Question

Assume a debtor has issued a statutory demand to Mask R Us Pty Ltd for the non-payment of a $10,000 debt.

Explain, with reference to the Corporations Act, the legal options available to the company in responding to the statutory demand and the legal consequences of ignoring the statutory demand?

Answer 1

When these reminders are ignored, your company’s creditors could send a demand letter called a statutory payment demand – it’s a a document issued by the creditor’s solicitor, demanding payment of a debt owed by your company.

What is a statutory demand?

A statutory demand is an official document demanding that your company repay its creditors. Statutory demands are typically sent by creditors after all other forms of debt collection, such as phone calls and reminder letters, have failed.

Statutory demands need to be sent by a solicitor, and it costs creditors hundreds of pounds to issue a statutory demand for payment against your company. Receiving a statutory demand indicates a creditor is ready to take action against your company.

If your company ignores a statutory payment demand, the creditor that issued the demand can file a winding up petition against your company. This petition can, if it is granted by a judge, lead to the compulsory liquidation of your business.

What is required for a statutory demand?

Creditors can’t just send out statutory demands to prompt immediate payment of any of their debts. They need to satisfy several criteria:

• The debt that are owed must be £750 or greater in value
• The debt must not be secured by assets worth more than the debt itself
• The debt must be agreed upon and not in dispute by your business
• The creditor must not owe any debts to your company

If these conditions are satisfied and the creditor has attempted to recover the debt using other means, they have the right to send a statutory demand to your business requiring payment of the debt within 21 days.

How should you respond?

A statutory payment demand is an incredibly serious letter, and it’s one that your company should never ignore. If you ignore a statutory demand, your creditor can issue a winding up petition against your company to liquidate its assets.

There are several ways to respond to a statutory payment demand. The first is to repay the creditor in full. If your company has sufficient funds and cash flow to do this, it should be your first response to any statutory demands you receive.

If your company lacks the financial resources to pay its creditors, you might be able to negotiate a company voluntary arrangement (CVA) with the creditor. A CVA lets your company repay some or all of its debts over a prearranged time period.

What happens if you ignore a statutory demand?

Statutory demands for payment are usually sent out as the final step in a creditor’s debt recovery process before liquidation. If you receive one, you’re required to respond within 21 days.

Should your company fail to respond to the demand letter within 21 days, the company that sent it can file for a winding-up petition against your company.

This petition will be subject to a High Court hearing. If your company does not reach an arrangement with the creditor prior to the hearing or does not prove the debt is not legitimate, a winding up order against your company will be issued.

A winding up order results in the closure of your company and the liquidation of its assets in order to repay creditors. Because this option results in the closure of your company, it should be avoided by repaying the debt or proposing a CVA.

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