct

The law is very clear that the Demand must be in respect of a debt that is due. The debt that is due is the only amount that can be the subject of demand. Loading the amount with interest, for example, when the debtor has not contractually agreed to pay rent is not the debt that is due. Rectification may be an option for the creditor but starting again with a fresh demand will ensure it meets the requirements.

Statutory Demand Issue: The amount is in dispute:

It is common for the debtor and creditor to have differing views on the amount that is payable. The law provides for this circumstance by providing a means for the demand to be unenforceable. For the debtor to exercise its right to rebut the demand, a notice must be served in the High Court and served on the creditor within 10 working days of the date of service of the Demand. If the debtor fails to meet this 10-day deadline, then a right exists for the creditor to assume the amount is not in dispute.

When a debtor files in the High Court to dispute the amount, they must provide evidence supporting their claim. In the past, some debtors have used disputes as a tactic to delay proceedings. However, if the court determines the dispute lacks sincerity, it has the authority to promptly appoint a Liquidator.

Statutory Demands are a powerful tool designed and used to bring matters to a head. Considering a strategy of restructuring the affairs of the company using the Voluntary Administration model may be a far better option than fighting it out in the Courts.

Read Part 2: The life cycle and purpose of a Statutory Demand