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

In brief – Section 459E statutory demand and insolvency

Under Section 459C of the Corporations Act, a company is presumed to be insolvent if during or after the three months preceding the day on which an application is made for the winding up of the company, one of a number of events occurred. This includes, most commonly, failure to comply with a Section 459E statutory demand which a creditor has served on the company.

In practice the process of making a statutory demand is often used as a means of collecting debts, although that is not what it is supposed to be about. A statutory demand is supposed to form the first part in a winding up application.

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 the slate is wiped clean, a company is 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 as applied 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, the legislature introduced significant amendments in the mid-1990s.

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." As it turns out, the amendments have certainly have not reduced the amount of litigation in respect of 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

Valid demands can only be sent by creditors who have a debt, which is due and payable1. The debt cannot be contingent or prospective. You have to be able to put a dollar value on it. The debt or debts claimed in the statutory demand must total at least the statutory minimum2, which is presently $2,000.003.

The demand must be in the prescribed form4, must be in writing and must be signed by or on behalf of the creditor. It must correctly state the debtor's company name and its registered office and it must 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 creditor's solicitors.

If the creditor is a company, the statutory demand should be given under the common seal.

Because a creditor can gain the benefit of a presumption of insolvency if the statutory demand is not complied with, the...