When creditor’s statutory demands are defective – lessons to be learned

A creditor’s statutory demand is a mechanism created in the Corporations Act 2001 (“the Act”) for a creditor to serve notice on a company where they have reason to believe the company may be or is insolvent. To be insolvent simply means the company is unable to pay its debts as and when they are
due and payable.

It is reasonably common to serve a creditor’s statutory demand on a company that owes money in excess of $5,000. The Courts have repeatedly said this process should not be used as a debt collection mechanism, but it is surprising how often creditors still go down this road.

If a company is served with a creditor’s statutory demand, then the company has 21 days from the date of receipt to either pay the debt (or reach a payment arrangement with the creditor for the payment of the debt) or to obtain orders from the Court to set aside the creditors statutory demand. If neither of these happen within the 21 days, then the company is ‘deemed’ to be insolvent and steps can be taken to wind up the company on the basis it is insolvent.

Section 459G of the Act provides limited circumstances where a creditor’s statutory demand can be set aside, namely
– Where there is a genuine dispute about the existence or amount of the debt; or
– Where there is a defect in the creditors statutory demand, and substantial injustice would be caused unless the creditors statutory demand is set aside.

In the latter case, there is a two- part test that must be applied by the Court. The Court must firstly ‘satisfy itself that there is a defect in the creditors statutory demand, before considering whether substantial injustice would be caused if it were not set aside.

In a recent decision of the Supreme Court of Western Australia in Budz Pty Ltd v Acurix Networks Pty Ltd [2019] WASC 152, Master Sanderson had to consider the effect of a defect in a creditor’s statutory demand and a further defect in the affidavit that accompanied the demand.

The creditor’s statutory demand was alleged to be defective on the basis that the creditor had failed to use the correct wording to verify the debt was due and payable, and instead used the wording relevant for a judgment debt. It was accepted by the Master that this made the creditor’s statutory
demand defective but was not sufficient to cause the Master to set aside the creditor’s statutory demand by itself.

The situation was compounded because the affidavit that accompanied the creditor’s statutory demand was also defective. The affidavit gave no indication of how the deponent had satisfied himself the debt was due and payable. The Master held that this was sufficient to establish that substantial injustice would be caused if the creditor’s statutory demand was not set aside and made orders accordingly, including an order to the creditor to pay the debtor’s legal costs.

The lessons to be learned here can be summarised as follows:

1. A creditor’s statutory demand needs to be properly drafted to ensure that it complies with the various legislative requirements or it may be set aside by a Court.
2. The affidavit accompanying the creditor’s statutory demand also needs to meet some minimum standards, including the deponent stating how they have satisfied themselves that the debt is due and payable.
3. It is important to take immediate action if you are served with a creditor’s statutory demand or the right to bring an application to set it aside will be lost.
4. A defective creditor’s statutory demand being set aside by a Court will result in the creditor being saddled with the legal costs of an application to set it aside, which will only add further insult to injury.

If you are considering issuing a creditor’s statutory demand, then I recommend you seek legal advice to ensure that it is properly drafted and meets all of the requirements set out in the Act and the Rules of the Supreme Court.

As always, I’m happy to field questions or assist further – craig@solomonhollettlawyers.com.au