It probably comes as no surprise that the term statutory demand is one of the most Googled legal phrases. In this podcast, South Geldard Director Gordon Stünzner talks about what statutory demands are, in particular their use in debt collection.
Dan: It probably comes to no surprise that the term statutory demand is one of the most Googled legal phrases. Well, to find out what they are, in particular, there use in debt collection, I’m with South Geldard Lawyers Director, Gordon Stunzner. So Gordon, what is a statutory demand?
Gordon: Thanks, Dan. Look, a statutory demand is, as the name implies, a demand which is made under statute. It’s a formal legal document which a person issues to another person whom they claim owes a debt to them. It’s issued under the Corporations Act. It only relates to companies and not to personal debts. I’ll talk about that further on in this podcast, but that’s an important distinction to have in mind. Once the statute of demand has been issued, the person who receives it has 21 days to respond to it either by paying the debt or applying to the court to have it set aside. Now, it’s not something you can ignore either as the person issuing it or the person receiving it, and action has to be taken one way or the other.
If the debt is not paid or not answered, then the company upon whom this demand has been served is deemed to be insolvent. So a statutory demand is really a precursor for the winding up of the company. It’s not necessarily, or strictly speaking, not necessarily a debt collection tool, but it is often used in that sense. What it does do is set you up for an application to the Supreme Court to wind up a company in insolvency and then collect your debt, along with all other creditors in that winding up process, which is liquidation or receivership, depending on what comes from it and what the court orders. You can understand that these things could be used for good or for evil, and the process really is full of pitfalls for the unwary on both sides of the equation.
Dan: So, practically speaking, are they an effective tool for debt collection?
Gordon: Dan, yes they are, and also no, they’re not. Yes, they are in the sense that they are very powerful. If you have no doubt that you are owed the money and there’s no dispute as to the amount of the debt and that person just simply doesn’t want to pay it to you, then yes, this is very effective. It really forces the hand of the recipient to do something. Either they come to you and to talk about how to manage the payment, or it forces their hand to go into court, either have to set aside, which if they win, obviously, is not so good for you. But if they fail, you can take it further and have the company wound up. It’s not effective as a tool if there is a dispute, and you have to be very careful about that.
It can even be a matter of timing of the debts or the invoices, or there might be a serious debate about whether the money is actually owed or not. If that’s the case, these things can blow back in your face quite spectacularly and leave you open to not only losing the amount of the debt that you’re but also exposing you to costs of the court if it is heard before a judge in the Supreme Court. Being absolutely certain that you do have a debt owed to you is if you’ve taken the matter through to a smaller court like the magistrate’s court or the district court and got orders in your favour, that the debt is owed to you, then that’s unequivocal. I would certainly issue a statute of demand in that case. If it’s your first step, I’d be very wary as it can have negative consequences and quite diverse outcomes.
Dan: What about the pros and cons, Gordon, of actually issuing a statutory demand?
Gordon: Dan, look, as we’ve discussed, there are good and bad sides to a statutory demand. The pros of that demand are pretty simple, actually, that they’ve got legal enforceability. It is backed by the Corporations Act, and it has that timeframe. It’s irrevocable, so once the process starts, it has to be answered. The 21 days is set in stone and if that date passes, then you do have that deemed insolvency of the creditor. What that means is that often they will come to you and negotiate.
It’s immense leverage in that negotiation phase, and that certainly is used in many cases to extract that debt out of that person. It can be very cost-effective, until it gets to court, there really isn’t a great deal of expenditure to you apart from having your lawyer draft the form, making sure you’ve reached the threshold at today’s date, it’s $4,000 of the debt, and then drafting affidavits in the correct order and appropriate affidavits to support that claim and then issuing it. It’s not filed in court until such time as it needs to go further. In terms of, I guess, the speed, it’s, as I said, an easy document to prepare an issue and you don’t actually have any real court process unless the debtor disputes the debt, and tries to aside or the 21 days expires and then you take it further and have that company wound up.
In terms of the cons, notwithstanding the speed and the lack of cost or the manageable cost in issuing it, the effectiveness is only really as good as the depth of the pockets of the debtor. Although you may well have a strong case if there’s no money to be had, it doesn’t matter how good your forms are or how good your case may be. You will simply not recover anything and it’ll be a hollow victory at best. The biggest risks or the biggest cons to these are the risks to you if there is a dispute. A statute of demand can be set aside for any number of reasons, and one of those which I’ve alluded to already is a dispute. If there’s a general dispute about the debt, you will fail. All the person needs to do is take that to the Supreme Court and demonstrate that there is an argument or they have a right of setoff, and that is, they claim a debt against you.
