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A Crash Course for Small Business Owners on a Creditor’s Statutory Demand

It can be hard for business owners to know how to tackle debt collection, particularly if you're an SME and have close relationships with your clients. But if a company entity owes $2000 or more, a Creditor's Statutory Demand is likely to be the most effective method of retrieving the unpaid debts.

Do you have a debt owed to you by another company? Are your efforts to recover the money owed to you failing? 

If you answered yes, chances are you’ve already tried chasing the right people up with phone calls, emails, maybe even a letter of demand – and yet, you still aren’t getting any closer to a repayment of your unpaid debts. 

In instances like these, a Creditor’s Statutory Demand is likely to be the most effective tool in recovering your unpaid debts. 

What is a Creditor’s Statutory Demand? 

A Creditor’s Statutory Demand is a demand letter that is issued in accordance with section 459E of the Corporations Act 2001 (Cth). A creditor can issue the demand letter to a debtor company to compel the payment of a debt owed. 

After being issued with the demand letter, the debtor company has 21 days to satisfy the debt stated in the Creditor’s Statutory Demand. Failure to pay the debt within the 21 day window will result in the company committing an ‘act of insolvency’. The creditor can then rely on the ‘act of insolvency’ and, if they wish, attempt to place that company into liquidation.

It’s important for creditors to note that a Creditor’s Statutory Demand is only appropriate in scenarios where the debtor company has not satisfied its debt because it is suffering financial difficulty. 

When can a Creditor’s Statutory Demand be issued? 

Before issuing a Creditor’s Statutory Demand, there are a few requirements that a creditor will need to fulfill first: 

  1. The debt must be owed by a company entity, as opposed to an individual or trust
  2. The debt owing to the creditor must exceed $2000 
  3. The debt must be due and payable to the creditor at the time the Creditor’s Statutory Demand is issued 
  4. The Creditor’s Statutory Demand will also have to be coupled with either a Judgement debt or an affidavit sworn by the creditor stating that the debt is in fact due and payable to them 

What happens when a debtor company fails to comply with a Creditor’s Statutory Demand? 

Once the Creditor’s Statutory Demand has been issued, the debtor company is given 21 days to repay the debt in full. If the payment hasn’t been made within the 21 days, the creditor is entitled to commence ‘winding up’ proceedings in the Supreme Court of the jurisdiction in which the debt is owed. 

Once the winding up process has commenced, the debtor company is still able to pay off their debt to prevent the company from being liquidated However, should the company be wound up at a later date, the payment could potentially be subject to an unfair preference claim. 

In the event that the winding up proceedings eventuate, the debtor company will be placed into a compulsory liquidation pursuant to section 459P of the Corporations Act 2001 (Cth)

Can a Creditor’s Statutory Demand be challenged? 

A debtor company can potentially seek to have the Creditor’s Statutory Demand set aside and therefore unenforceable. Some of these reasons include: 

  • The debtor company as a genuine dispute about the debt in question 
  • The debtor company has an offsetting claim against the creditor 
  • The Creditor’s Statutory Demand is defective in that it does not comply with the legal requirements when it is drafted and served. 

How did COVID-19 affect Creditor Statutory Demands? 

In an attempt to protect small businesses and individuals facing financial difficulty as a result of the pandemic, the Australian Government passed the Coronavirus Economic Response Package Omnibus Act 2020. The package offered temporary protection to companies suffering from cash flow difficulties. 

As part of these measures, reform was made to the technical requirements in issuing a Creditor’s Statutory Demand. The legislative changes were as follows: 

  • The debt threshold required to issue a Creditor’s Statutory Demand temporarily increased from $2,000 to $20,000
  • The compliance period in which debtor companies were given to pay the debt amount increased from 21 days to 6 months 

As of 31 December 2020, the temporary provisions reverted back to their pre-COVID-19 position. 

When drafting, issuing and settling a Creditor’s Statutory Demand, there are many factors to be considered and multiple technical aspects that must be complied with. Because the debt recovery space can be incredibly complex and difficult to navigate, we strongly recommend enlisting the help of a debt collection professional before getting started. For further assistance and clarification regarding Creditor Statutory Demands or other debt recovery actions, book a free consultation with our Melbourne-based BlueRock Law team

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