25
Sep

Setting aside a statutory demand: what constitutes a ‘genuine’ dispute?

What are statutory demands and how are they used?

A statutory demand is a formal demand served on a company for payment of an outstanding debt that carries significant consequences if ignored.

From the date of service, the company debtor has 21 days to comply with the statutory demand, either by:

  1. paying the debt;
  2. securing or compounding the debt to the creditor’s reasonable satisfaction;
  3. appointing a voluntary administrator; or
  4. applying to the Supreme Court, Federal Court of Australia or Federal Circuit and Family Court of Australia for orders setting aside the statutory demand.

If the company fails to comply with the statutory demand within 21 days, it will be presumed to be insolvent in accordance with the Corporations Act 2001 (Cth) (Corporations Act). The creditor may then rely on that presumption to apply to the Court for orders that the company be wound up in insolvency and for a liquidator to be appointed.

As such, a creditor’s statutory demand can be a valuable and effective method of obtaining payment from a delinquent payer.

That said, creditors must be mindful of the essential requirements of the debt underlying the creditor’s statutory demand and the consequences of issuing a creditor’s statutory demand without a proper basis.

A statutory demand can only be issued in respect of a debt:

  1. that is equal to or exceeds $4,000.00;
  2. that is due and payable;
  3. in respect of which no genuine dispute as to the debt exists between the parties; and
  4. that is not capable of being set off by a claim by the debtor company, such that the amount payable to the creditor is less than $4,000.00.

While issuing a statutory demand can be an efficient and effective means of eliciting payment of an outstanding debt, creditors should exercise caution before doing so given that, if orders are subsequently made by the Court setting aside the statutory demand, it is likely that the creditor will be ordered to pay the company debtor’s legal costs associated with the application to set aside.

When can a statutory demand be set aside?

A company served with a statutory demand may apply to the Court to have the statutory demand set aside on a number of grounds, namely where:

  1. there is a genuine dispute as to the existence or amount of the debt;
  2. the company debtor has an offsetting claim which reduces the amount owing to less than $4,000.00;
  3. there is a formal defect in the statutory demand that causes substantial injustice to the company debtor if the demand were not set aside; or
  4. there is some other reason why the statutory demand should be set aside.

When is there a ‘genuine’ dispute?

The threshold for establishing a genuine dispute is a relatively low one. The company is not required to establish that it will ultimately succeed in disputing the debt, but rather that there is a genuine issue warranting further investigation.

The Courts have found that a “genuine dispute” is one which:

  1. involves a “plausible contention requiring investigation” or “serious question to be tried”;
  2. is bona fide and truly exists in fact;
  3. relies on grounds that are real and “not spurious, hypothetical, illusory or misconceived”;
  4. has a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion;
  5. is supported by sufficient factual particularity to exclude a merely fanciful or futile contention; and
  6. is not something “merely created or constructed in response to the pressure represented by the service of the statutory demand”.

Although the threshold is not high, mere assertion of a dispute will not be sufficient and the company debtor must demonstrate a genuine basis for the dispute. Where the legal argument relied upon is “patently feeble” or where it is “as plain as a pikestaff” that the argument has no basis, then no genuine dispute will exist.

Importantly, the Court is not required to determine the ultimate merits of the underlying dispute. The question is whether there is a genuine issue requiring further investigation and determination.

The position is different where the statutory demand seeks payment of a judgment debt. In those circumstances, there can generally be no genuine dispute as to the existence or amount of the judgment debt, as those matters have already been determined by a Court.

What are the risks for creditors?

Given the relatively low threshold for establishing a genuine dispute, creditors should exercise caution before issuing a statutory demand.

If the statutory demand is set aside, it is likely that the creditor will be ordered to pay the company debtor’s legal costs associated with the application.

Dark Legal is here to help

Statutory demands are a powerful debt recovery tool, but they must be used with care. Obtaining early legal advice can help ensure that the correct steps are taken within the required timeframe and reduce the risk of unnecessary costs or adverse consequences.

A creditor should be satisfied that the debt is properly due and not subject to a genuine dispute before issuing a creditor’s statutory demand. Dark Legal can assist creditors in determining whether a statutory demand is appropriate and advocate for you should a debtor subsequently demand that the creditor’s statutory demand be withdrawn prior to the 21-day time limit elapsing.

If you have been served with a creditor’s statutory demand, you have a limited period of time to act and the consequences of inaction are significant. We encourage you to contact us immediately so that we can consider and advise you promptly as to your options and the most strategic response.