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Use Of Statutory Demands - News Article 07/11/08

It is also a timely reminder on the use of creditors’ statutory demands under the Corporations Act.  The use of the statutory demand to require payment of debts over $2,000 can’t be underestimated as a weapon in recovering unpaid debts.  The Debtor company has the option of disputing the debt or paying up, otherwise it is liable to be wound up. 

But it is also just as important to note that they can only be used where there is no genuine dispute relating to the debt.  If there is a genuine dispute, then the proper course, even with the delay and cost involved, is to commence court proceedings and let a court decide whether the debt is genuine.  Once armed with a court order, there is little stopping the enforcement of that judgment debt by way of statutory demand and winding up proceedings. 

If the debt is disputed and a statutory demand is served, a creditor is entitled to apply to the Supreme Court to have the demand set aside.  If they are successful in the application to set aside the demand, the creditor who issued the demand can find themselves burdened with a costs order which can run to many thousands of dollars and also, with no satisfaction for the debt.

A recent court case has highlighted the dangers of using a statutory demand where the creditor knew the debt was contested. In the Queensland Supreme Court decision of MacKay Computer Services Pty Ltd v Wi-Man Pty Ltd, a costs order was made against a creditor who issued a statutory demand for a debt in respect of which it knew there was a genuine dispute.

The facts

The creditor issued a statutory demand for a debt of $47,014.79.  As is the usual case, the debtor wrote to the creditor setting out the facts outlining the existence of a genuine dispute about the debt, demanding the creditor “withdraw” the demand failing which it would apply to have it set aside.  Not having heard from the creditor, the debtor issued and served an application to set it aside within the required 21 day period. The creditor after being served, told the debtor that it was “withdrawing” the demand. The debtor pressed on with the hearing in any event and contended that there was never any proper basis for the debt claimed by the creditor, that the creditor had known this, and that as a result the statutory demand was an abuse of the court’s process.

The decision

The Court found there was a genuine dispute about the existence of the debt, the creditor knew there was a genuine dispute and that the debtor would certainly have succeeded in its application to set aside the demand, if it had not been “withdrawn”. The court ordered the creditor to pay the debtor’s costs.

Also a reminder to any company served with a statutory demand to act quickly on it.  There are only 21 days to apply to the Court to set it aside if it is disputed.  No extensions on that period are possible.