The burden of being an unwilling creditor is one that many businesses will carry at some
stage of their existence. As a matter of course,a business will extend credit to a person or
company and specify a deadline by which the debt must be repaid. In most cases, it will
take one or two calls or emails from the creditor to the debtor to get the matter resolved
and for business to continue as usual. But what can you do if despite your dogged
persistence the debtor fails to concede that the debt is due and payable, or even fails to
acknowledge your communication at all?

Issue a statutory demand

A statutory demand is a more formal means of persuading a debtor to pay its debts and is
provided for under the provisions of the Corporations Act. It should really be viewed as the
first part of a winding-up application, rather than as a debt collection method although it
can work well in this regard. Unless the debtor company can establish a genuine dispute about the demand, that company will be presumed to be insolvent if the debt is not paid. This is something a debtor will clearly want to avoid as the company may be wound up if it is deemed insolvent. It therefore serves as powerful tool with which a frustrated creditor can arm itself. A statutory demand can be issued for a portion of a debt, provided that the undisputed portion exceeds the statutory minimum, and the payment of the debt is requested using clear, correct and unambiguous terms.

The Statutory Demand process

A statutory demand can be served on a company that owes the sum of at least $2,000. The process that must be followed by both the creditor and the debtor are explicitly stated in the Act, and failure to abide by the procedures will not be treated leniently by the courts. In order to ensure compliance with the legal requirements for the statutory demand the
creditor should:

 Present the debt information on Form 509H.

 Attach an affidavit confirming that the debt is due and payable.

If a creditor fails to follow the rules, the court may set aside the statutory demand and
award the debtor its legal costs. The main compliance problems for the creditor tend to
arise as a result of: (1) a disputed debt (2) failing to follow the rules for service of the
document, or (3) presenting a verifying affidavit containing incorrect or insufficient
information.

(1) Disputed Debt

There is little to be gained by trying to use the statutory demandin respect of a disputed
debt. The demand process should only be used if the creditor is quite sure that the debtor
has no grounds on which to dispute payment. This can be proven if, for example, the
company has acknowledged the debt in writing. If the debtor can cast serious doubt on the
existence or size of the debt the court will not find in the creditor’s favour.

(2) Service

All companies are required to register their office address with ASIC and keep those records up to date. A creditor wanting to serve documents on a company should serve them at the address recorded on the ASIC register.The rules on service state that if a company wishes to have a demand set aside, it must apply to the court within 21 days of service of the demand. Courts have been inconsistent in how they deal with debtors who claim that the demand arrived late or who deny ever having received the demand at all. In order to avoid having to deal with these excuses, the creditor is best advised to hand deliver the demand and have the recipient sign for it. A record should be kept in the event that a court requires proof of proper service. If the demand was posted and was returned to the creditor (or if the office was unoccupied), the demand should be served personally on a company director instead.

(3) The Affidavit

Failure to comply with the rules applicable to the preparation of the affidavit is likely to
result in dismissal.Any mistakes by the creditor should be corrected as soon as they are
noticed, even if brought to his attention by the debtor. The courts will not assist creditors
who issue faulty documents or who continue pursue the demand process although aware of glaring deficiencies. The main reasons for disapproval of the affidavit are:

 No indication of how the supposed debtor knows that the debt is due and payable.

 Failure to state that the creditor believes that there is no “genuine dispute” about
the existence of or amount of the debt. The person who has been chasing the debt,
for example, the credit controller would be an appropriate person to swear an
affidavit as he/she would know the history and that there is no genuine dispute.If
the debtor can show that it has an off-setting claim (counter claim) then it may
succeed in derailing the statutory demand.

 The affidavit is sworn first and there is a gap between the datethat it was signed and
the date of the statutory demand.

What will the Debtor do?

Once the debtor receives the statutory demand there are a number of things that it can do.
The ideal reaction is for the debtor to pay off the debt in full, or to negotiate a settlement of
the matter to the creditor’s satisfaction. The unwelcome reaction is if the debtor choses to apply for the statutory demand to be set aside. It can do this if it disputes the debt or if there have been mistakes in the preparation of or service of the document.Apart from anything else, the set-aside motion automatically extends the time limit for compliance with the demand and gives the debtor weeks or months of breathing space. If the demand does get set aside, the creditor will need to go through the whole process again – which can prove costly and time-consuming. A demand which has a defect will only be set aside where it causes substantial injustice. The demand will not be set aside if it was a demand within the terms of the Act and the defect is really a minor error. If the debtor fails to respond to the demand the creditor can apply to have the company wound up or put into liquidation.

For further information

If you are having difficulty collecting an outstanding debt, please contact You Legal for
confidential legal advice. We can assist you in ensuring that the statutory demand is
prepared in accordance with the necessary rules and is effectively served on the debtor.

* This blog is for general guidance only.  Legal advice should be sought before taking action in relation to any specific issues.