Attention to Detail – Defects in Statutory Demands
A statutory demand is a useful way to exert pressure on a company to force it to pay its debts.
However, a creditor using a statutory demand to quickly recover a debt can run into trouble if the legal requirements regarding the form and wording of the statutory demand are not complied with.
Defects in statutory demands have regularly prevented creditors from obtaining winding up orders against debtor companies.
In this article we provide a practical guide as to the form of a statutory demand and drafting issues to avoid.
What is a Statutory Demand?
A statutory demand is a formal, verified demand issued under section 459E of the Corporations Act 2001 (Cth). A creditor can make a statutory demand for payment of a debt as long as there is a debt which is due and payable.
Companies which are served with a statutory demand have 21 days to either pay the money owed or to make an application to set aside the statutory demand. If a debtor company fails to comply with a statutory demand or have the demand set aside, a presumption can be made that the debtor company is insolvent and an application made by the creditor to have the debtor company wound up.
Defects in a Demand
The Corporations Act places strict requirements on the form and wording of a statutory demand. In particular, a statutory demand should:
- specify the debt;
- require the company to pay the amount of the debt within 21 days after service of the demand;
- be in writing;
- be drafted in accordance with the prescribed form 509H; and
- be signed by or on behalf of the creditor.
An application to set aside a demand can be made if there is a defect in the demand and a substantial injustice will be caused to the company served with the demand if it is not set aside. A defect is defined in the Corporations Act as an irregularity, a misstatement of an amount or total, a misdescription of a debt or other matter, or a misdescription of a person or entity.
For a statutory demand to be set aside on the basis of a defect, the defect must be in the statutory demand itself, rather than any other document such as a supporting affidavit. Minor defects (such as the omission of a signature from the demand) will not usually form the basis for setting aside a statutory demand. Notwithstanding, various defects have been regarded as capable of causing substantial injustice to the company served with a demand.
Examples of Defects
In the case of Townview Holdings Pty Ltd v Sunstate Design and Construct Pty Ltd, Townview sought to wind up Sunstate because of its failure to comply with a statutory demand.
The demand used by Townview failed to comply with requirements in that it did not have a “warning notice” as contained in the prescribed form. The warning notice states that a failure to respond to a statutory demand can result in a company being placed in liquidation. The Court found that the warning notice was central to the operation of the demand and the failure to incorporate the warning notice was fatal.
That decision was not followed by the Court in Poolrite Australia Pty Ltd (In Liq) v Structural Pools Aust Pty Ltd. In that case, the Federal Court found that the creditor’s failure to include the warning notice was not fatal to the validity of the demand because there was no evidence of a substantial injustice to the debtor. The decision in Poolrite shows that Courts are inclined to disregard technical deficiencies in order to facilitate the efficiency of the winding up process. However, if a substantial injustice can be shown to have been caused by the omission of the “warning notice” a debtor continues to have good grounds to argue that a demand should be set aside.
Examples of other defects which have been found to cause a substantial injustice include:
- misdescribing the nature of the debt (see IFA Homeware Imports Pty Ltd v Shanghai Jerrys Candle Co Ltd  FCA 533);
- failing to describe individual debts where a statutory demand relates to more than one debt; and
- where a debt is owed to two creditors, the demand only being signed by one of the creditors (see Gone Farming v Long  NSWSC 816).
Challenges to the validity of a statutory demand can result in increased costs for a creditor seeking to recover a debt. As such, extra care should be used in drafting a statutory demand to ensure that the demand meets the strict requirements as to form.
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