Dealing with Statutory demands

Pursuant to the Corporations Act, a creditor that is owed more than $2,000 is eligible to issue a statutory demand against a company requiring it to either make payment, or come to a satisfactory arrangement for settlement of the debt within 21 days of service of the demand.

In the winding up process, an expired statutory demand evidences the insolvency of the debtor company.

A creditor is not required to obtain judgment prior to issuing a statutory demand, however, the creditor runs the risk that it had no right to make the application on the basis that the debt is disputed. Obtaining judgement prior to issuing a statutory demand will expose any such potential dispute.

A debtor, having been served with a statutory demand, may seek to have the demand set aside should there be a “genuine dispute” to the debt and/or an offsetting claim. Should the debtor fail to attempt to set aside the demand within the 21 day period, the debtor is unable to raise any dispute relating to the debt in subsequent hearings of a winding up application.

Controversy has emerged as a result of a recent case, Britten-Norman Pty Ltd (“Britten”) v Analysis & Technology Australia Pty Ltd (“A&T”) (2013)(“the case”), where many in the legal profession argue that the standard of evidence in  demonstrating a “genuine dispute” has been lowered as a result of the decision of the NSW Court of Appeal.

In short, Britten leased a surveillance system to A&T, which was required to be a certain level of accuracy to allow Britten to secure a contract to provide aerial surveillance to aid bushfire fighting. Britten claimed the system failed to meet the required level of accuracy, which cost them the contract. Britten was unable to meet the lease payments for the system and A&T issued a statutory demand.

Britten relied upon oral representations, which were not necessarily supported by documentary evidence to dispute the demand. Further, it claimed estimated loss of profits for the first year of trading, which was not supported by any kind of expert report.

The Court of Appeal ruled that a “genuine dispute” was evident and Britten demonstrated sufficient evidence to satisfy the Court that the offsetting claim exceeded the amount specified in the demand. Accordingly, the demand was set aside.

The case reinforces the risk of issuing a statutory demand without judgment in the instance where the debtor may raise the “genuine dispute” defence. Further, in those circumstances, it may be that an adverse costs order is made against the creditor that issued the statutory demand.

Given the potential risks, it may be prudent to consider firstly seeking judgement prior to issuing a statutory demand.