Statutory Demands: What they are and why they matter

Our Disputes & Litigation team outlines recent changes to the law surrounding Statutory Demands resulting from the COVID-19 pandemic.

Introduction

For anyone who operates a company or does business with companies - so essentially everybody in business – having to deal with a creditor's statutory demand at some point is almost inevitable. And we probably think we know what they are and how they work. They can be a powerful tool for recovering a debt as the consequences of not complying with a creditor’s statutory demand can be very serious for the debtor company. But there have been changes in this area of law as a result of the COVID-19 pandemic, so it is worthwhile to have another look at what creditor's statutory demands are and why they matter.

Creditor's Statutory Demand

In Australia, creditor’s statutory demands cannot be made against individuals (“natural persons” in legal jargon). They can only be made against companies registered under the Corporations Act 2001 (and some analogous bodies under Part 5.7 of the Corporations Act 2001 that are not companies, for example trade unions and associations).

A company has its own separate legal personality, which is distinct from its directors or shareholders, even if that company only has one director and one shareholder. So, for example, if David Sharrock owns all the 100 shares in David Sharrock Pty Ltd, and is the sole director of that company, as a legal matter they are two different people: David Sharrock the natural person, and David Sharrock Pty Ltd the company.

Although of course there are exceptions that allow creditors to go behind the “corporate veil” (for example in relation to deliberately trying to defeat creditors), and the people you are doing business with might seek to make the natural persons behind a company be liable (by requiring guarantees from the directors as a condition of giving credit to the company), the basic principle is that a company is its own person with its own limited liability. This has been the case at least since the classic English case of Salomon v A Salomon & Co Ltd [1897] AC 22.

So, given that the company is its own distinct person, there are responsibilities that go with that privilege. One is that creditors can assert their claims against a company differently than they would against a natural person. Under section 459E of the Corporations Act 2001, a creditor can make a demand – in accordance with the prescribed form – for a debt that the company owes the creditor, provided it is equal to or more than the statutory minimum. There are some points to note about this:

  • If the debt is not a judgment debt, (i.e. a court judgment for payment), then you need to make an affidavit in support of the debt which verifies that the debt is due and payable, including that there is no genuine dispute about the debt. A creditor’s statutory demand is not available in a case which is not about a debt, e.g. a claim for compensation (i.e. without a judgment for that compensation).
  • The statutory minimum was $2,000 before the COVID-19 pandemic, but increased to $20,000 during the pandemic to provide greater protection for distressed companies. The minimum has now been reduced, but is double what it was before the pandemic: $4,000 (Corporations Regulations 2001 sub-regulation 5.4.01AAA(1)). If your debt is under $4,000 you can still sue for it in court, or if you have already received a court order you can enforce the judgment debt by seeking orders to have assets possessed and sold, or an order to have a payment that would be made to the company be made to you instead (“garnishing”).

What should I do if I receive a Statutory Demand?

The important thing to note about the creditor’s statutory demand if you receive one is you must act on it within the statutory time period – this cannot be extended – by either paying the debt to the creditor, reaching an agreement with the creditor, or applying to court (either the Supreme Court or the Federal Court) to have the statutory demand set aside. This statutory time period is now again what it was before the COVID-19 pandemic: 21 days (Corporations Regulations 2001 sub-regulation 5.4.01AAA(2)). It had been extended to six months during the pandemic.

If the creditor’s statutory demand is not addressed within 21 days, then the company is presumed to be insolvent (Corporations Act 2001sub-section 459C(2)) and the creditor can apply to have the company “wound up”, which involves appointing an external controller over the company (a Liquidator).

Please note as we come up to Christmas that the 21 day period is not extended over Christmas (unlike deadlines in the court system). Also a creditor’s statutory demand will be validly served if it is sent to the company’s registered address. So, it is advisable to keep your company details up-to-date in order to reduce the risk of a demand being sent to a previous registered address without you being aware.

How can Sharrock Pitman Legal assist?

If you would like to know more, or this refresher raises any questions, please feel free to contact us at Sharrock Pitman on 1300 205 506 or email litigation@sharrockpitman.com.au. Additionally, if you have received a Statutory Demand and would like advice, please do not hesitate to contact our Litigation team.

Disclaimer

The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

Liability limited by a scheme approved under Professional Standards Legislation.

For further information contact  
Caroline Callegari

Caroline Callegari is an Associate Principal and leads our Disputes & Litigation team. She has an advisory and advocacy practice in the following areas: Commercial Litigation, corporate and personal disputes, debt recovery and, insolvency and bankruptcy matters. Caroline can be contacted on (03) 8561 3324.

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