They can claim there’s a deficiency in the document and that can even be in the forms of the affidavits that they’re sworn before the demand or before the debt is due. So, there can be technical issues that will trip you up and there can be practical issues which will trip you up. The other thing to consider is the relationship you have with that person. Often you want to apply some pressure and some leverage to get the debt paid, but you still want to have an ongoing relationship with a supplier or a contractor or a subcontractor. These things will certainly make that relationship very strained. To receive one forces you into action and you know that this person is really attempting to kill your business. To come out of that with a relationship that can survive and can enter into future contracts is pretty unlikely. So I think that is also a consideration that has to be at the back of your mind, at least, when you decide to get down this path.
Dan: Is it something like a surgical airstrike or can it be overkill?
Gordon: Dan, both of those are really quite good analogies. They are a surgical airstrike and can be very precise when all of your ducks are lined up, you’ve got a judgement debt in your favour, there’s no dispute and the person simply does not want to pay you the money, and of course, they have the capacity to pay you the money. In that case, it’s a very cost-effective, speedy, and powerful way of recovering those funds. In terms of overkill, if it’s used for evil, as I said previously, the courts look upon these things very dimly. The courts will actually protect a debtor from the misuse of a statute of demand. A stat demand is not, strictly speaking, a debt collection tool. It is a precursor to a court action to wind up a company. Now, the courts recognise that, that is an extremely drastic and far-reaching action to take upon a business.
Often these businesses have employees and support a number of families and the courts are loath to allow someone to misuse that power. In that sense, it has been described by some judges, particularly in the local Supreme Court in Central Queensland, as a tactical nuclear missile overkill, and in that particular case, the judge was quite scathing of the person who had used the statute demand regime to try and extract a debt out of a dispute over money. Yes, it can be quite precise and effective, but if used for evil, then expect to have the full force of the courts come down upon you and pay the costs of the other person in court and everything else that goes with it. So, yeah look, proceed with caution. Both of those are, I think, quite good descriptions of what they can be.
Dan: So, Gordon, if somebody was listening to this podcast and they’ve received a statutory demand, what should they now do?
Gordon: If you receive a statutory demand, you need to act quickly. These things can’t be waived, and the 21 days will continue, and if you don’t answer it, and don’t set aside the statute of demand or don’t pay the debt, then as I said, your company will be deemed to be insolvent and you’ll have a battle in court to prove that you aren’t insolvent and you’ll have a battle in court to prove that you are insolvent and shouldn’t be wound up, that in itself is going to be an enormous cost in terms of dollars and time to your company. We will certainly talk you through the process as to what you should be doing.
If the debt is owed and there’s no doubt about that, our advice to you will be to pay the debt or make arrangements to pay that debt. Even if we have a payment plan, that statutory demand will sit there and we’ll have to have some deed in place to prevent that person from acting on that demand and winding the company up in the future. If there are some deficiencies or if there is a reason to set it aside, we need to know that as well. The threshold for doing that is fairly low. If you do receive it and you do have a debate about what the debt should be, even if we acknowledge the debt, but we think it should be less than what you’re saying, that’s sufficient for us to take it to court and set this aside.
We need to look very carefully at the form of the demand and the affidavits that go with it because a technical deficiency is sufficient to have these things set aside. The short answer is act quickly, collate your documents and take it to your accountant and to your lawyer and make sure you are either ready to pay the debt or take action to have it set aside. That’s something we can assist with and we have done for many clients in the past, and we’ve acted for clients on both sides of the fence. So, it’s something we’re familiar with and quite comfortable dealing with.
Dan: Now, if anyone listening to this podcast has questions, they can reach out to you and the team at South Geldard.
Gordon: Of course, Dan. It’s what we’re here for, our commercial lawyers are all familiar with this jurisdiction and can assist. If you do have a lawyer in our firm already, certainly talk to them. If they can’t deal with it themselves, there’ll be another lawyer who specialises in commercial matters and insolvency who’s able to take it up. This is really just an overview of what is involved in the such demands. But if you have any questions, certainly go to our website and find the lawyer who you think will be the best fit for you. I’m certainly able to assist and would be happy to and give us a call.
Thank you for listening. If you have any questions, please do not hesitate contacting Rockhampton lawyers South Geldard on 07 4936 9100.