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Statutory demands in the recovery process

If a person refuses to pay a debt owed to you, recovery can be a slow and costly process. Whether the debt arose pursuant to a contract or in respect of goods delivered and services rendered, often litigation is the only way to compel payment. However, if the debtor is a corporation, there is another means to bring pressure on a debtor to pay the debt owed.

Under the Corporations Act 2001 a statutory demand may be issued to a company in respect of debts which are due and payable, provided the debt exceeds $2,000. A statutory demand is a prescribed form and must set out required information.

Once a statutory demand has been issued, the debtor company must either comply with the demand within 21 days or apply to Court to have it set aside. The consequence for failing to do one of these two things is severe. The creditor that issued the demand can apply to have the debtor company wound up on the basis of insolvency. The Corporations Act 2001 provides that a company is presumed to be insolvent if, within 3 months prior to the winding up application, the company failed to comply with a statutory demand.

The threat of being forced into liquidation is a compelling motivator for even the most recalcitrant of debtors. However, there are also things to be wary of, as statutory demands are not always an appropriate opening salvo in an attempt to recover a debt. Where the debt is disputed, or the debtor has an offsetting claim, a statutory demand will be set aside by the Court and the creditor may waste both time and money for little gain.

Statutory demands are a powerful tool in compelling debtor companies to pay their debts. However, an appreciation for when they are not appropriate is essential to ensure debt recovery is carried out quickly and cost effectively.