Statutory demands – how to make them and how to resist them

In brief - Statutory demands under section 459E of the Corporations Act

Creditors can make a statutory demand for payment of a debt under section 459E of the Corporations Act as long as the debt is due and payable. Companies which are served with a statutory demand have 21 days to apply to the Court to have it set aside.

Failure to comply with statutory demand common cause of presumption of insolvency

Under section 459C of the Corporations Act, a company is presumed to be insolvent if in the three months after the day on which a winding up application is made, one of these events occurs:

the company fails to comply with a statutory demand a judgment remains unsatisfied a receiver and/or manager or controller is appointed to the company, either privately or by the Court Most commonly the presumption of insolvency arises from the failure to comply with a statutory demand.

While some parties attempt to use statutory demands as a means of collecting debts, the Courts have been quite clear that this is an improper purpose.

Most common reason for company liquidation is insolvency

Just as an individual can be bankrupted, so a corporation can be wound up and brought to a commercial end. Whereas an individual continues to live and breathe through and after bankruptcy and their debt position is largely wiped clean, a company is ultimately brought to a commercial conclusion by a wind-up application.

The most common basis for placing a company into liquidation is insolvency.

The test of whether or not a company is insolvent under section 95A of the Corporations Act is whether or not the company is able to pay its debts as and when they become due and payable.

Legislative changes only serve to increase statutory demand litigation

In an attempt to deal with the abundance of litigation in this area, the legislature introduced significant amendments in the mid-1990s to make the requirements for the statutory demand less presumptive to be effective.

In Scolaro's Concrete Constructions Pty Limited v Schiavello Commercial Interiors (Vic) Pty Limited, the Full Federal Court said about those amendments that:

Unless the debtor demonstrates that there is a genuine dispute about the claim, the inevitable result would be a prima facie conclusion of insolvency if the amount were not paid. The public interest is served by these provisions because they tend to bring about a situation in which insolvent companies are either discouraged or prevented from continuing to trade. However, the amendments have not reduced the amount of litigation for statutory demands. In fact, there seems to be more litigation. The result is at odds with the intention of the legislature.

Characteristics of a valid statutory demand

Demands can only be sent by creditors who have a debt which is due and payable (section 459E(1)(a)). The debt cannot be contingent or prospective. A creditor must be able to put a dollar value on it. The debt or debts claimed in the statutory demand must total at least the statutory minimum (section 459E(1)), which is presently $2,000.00 ( section 9).

The demand must be in the prescribed form ( form 509H). It must:

be in writing be signed by or on behalf of the creditor correctly state the debtor's company name and its registered office specify a place in Australia where the debt can be paid It has been held that it is permissible to specify that payment be made to the...