The future of your business may depend on you recognizing a statutory demand.
Is your business run through a proprietary limited company, or do you act as registered office for a proprietary limited company? If so, then it is vitally important that you (and your staff) can recognize a statutory demand, as your business may depend on it!
It’s a scenario familiar to many lawyers. A client calls in with a document that their company has received from a creditor, demanding payment of an allegedly outstanding debt within 21 days of service. The client didn’t really know what it was (and they believed that the money wasn’t owed anyway), so it was put to the side while the client got on with running their business.
The document may read something like this:
Corporations Act 2001
CREDITOR’S STATUTORY DEMAND FOR PAYMENT OF DEBT
Make no mistake, this is a serious situation for the company.
If the 21-day period from service of the demand has not yet passed, then the company has to either pay the debt or make an application to a court to have it set aside. It is open for the company to negotiate with the creditor to revoke the demand, but this doesn’t stop the 21-day period running.
If the 21-day period has passed without an application, however, then the company is deemed by operation of the Corporations Act (s 459C (2)(a)) to be insolvent, and the company is in grave danger of being liquidated by a court.
The options for the company at this point have seriously narrowed.
If the company had applied to set aside the statutory demand within the 21-day period, it could have relied on one or more of several different grounds. These include that there is a genuine dispute about the debt, the company has an offsetting claim against the creditor, that there is a technical defect in the demand that would cause a substantial injustice if it is not set aside, or for some other reason.
However, if the 21-day period has passed without any action, then the company cannot contest, without leave, a winding-up order on any ground that it could have relied upon to set aside the statutory demand (s 459S).
There can be serious knock-on effects as well. Many finance agreements have clauses that operate to trigger a default when the company has a winding-up application brought against it.
What can be done to prevent this?
Firstly, if you get served with a statutory demand, then get legal advice immediately. The application to set aside the statutory demand must be commenced and served within the 21-day period, and all of the grounds to be relied upon must be raised in that application. So, time is of the essence when preparing the application, and every day counts.
If the 21-day period has passed then you need immediate advice on your options.
If you act as a registered office for a proprietary limited company – many accountants offer this service to their clients – then it is vitally important that whoever processes incoming mail and deliveries can recognize a statutory demand, and procedures are in place for the demand to be properly dealt with. A mishandled statutory demand can result in a winding-up application against a client’s company that puts the company in grave danger of liquidation, with obvious consequences in wasted time and money, not to mention embarrassment and damage to your reputation.
Don’t let it happen to you!