September 15, 2016

Statutory Demands

Over the past few months I have seen a marked increase in the number of phone calls from directors and their advisors requesting details of the available options to deal with Statutory Demands and Winding-up applications.

If a creditor is owed money by a company there are many ways they can seek to recover it.

Firstly, a letter of demand should be sent to the company setting out the amount of the debt and a timeframe for paying the same. The company can then either pay, seek to settle or enter into an agreed payment arrangement to discharge the debt.

Secondly, if a letter of demand and resultant negotiations prove fruitless, the creditor can take steps in Court to enforce payment by way of a Statement of Claim. A debtor company then has 28 days to file a defence against the claim and if no defence is filed, the creditor will be awarded a Judgement Debt against the debtor company. A judgement debtor has the ability to seek:

  •  A writ of execution to the Sheriff to seize assets;
  •  A writ possession for land;
  •  A writ of delivery of goods;
  •  An examination order to compel director(s) to provide answers on the company’s  ability to pay;
  •  A Charging Order over specific company property; and / or
  •  A Statutory Demand which may lead to a winding up order over the debtor company.

Lastly, once a Judgement Debt has been awarded, the creditor may issue a Statutory Demand against the debtor company pursuant to Section 459 of the Corporations Act 2001 (Cth) notifying the company that if it does not pay the debt, the creditor will apply to the court to wind up the company on the basis that the company is insolvent. A Statutory Demand for payment is issued in respect of a debt over $2,000 and once served on the company, the options available to a director(s) are limited to;

  1. Paying the specified sum detailed on the Statutory Demand on which the application was made; or
  2. Disputing the application by trying to have it set-aside by the Court; or
  3. Taking steps themselves to appoint a Liquidator; or
  4. Taking steps to appoint a Voluntary Administrator; or
  5. Do nothing and wait for the liquidator appointed by the Court to come knocking.

Failure to do any of the options within the 21 day period is seen to be an act of insolvency and, therefore, grounds on which a creditor can file an application with the Court to force the company into liquidation. At this point the options are seriously reduced and the problem more expensive to resolve.

I am always surprised by the number of calls I receive which go along the lines of “I have received a winding-up application but I wasn’t aware that I even had a debt to that creditor”, or “…but I didn’t think they would take it this far”, or “…I didn’t receive the Statutory Demand or notice of the Winding-up hearing” or “…I had called the creditor and they were happy with the payment arrangement we had agreed over the phone”.  As stated above, there is a clearly defined statutory process that must be followed which provides minimum notice periods of 28 days and 21 days and the old adage of “no news is good news” is something that does not apply to debt collection – usually no news means that the guns are being loaded for the next attack.

Courts are usually mindful to ensure that the correct compliance has been followed to avoid an abuse of process by creditors. However company director(s) and advisors can take the following steps to minimise the risk of notices falling through the cracks including:

  • Ensuring that ASIC registration details for the registered office and place of business are kept up to date;
  • Ensuring that correct internal procedures are in place so that all mail is reviewed by senior staff / business owners;
  • Maintaining good client / advisor relationships (fees paid etc.) so that communication can remain open between all parties so good and timely advice can be obtained; and
  • Documenting all discussions and payment arrangements with creditors and then ensuring compliance with the agreed terms.

Clearly there are cases where the Court has got it wrong or a creditor has abused the process, for example in miscalculating a debt or failing to withdraw an application after the debt had been paid. A company is able to defend a Winding-up application or seek to have a Winding-up Order set-aside on the grounds that it should never have been made.

If a company has systemic cash flow problems and simply pays creditors as a reaction to defending winding-up applications, there is a strong risk that other creditors will substitute themselves in place of the petitioning creditor to ensure that they also get paid or the company be placed into liquidation. A successful defence may still require the company to satisfy the Judge that the company is solvent and able to pay its debts as and when they fall due. This is so if a company has a large number of creditors and there is a history of late payments, the Court may still grant the winding-up on the grounds of insolvency.

If your clients are dealing with financial distress, please contact our experts or call us on 1800 246 801 for more information.

Article written by Daniel Quinn, Director, New South Wales

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