Many businesses face a difficult dilemma of whether or not to pursue a debt. To pursue debts by a traditional civil proceeding (usually in the local or district court) can be a slow and expensive process.

An alternative approach is to make a so-called “statutory demand” under section 459E of the Corporations Act.

When a statutory demand is made, the debtor must either pay or challenge its validity within 21 days by seeking to have it set aside. If they fail to do that, the creditor who served the statutory demand may make an application to the court that the debtor be placed into liquidation.

Statutory demands are relatively easy and inexpensive to prepare and can be a useful strategy in achieving a speedy resolution.  They place the debtor under immediate pressure to respond quickly by paying the debt or proposing an acceptable payment plan.

However, a common pitfall with statutory demands is that they can only be effectively used if there is no ‘genuine dispute’ between the creditor and the debtor.  The courts apply a relatively low threshold for determining whether or not there is a genuine dispute.  For example, if you supply goods to a company that accepts them without complaint, but later claims that the goods were defective in some way and refuses to pay for them, the court would probably say there is a genuine dispute. In essence, the court would consider that such a matter is not a case where the debtor should be placed in liquidation, but rather the issue of whether the goods were defective must be determined in a normal civil proceeding by a different court.

Therefore, when making your decision whether to use a statutory demand, it is critical to think carefully about the circumstances of the relevant transaction.  If there is a possibility of any complaints about the goods or services in question, or any difference of opinion as to the amount due, then a statutory demand may not be an optimal option. On the other hand, if there is no obvious basis to dispute the debt, then statutory demands have real appeal due to their relatively low cost and their capacity to put pressure on the debtor to resolve the matter promptly.

For more information or assistance with any debt recovery or disputes, please contact Paul Gambin at paul.gambin@sourcelegal.com.au or Stanislav Roth at stanislav.roth@sourcelegal.com.au.

A copy of the article can be downloaded here.

By | Published On: 24th August, 2014 | Categories: Other legal services, Guides |