Receiving a statutory demand can overwhelm any company. In Australia, a creditor issues a statutory demand to compel a debtor company to pay an outstanding debt. Ignoring this demand can lead to severe consequences, including a winding-up application based on insolvency. However, businesses facing a statutory demand have strategic options to dispute the debt and avoid the negative outcomes of non-compliance.
What is a Statutory Demand?
A statutory demand is a formal request from a creditor, typically issued under the Corporations Act, demanding a debtor company to pay an outstanding debt. If the company does not comply within 21 days, the creditor can file a winding-up application, assuming the company is insolvent. It’s crucial for companies to act quickly upon receiving a statutory demand to protect their interests.
What is a Genuine Dispute?
When disputing a statutory demand, one key factor is establishing a “genuine dispute.” In the landmark case Eyota Pty Ltd v Hanave Pty Ltd (1994), the court defined a genuine dispute as one requiring “plausible contention requiring investigation.” This means the dispute must be real and substantial, not hypothetical or artificial.
How to Establish a Genuine Dispute?
A company does not need to fully prove the dispute. The court will only require enough evidence to demonstrate a plausible reason to challenge the debt. The test is based on the balance of probabilities, so an arguable case against the debt may be sufficient to dispute the statutory demand.
In Creata (Aust) Pty Ltd v Faull (2017), the court made it clear that an applicant does not need to present full evidence but must provide enough to show a genuine dispute or an offsetting claim.
Common Scenarios for a Genuine Dispute
A genuine dispute can arise in various situations, including:
- Existence of the Debt: Disagreements about whether the debt is owed or if the amount is correct.
- Concluded Agreements: Disputes over whether an agreement has been fully executed.
- Contract Interpretation: Differing interpretations of contract terms.
- Quality of Services: Disputes about the provision of services or the quality of services provided.
- Ambiguous Court Judgments: Where a court judgment or order is unclear or ambiguous.
- Pending Appeals: When a judgment is under appeal and has not yet finalised.
The Role of Offsetting Claims in Disputing a Statutory Demand
A company can also dispute a statutory demand using an offsetting claim under section 459H(1)(b) of the Corporations Act. An offsetting claim could include a counterclaim, set-off, or cross-demand.
To be valid, the offsetting claim must be genuine and quantifiable. It doesn’t necessarily need to relate directly to the debt but must be substantial enough to reduce or nullify the debt.
Challenging a Statutory Demand Based on Defects
A company can also challenge a statutory demand if it contains significant defects, as per section 459J(1)(a) of the Corporations Act. Defects that can render the demand invalid include:
- Missing signatures
- Incorrect debtor details or debt amounts
- Improperly completed affidavits
- Errors in the formal requirements for serving the demand
These defects must be substantial enough to make the demand unjust.
The Process of Disputing a Statutory Demand
To dispute a statutory demand, a company must file an application and affidavit in the relevant court (State Supreme Court or Federal Court). The affidavit must clearly detail the grounds of the dispute, including any genuine dispute or offsetting claim, and provide supporting documents.
Key Steps to Dispute a Statutory Demand:
- File an Application: Submit the application and affidavit to the appropriate court.
- Detail the Dispute: Include all relevant evidence and documents supporting the dispute.
- Court Hearing: The court will assess whether the statutory demand should be set aside or varied.
Possible Outcomes For A Dispute Of This Nature
If the court agrees that the statutory demand is not valid, it may set aside or vary the demand. If the amended debt is below $4,000, the court might dismiss the demand entirely.
However, if the court finds that the dispute is not genuine, it could grant an additional seven days for the company to comply.
Why Seek Legal Assistance?
Disputing a statutory demand can be a complex process, requiring a thorough understanding of legal criteria and court procedures. If your business is facing a similar situation, you must act quickly to explore your options and avoid the risk of a winding-up application.
At Allied Legal, our commercial law experts can guide you through the process of disputing a statutory demand. We have extensive experience helping businesses protect their interests and resolve disputes effectively.
If you need assistance or would like to discuss your case further, contact us at (03) 8691 3111 or email us at hello@alliedlegal.com.au.
This article was adapted from insights published by Toby Boys, Tom Goodwin, and Thao Nguyen in “Received a statutory demand? Consider these three proven grounds to dispute the debt” on Mondaq, published on 24 April 2023.
