15 Jan 2019

Written by Daniel Morris, Special Counsel, Commercial Litigation

Statutory demands can be an effective way to recover debts from insolvent companies that owe you money. A statutory demand is a special form prescribed under the Corporations Act 2001 which has the effect of demanding payment of a debt owed by a company within 21 days. Once a statutory demand is served, the debtor company has two choices:

  • apply to the Court to have the statutory demand set aside (basically, declared to be of no effect) on the basis that there is an arguable defense to the debt that is being demanded; or
  • pay the demanded amount.

If a company served with a statutory demand does neither of these things within 21 days, it will be presumed by law to be insolvent and proceedings will commence for the company to be wound up.

At this point, it may appear that issuing a statutory demand is a sure-fire way to recover money owed by a company. However, that is not necessarily so. Beyond the obvious point that you, as the demanding creditor, may not recover all of what is owed to you if there is simply not enough in the debtor company’s bank account and other assets to cover its debts, consider also that you may not be the only creditor competing for a slice of a limited pie. There may be others entitled to be paid before you are, either because they have secured that entitlement in some way (by a mortgage or effective registrations on the Personal Property Securities Register, for example), or because the Corporations Act 2001 gives them priority – as in the case of employees and liquidators, for example.

You can do some basic searches to get an idea as to where in the order of priorities you are likely to find yourself if a company that owes you money is wound up in insolvency. This is often advisable; the risk being that if you issue a statutory demand as an unsecured, and therefore low-priority, creditor, you can end up being ordered to assist the Court in the winding up proceedings, at your own expense, for the benefit of banks and other secured creditors. At that point, you may not have the option of abandoning the winding up application. The reason is, once the Court becomes aware of a potentially insolvent company, it owes a duty to the public to investigate the insolvency and wind the company up if the company cannot prove that it is actually solvent. If you are the one that instigated the winding up proceeding, the Court may call upon you to see that proceeding through to the end, whether it helps you recover your debt or not.

Before engaging in any kind of legal proceeding, even if just to recover a simple debt, it always pays to talk to an appropriately qualified lawyer. HHG Legal Group’s experienced team of commercial litigators can help you secure your right to be paid before you are owed money and find the most effective way to recover the maximum amount at minimal cost, when a debtor defaults.

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