Seeking your money back-  Benefits and disadvantages of issuing a legislative demand

This article explores what a statutory demand is and the costs and advantages of recovering your money by making a statutory demand. 

It is necessary to note that a statutory demand is not a way of raising debt, but a step in the process of initiating debtor company wind-up proceedings. In order to create reasons to initiate winding-up proceedings, a creditor may use a statutory demand. In practice, however, a statutory demand provides a powerful incentive for a debtor to pay his debts, as it is economically undesirable for a business to be believed to be insolvent and then to have proceedings initiated against it.

What’s a statutory demand? 

A statutory demand is a proposal made by a borrower to pay a debtor corporation within 21 days for a debt. 

The delinquent corporation is deemed to be insolvent if the debt is not paid or satisfied or if an application to set aside the statutory demand is not submitted and served within 21 days of the date of operation of the request. The creditor may begin winding up proceedings against the debtor company in either the State Supreme Court or the Federal Court of Australia until a presumption of insolvency occurs. The debtor company has only 21 days to take action to set aside the statutory demand from the date of service of the statutory demand, but the results are not always assured even then.

Advantages of issuing a statutory demand 

It can be an efficient means of recovering an undisputed debt for a borrower. 

It will also provide a fast and effective way for a borrower to bring winding-up proceedings against a potentially insolvent debtor company. 

From a commercial viewpoint, a highly precarious situation for a debtor company to be in is the assumption of insolvency that occurs when a debtor company fails to comply with a statutory demand or the start of winding up proceedings. For the debtor company to settle its obligations, this may serve as a very strong motive.

Consequences of a statutory demand being published 

The debtor may attempt to set aside the statutory claim and may be entitled, if successful, to recover the legal costs of that appeal. For reasons that involve the debtor company having a real dispute over the volume or nature of the debt or having an offsetting argument against the creditor, a statutory demand can be set aside. The threshold for setting a statutory demand aside is low, which raises the risk of ordering an adverse expense. The borrower must then initiate debt recovery proceedings against the debtor company if the statutory demand is set aside. 

If the debtor company fails to comply with the statutory demand, the only compliance recourse open to a borrower is to begin winding up proceedings against the debtor company. Whereas other compliance remedies (such as granting a writ of execution) are available to a borrower with a judgment debt.

When deciding whether to submit a legislative petition, take a commercial approach and weigh all these variables prior to doing so. Conversely, it is necessary to obtain legal advice as soon as possible if you are presented with a legislative demand, as the implications can be quite severe.

Click here if your company or yourself is facing a financial difficulties including Statutory Demand.