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Outstanding debt: Avenues to recovery by statutory demand – Insolvency/Bankruptcy



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Debt recovery can often be a tricky exercise, as debtors are
adept at avoiding and/or delaying payment where there is a debt
outstanding.

A cost-effective avenue for debt recovery, where the debtor is a
company, is by way of a statutory demand.

A statutory demand is a formal demand for payment under the
Corporations Act where the debt is $4,000.00 or more. To be able to
issue a statutory demand, proof that an undisputed debt is owing is
sufficient; a court judgment is not required (although a court
judgment will certainly assist). In the appropriate circumstances,
we would recommend serving a statutory demand for the following
reasons.

  • A statutory demand usually brings matters to a head more
    quickly as you only need to allow the company debtor 21 days to pay
    or dispute the debt. Court proceedings usually take much longer,
    and at a much greater cost.

  • if the company debtor does not pay or dispute the debt within
    21 days after receiving the statutory demand, you may apply to the
    Supreme Court or the Federal Court for an order that a liquidator
    be appointed to the company debtor. The threat of a liquidator
    being appointed will often give you enough leverage to reach a
    reasonable settlement.

Potential Drawbacks

However, there are some downsides and matters you need to be
aware of before serving a statutory demand – those downsides
and matters are as follows.

  • If the company debtor disputes part or all of the debt claimed
    in the statutory demand, then the debtor will have a basis to apply
    to the court to have the statutory demand set aside. If this
    happens, the debtor only needs to prove that there is a genuine
    dispute to succeed, so you will likely be advised to withdraw the
    statutory demand to avoid an order that you pay the debtor’s
    legal costs. If you have to withdraw the statutory demand because
    the debt is disputed, your only option will be to commence court
    action to sue for the debt. It is important to be aware that, even
    if you are unaware of any dispute from the debtor, it is not a high
    bar to set aside a statutory demand. Debtors will often try to
    dispute the debt on any grounds, even baseless or trivial, that may
    prevent you from pursuing payment.

  • If company debtor fails to take any action at all in response
    to the statutory demand within 21 days, then to apply the maximum
    possible pressure on the company debtor you would need to commence
    Supreme Court proceedings, seeking an order that a liquidator be
    appointed to the company debtor on the grounds that it failed to
    comply with the Statutory Demand. The cost of those Supreme Court
    proceedings will often be at a high cost, of which you may only be
    able to recover part or, in a worst case scenario, none at all, so
    it is imperative that you are properly advised as to whether it is
    commercial to pursue this option. Moreover, if the company debtor
    then steps in at the 11th hour and defends the court
    proceedings, the costs would increase further.

Defending a Statutory Demand

By way of example, in the matter of Australia and New
Zealand Banking Group Limited v Thomson
[2022] QSC 18, Justice
Williams considered, inter alia, an application to set
aside a statutory demand.

The applicant debtor contended that there was a “genuine
dispute” about the claimed debt, such that the statutory
demand should be set aside, even though the respondent creditor
claimed there was a settlement agreement to pay the debt. Her
Honour noted that the onus of establishing the existence of a
genuine dispute was on the applicant debtor, but also quoted from
SGR Pastoral Pty Ltd v Christensen (2019) 2 QR 334, where
it was said that: “The threshold is not high or demanding; a
genuine dispute means there must be a plausible contention
requiring investigation; and it is only if the applicant’s
contentions are so devoid of substance that no further
investigation is warranted that the applicant will fail.”

The applicant debtor pointed to various contemporaneous
correspondence, which it said put into question whether there was a
concluded settlement that could give rise to the alleged debt. The
correspondence was crucial since there was “no evidence of any
agreement being evidenced in a deed or agreement”.

Having reviewed the correspondence, Williams J considered that
it showed only that there had been “ongoing negotiations”
about a settlement, and not that any settlement had been agreed.
Her Honour concluded that there was a “clear and genuine
dispute between the parties as to whether there is a debt that is
due and payable as claimed in the statutory demand”.
Accordingly, the demand was set aside.

Whilst this is more an extreme example, it shows the ability of
the courts to set aside statutory demands, showcasing the necessity
that if you are to proceed, you must be appropriately advised to
ensure that you are not opening yourself up to liability.

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