Dealing with Statutory demands

03/11/2014

A statutory demand is a notice issued by a creditor who is owed more than $2,000, to the debtor, requiring it to make a payment, or to come to a satisfactory arrangement to settle the debt within 21 days of service of the demand, according to the Corporations Act.

An expired statutory demand also acts as evidence during a winding-up process, showing the debtor company’s lack of going concern.

To issue a statutory demand, the creditor does not need to obtain court decision. For this reason, a statutory demand issuance is less prudent, putting the creditor at risk of not having the right to claim should the debt be disputed. Enforcing a judgement would allow such potential disputes to be exposed.

For a debtor who is served with a statutory demand, but has a “genuine dispute” to the debt, or to offset the claim, then the debtor is allowed to set the demand aside within 21 days period. If he/she does not do it within 21 days, the debtor can no longer raise any dispute to the debt during hearings of a winding up application.

A controversial case came about recently between Britten-Norman Pty Ltd against Analysis & Technology Australia Pty Ltd in 2013, whereby Britten leased a surveillance system from A&T, who was required to meet a certain level of accuracy as a requirement before Britten was able to tender for a contract. However, Britten claimed the system failed to meet their requirement; hence Britten lost their chance to secure a commercial contract, resulting with Britten not being able to meet the lease payments for the surveillance system, to which A&T decided to issue Britten with a statutory demand.

Oral representations were relied upon by Britten, as documentary evidence support was not necessary to dispute the demand. Britten also claimed an estimated loss of profits for the first year of trading without any expert report to support their claim.

Britten was supported by the Court of Appeal, who ruled that a “genuine dispute” was indeed evident, and that it has provided sufficient evidence that indicates the offsetting claim exceeded the amount specified in the demand. As a result, the demand was set aside.

This case reinforces the risk of Statutory Demand issuance without any court decision, crippling the creditor’s case should the debtor raise the “genuine dispute” defence. Worst-case scenario, the creditor might even incur adverse costs as a penalty based on the Court of Appeal decision.

Hence, taking into account the potential risks, it is more prudent to first seek judgement prior to issuing a statutory demand.

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