Circumstances Where A Court May Set Aside A Statutory Demand
Where a debtor company has failed, neglected or refused to pay a debt, the creditor may well suspect that the debtor company is unable to pay its debts as and when they fall due, as the debtor may be insolvent. In the circumstances, a statutory demand is a powerful tool creditors can use to compel a debtor company to pay its legitimate and indisputable debts within the prescribed statutory timeframe, otherwise the debtor company will be automatically presumed insolvent at law and liable to being wound up in liquidation by further Court action.
However, there are specific circumstances under which a Court may decide to set aside a statutory demand. And if you’ve recently been served a statutory demand, you may be wondering whether you have grounds to have it set aside by Court Order, or have an undertaking given by the creditor that the statutory demand will not be enforced until it lapses at law through negotiations and settlement via litigation and dispute resolution.
In this blog, we’ll examine statutory demands, their significance in the corporate world and the conditions under which a Court may intervene to set them aside.
What are statutory demands?
A statutory demand is a legal, and technical, written request issued by a creditor to a debtor company, demanding payment of an outstanding debt within 21 days. Under section 459E of the Corporations Act 2001 (Cth), if the debtor company fails to comply with the statutory demand or apply to have it set aside within this period, the creditor can apply to the Court to have the company wound up in insolvency.
The statutory demand process is an initial step in initiating insolvency proceedings, emphasising the seriousness of such demands.
Statutory demands must also meet specific requirements, including the precise amount of debt claimed, which must be undisputed and exceed the statutory minimum (currently $4,000). The demand must also be in writing, in the prescribed form and be accompanied by a supporting affidavit if the debt is not a judgment debt.
Five circumstances a court may set aside a statutory demand
While statutory demands are sometimes necessary for creditors, the Courts recognise that they should not be used improperly or oppressively. This means there are several grounds on which a debtor company can apply to have a statutory demand set aside:
- A genuine dispute to the existence or amount of the debt in question
One of the primary grounds for setting aside a statutory demand is the existence of the debt itself. The debtor company must show that there is a real and not a hypothetical dispute. This might involve disputes over the contract terms, the quality of goods or services provided or any set-offs or counterclaims the debtor might have against the creditor.
- Offsetting claims
An offsetting claim is a genuine claim that the debtor company has against the creditor, which can effectively reduce or negate the amount claimed in the statutory demand. The Court will consider whether the offsetting claim is genuine and substantial. If the debtor company can demonstrate an offsetting claim that brings the debt below the statutory minimum, the demand may be set aside.
- Inaccuracies and errors in the demand
A statutory demand must comply with the strict requirements set out in the Corporations Act 2001 (Cth) and other relevant regulations. Any defects in the demand, such as inaccuracies in the debt amount, incorrect company details or failure to use the correct form, including a failure to effect valid service, can be grounds for setting the demand aside. However, the Court will typically only set aside the demand if the defects cause substantial injustice to the debtor.
- Grounds for substantial injustice
Even if a statutory demand complies with the formal requirements, the court may set it aside if it causes substantial injustice to the debtor company. This might occur if the demand is used for an improper purpose, such as to pressure the debtor into settling a disputed debt or to damage the debtor’s reputation. The Court will assess the overall context and impact of the demand on the debtor company.
- “Some other reason”
The Court has a broad discretion to set aside a statutory demand for “some other reason”. This provision allows the Court to consider any other circumstances that might render it unjust to allow the demand to stand. These might include situations where the demand is served in bad faith, where there is evidence of unconscionable conduct by the creditor or where compliance with the demand would be overly oppressive to the debtor company.
Setting aside a statutory demand — what you need to do
To set aside a statutory demand, the debtor company must file an application with the Court within 21 days of being served with the demand. The application must be supported by an affidavit outlining the grounds for setting aside the demand and any evidence supporting those grounds. The Court will then hold a hearing to determine whether the statutory demand should be set aside.
It is crucial for debtor companies to act quickly and seek legal advice as soon as they receive a statutory demand. Failing to file and serve an application and supporting affidavit strictly within the 21-day period can result in extreme consequences for the debtor company, including the company being placed into insolvency.
Working with an experienced legal professional specialising in litigation and dispute resolution can ensure your rights are protected and upheld during this critical time as they seek to achieve the best possible outcome.
Challenge demands and other legal matters with confidence with ADVII LAW
While no business wants to find themselves in the middle of a financial dispute, they are a lot more common than you think. If your company is facing a statutory demand or is considering issuing one, it is highly advisable to seek professional legal advice to ensure your rights and obligations are fully understood and protected.
At ADVIILAW, our expertise lies within the corporate sector, and our litigators can provide expert guidance tailored to your specific circumstances. For more information about statutory demands or to discuss your case, contact us today.
Disclaimer
This commentary is of a general nature only, containing some general information for the reader.
It is not intended to be legal advice, nor can it be relied upon as legal advice, as each case will depend upon its own specific facts, matters and circumstances.
To this end, please kindly read our Website Terms including the disclaimer contained therein carefully. Laws, rules and principles may be subject to sudden and unexpected changes and you should always consult a lawyer about your specific circumstances before committing to a course of action.
Disclaimer
This commentary is of a general nature only, containing some general information for the reader.
It is not intended to be legal advice, nor can it be relied upon as legal advice, as each case will depend upon its own specific facts, matters and circumstances.
To this end, please kindly read our Website Terms including the disclaimer contained therein carefully. Laws, rules and principles may be subject to sudden and unexpected changes and you should always consult a lawyer about your specific circumstances before committing to a course of action.
