Debt Collection becomes harder for Creditors issuing Statutory Demands

Where a debt collection by a Company, a creditor can issue that debtor company with a statutory demand for payment. This form of demand can be issued in accordance with section 459E of the Corporations Act if the creditor is owed more than $2000.

Where a statutory demand has been issued, the debtor company has 21 days to either:

  • Pay the debt in full; or
  • Apply to set aside the demand; or
  • Ignore the demand and at the end of the 21 days the company will be deemed insolvent and the creditor can proceed with a winding up application.

In seeking to set aside a statutory demand, the application is made on the basis that there is a genuine dispute as to the debt and/or that there is an offsetting claim.

In a recent case of Britten–Norman Pty Ltd v Analysis & Technology Australia Pty Ltd (2013) NSWCA 344 “Britten” it appears the court has lowered the standard of evidence required for a statutory demand to be set aside. It was an appeal of the decision of the Supreme Court where it refused to set aside the statutory demand.

In Britten’s case, the court allowed allegations of conversations had, to be sufficient to set aside a demand even where documentary evidence suggests the allegations may not be accurate. So what were the facts?

  • The debtor claimed that a director of the creditor had made representations regarding the accuracy of its surveillance system, suggesting that its system would enable the debtor to win work.
  • The debtor claimed the system did not work as represented.
  • As a result the debtor claimed loss of profits in the amount of $144,000.
  • On the other hand, the creditor produced a series of communications from the debtor’s director expressing gratitude for the creditor’s support and acknowledgments of the debt owed.

In setting aside the statutory demand the Court of Appeal followed the approach that the expression “genuine dispute” involves a party raising a plausible contention requiring investigation.

It should be noted that where a statutory demand is set aside, costs are most often awarded against the debtor.

This decision highlites that creditors must be fully aware of the risk of an adverse cost order in circumstances where the debtor company can raise the “genuine dispute” defence. And this is so, even where the evidence about the dispute is very weak or might not be admissible at a subsequent trial.

Given this decision by the courts in their willingness to set aside statutory demands, we question whether the issuance of demands without first obtaining judgement is worth the risk.

Written by Richard Thompson

Richard Thompson is the Managing Director and owner of JMA Credit Control and has over 25 years’ of trusted experience. Richard has a wealth of knowledge in Credit Management and Debt Recovery ensuring client’s recovery bad debt quickly and cost effectively.

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