Statutory Demands: A Risky Business

A statutory demand notice is a formal, attested demand, which if correctly issued and served, gives the debtor company 21 days from the date of service to pay or compromise the debt to the creditor’s satisfaction. If the company fails to do so, then it is presumed to be “insolvent”.

If a debtor company takes issue with the claim in the statutory demand, its form or its service, then the debtor company only has 21 days within which it must file and serve an application before the Court to have the statutory demand set aside; the Court cannot allow more time in which to bring that application and the application must be served with all the evidence on which the debtor company intends to rely.

If the debtor company responds promptly, and has creditable proof that there is a genuine dispute regarding the debt claimed, then it should immediately state that case to the party making the demand, inviting the creditor to withdraw the statutory demand. A “genuine dispute” about the debt is a very low threshold. If the creditor does not heed that, then the creditor risks losing such an application, with a costs order to bear for the creditor’s trouble.

With time being of the essence, the worst thing you can do in relation to a statutory demand is to ignore it.

Consider:

  1. A company which ignores the notice and allows 21 days from service to expire is presumed insolvent; this triggers an opportunity for a winding up application.
  2. Once a winding up application is made, other creditors can apply to “adopt” the application and thus even resolving the statutory demand does not solve the problem.
  3. Rebutting a presumption of insolvency is expensive and no mean feat: the onus is on the defendant, who must present the Court with the “fullest and best” evidence of its financial position.

Where there is proper basis for belief that no genuine dispute exists, a statutory demand puts the creditor in a strong position.

But where the debt claimed was in dispute, then the pendulum of pressure can rapidly and fiercely swing in the opposite direction and can do so at considerable cost. Not only will the costs of preparing the statutory demand be sunk, but also the imprudent creditor claim can be turned into a considerable liability. In short, a statutory demand should not be lightly made, nor lightly taken.

Lesson for the well prepared: Habits are purportedly broken in 21 days – as are debtor companies who fail to respond to statutory demand notices.

By Mark Love, Legal Director, Business Law.

First published in B2B Magazine.