Creditors Statutory Demands – Been Served? Can you beat them?
By Phillip Leaman
15 July 2013
Change of pace for our usual business law/leasing updates this week: When a creditor is owed money (more than $2,000) one way of attempting to obtain payment is the service on the debtor of a Creditors Statutory Demand in accordance with Section 459E of the Corporations Act 2001.
The demand must be in the prescribed form set out in Form 509H and the creditor must strictly comply with the requirements of the Corporations Act 2001 and relevant case law. Once served, in summary, the debtor has 21 days to pay the debt or to come to an arrangement acceptable to the creditor.
If the demand is not satisfied within 21 days, the debtor is deemed to have committed an act of insolvency and the creditor may thereafter file an application (usually in the Federal Court of Australia or the Supreme Court of Victoria) seeking the winding up of the company.
Normally, if there is a challenge to the demand by the debtor (i.e. that there is a genuine dispute as to the debt claimed etc), the company must make an application to the Court to have the demand set aside within the 21 day period.
But what happens if the winding up application has been issued and the 21 days has passed? All hope is not lost, but the possible challenges to the validity of the demand narrows greatly.
We had a matter in the Federal Court of Australia where a client was being pursued by the Australian Taxation Office (ATO) and a demand had been served on the client. Within the 21 days the client called the ATO and had put in a payment proposal to pay the debt by instalments. During a phone call with the ATO, the client asked whether she had to worry about the 21 day period under the notice and the ATO officer replied that it would take 28 days for the ATO to consider the payment proposal and in the event that the payment proposal was refused the client would have a further time period in which to pay the full amount of the claim. The ATO officer further stated that the letter setting out a further time period in which to pay would be “the worse case scenario”. After the expiry of the 21 day period, the ATO refused the payment proposal and demanded payment and stated that if payment was not made they would “commence legal proceedings for the recovery of the debt”.
Section 459F of the Corporation Act 2001 provides that “If, as at the end of the period for compliance with a statutory demand, the demand is still in effect and the company has not complied with it, the company is taken to fail to comply with the demand at the end of that period.”
In the case for our client, the Court found that due to the conversation with the ATO and the follow up letter, the inference in the ATO’s actions was that if the payment proposal was accepted then the demand would have been waived and if the proposal was not accepted (as in this case) but the client paid the demand by the due date fixed in the letter (after the 21 day period) then the demand would also be waived. With this in mind, the Court found that it would be difficult to work out when and if the demand would be relied upon. As such, the Court found that the demand was, at the expiry of the 21 day period not “in effect” as there was a potential for the demand not to be relied upon by the ATO and the consequences of the discussion with the ATO was enough to constitute the demand no longer being “in effect”. As such, there was no breach of Section 458F of the Corporations Act 2001.
The Federal Court of Australia dismissed the winding up proceeding in that matter and ordered the ATO to pay our client it’s costs arising from the action. This demonstrates the drastic consequences to a creditor for pursuing a demand which may have an issue.
Whilst the facts of our client’s case represent an unusual set of circumstances, the lesson to be learned from this case is that the actions of a creditor (or their employees) can have the effect of waiving the creditors rights to be able to enforce the demand if it is not made clear to the debtor that notwithstanding any payment proposal or other conversation that the 21 day period timeframe is still running.
As a creditor, it is best to only correspond with debtors in writing and be clear as to whether the demand timeframe is still running and if in doubt, serve a fresh demand on the creditor before issuing proceedings for the winding up of the company debtor.
The law concerning Creditors Statutory Demands is a mine field and the Court requires strict compliance from the parties. As a debtor, act early and within the 21 days as a Court still has the power to wind up the company if it is insolvent notwithstanding it might have a technical defence.
If you have any questions relating to these issues, please contact a member of our Insolvency Law team.