Creditors’ Statutory Demands

Companies – Winding Up – Section 459F Creditors’ Statutory Demands

Where a debtor is a company incorporated under the provisions of the Corporations Act 2001 (“the Act”) a creditor is in certain circumstances able to apply to Court to wind up the company.  Winding up is the process whereby the assets of a company are realised, the creditors paid out in accordance with the Act, any surplus is distributed amongst the shareholders and the company is then de-registered.

There are various circumstances which enable the Court to order the winding up of a company.  The most common procedure is in terms of Section 459C(2)(a) of the Act where a company is presumed to be insolvent where it fails to comply with a Statutory Demand in terms of Section 459(F) of the Act.

One of the main advantages of proceeding against a debtor in terms of a Statutory Demand is that it is not necessary for a creditor to have obtained a judgment against the debtor.  Accordingly, a creditor who has a claim against a debtor is not obliged to obtain a judgment prior to making a Statutory Demand on the debtor. It would however be preferable to rely on a judgment as the basis for the Statutory Demand as this will create difficulties for the Debtor Company to set aside the Statutory Demand on the basis of, for example, a denial of the debt.

 

Statutory Demand

The procedure although relatively straight forward is very technical and there are various formalities which must be complied with namely:

(a)   The debt must be specified in the Statutory Demand which is served at the registered office of the Debtor Company by ordinary pre-paid mail.

(b)   The demand must be in writing.

(c)   The demand must be accompanied by an affidavit verifying the debt unless the debt is a judgment debt.  Accordingly, a creditor is entitled to wind up a Debtor Company whether or not a judgment has been granted against the Debtor Company in favour of the creditor.

(d)   The debt must be for an amount of not less than $2,000.00.

The Debtor Company served with a Statutory Demand has 21 days in which to comply with such demand.

 

Application to set aside a Statutory Demand

A company that has been served with a Statutory Demand may apply to Court to set the demand aside which application must be proceeded with not more than 21 days after service of the demand.  Generally, the grounds upon which an application is made to set aside the Statutory Demand are restricted to a denial of the debt or the existence of a set-off.

If a Debtor Company has not applied to set aside the Statutory Demand application can be made to the Court for the winding up of the Debtor Company.  It is in respect of this application and the procedures to be followed that same are specific and technical.  The Originating Process for the winding up of the Debtor Company is supported by an affidavit deposed to by the applicant creditor or, where the applicant creditor is a company, one of its directors or principal officers.  Pursuant to the Originating Process for the winding up of the Debtor Company being issued there are procedures regarding service and publication which must be followed.  These include the nomination of a Liquidator, arranging service, advertising in a daily newspaper and preparing the relevant affidavits of service.  The winding up procedure would usually take approximately 8 weeks.

Although there will be costs incurred in respect of the application for winding up (and the application may be opposed or application may be made by the Debtor Company to set aside the Statutory Demand) the alternative procedure available to a creditor who is owed money by a Debtor Company is to institute proceedings for recovery thereof which proceedings may themselves be costly and time consuming.

A creditor should take particular care in ensuring that if a Statutory Demand is made the amount claimed from the Debtor Company is immediately due and payable. There must be no dispute in regard to the indebtedness failing which the creditor may be ordered to pay the costs of the application to Court by the Debtor Company to set aside the Statutory Demand.

It follows from what is set out above that if a Statutory Demand is received from a creditor urgent steps should be taken to set aside the demand within the aforementioned 21 day period.

The risk with winding up a company is that a creditor may receive little or no dividend even if the application for the winding up of the Debtor Company is successful. Whatever assets are available have to be shared amongst all creditors according to the ranking of the various classes of creditors.  On the other hand if the company’s assets are sufficient, a creditor should be able to recover the entire debt owed (or a substantial portion) together with costs in relation to the winding up application.

In summary, the procedure outlined above relating to Statutory Demands can be a useful tool which a creditor can utilise in the circumstances and on the grounds set out above.  On the other hand a Debtor Company receiving a Statutory Demand should react swiftly and appropriately to avoid an application for the winding up of the Debtor Company.

Batten Sacks will advise in regard to when it is appropriate and in client’s interests to utilise the above procedures.

For further information please contact Trevor Rosenthal on telephone (03) 8680 5555 or email trosenthal@battensacks.com.au.

Please note that the advice in this communication is general advice only and you should not rely on this advice unless you obtain legal advice specific to your own requirements.