Debt Collection: Difference Between Statutory Demands and Court Initiated Claims

Claims

When a person or a business is owed a debt of at least $4,000 by a company, there are two legal options to escalate the dispute if the debt remains unpaid: issue a creditor’s statutory demand or issue court proceedings.

Statutory Demands

Issued under the Corporations Act, statutory demands are essentially a notice to the debtor company that it is required to pay the debt within 21 days or else it is presumed to be insolvent.  The debtor has two options in response to a statutory demand: either do nothing or make an application to the Court to set it aside.

The debtor can apply to set aside the statutory demand, but it must apply to the Court (such as the Federal Court or a state Supreme Court) within 21 days after the demand is served on it. The debtor must then satisfy the Court that there is a genuine dispute about the debt, that it has an offsetting claim, or that there is some other reason to set the demand aside.  This is done by providing affidavits (sworn on oath) giving evidence to satisfy the Court that a ‘genuine dispute exists’.

All that is required in order to evidence a ‘genuine dispute’ is that the debtor has a ‘plausible contention requiring investigation’, but it cannot be ‘spurious, hypothetical, illusory or misconceived’ (i.e. not fanciful or far-fetched).

If the debtor does not contest the statutory demand or fails in its application to set it aside, then the debtor is presumed to be insolvent.  In which case, a creditor can (but is not required to) take action to wind-up the debtor company.

Costs & Benefits

The main downside to the statutory demand is that the burden of proof on the debtor is not very high, so if there is any chance of a dispute over the “debt”, the debtor might be able to have the statutory demand set aside (especially if the debtor is willing to perjure itself by filing dishonest affidavit material to fabricate a defence).  If the statutory demand is set aside, then the debtor is likely to succeed in its application and ask the Court for the creditor to pay the costs of the application (the unsuccessful party is usually required to pay about ½ to ⅔ of the successful party’s actual costs).

If the debtor does not make an application to set the statutory demand aside and the creditor decides not to take action to wind up the debtor, then the other disadvantage is that there might be two potential unintended consequences:

1. as the debtor will be presumed to be insolvent, any other creditor could immediately apply to wind-up the debtor if they found out about the statutory demand, which could result in the appointment of a liquidator.  The creditor would then have to compete as an unsecured creditor against other potentially secured and unsecured creditors; and
2. if the statutory demand is not set aside or at some time in the process the debtor enters into negotiations with the creditor and wishes to make a payment, then any payment made to the creditor could potentially be treated as a “preference payment” later on, especially if a liquidator subsequently alleges that the payment was made whilst the debtor was insolvent.  In which case, the liquidator might then try to recover the preference payment from the creditor.

Given the risks in lengthy litigation against potentially impecunious companies, the main benefit of statutory demands is that a creditor can usually avoid the costs and delays of issuing Court proceedings in order to get a result much sooner.

Court Initiated Claims

The alternative course of action would be to issue proceedings in one of the following Courts:

1. Supreme Court of Queensland: for claims more than $750,000;
2. District Court of Queensland: for claims between $150,000 and $750,000;
3. Magistrates Court of Queensland: for claims less than $150,000; or
4. Queensland Civil & Administrative Tribunal (QCAT): for certain claims up to $25,000.

If you issue a claim in one of the above Courts, the debtor will have 28 days to file and serve a defence. After that, you will have to go through the usual litigation process to get to a trial, unless you can quickly bring the matter to a head by making an application for summary judgment.

An application for summary judgment is a way to short-circuit the normally lengthy Court process by applying to the Court to give you immediate judgment against the debtor, which is only given if you can establish that the debtor has no real prospects of succeeding in its defence.  However, as with a statutory demand, there is nothing (at least initially) stopping the debtor from providing questionable or dishonest evidence to resist the application and make out that it has a defence.

Costs & Benefits

The main disadvantage with issuing Court proceedings is that it puts the onus on the creditor to prove the case and it may take longer and be more costly to get to the point of bringing the matter to a head.

The benefit of going through the Court initiated claim is that a creditor can avoid the risks associated with potential insolvency of the debtor, the potential for other creditors joining in to wind-up the debtor, or having a liquidator trying to recover payment of all or part of the debt as “preference payments”.

Conclusion

Creditors must be aware that a creditor’s statutory demand can only be used when it is for a debt that is due and owing, over which there is no genuine dispute.

The preferred course of action for a creditor will depend on many factors, including:

1. the urgency for the creditor to get payment of the debt;
2. whether the debtor has or may soon have the necessary funds to pay the debt, or at least enter into a payment plan to resolve the claim; and
3. the extent to which it is necessary to take action that would create as much nuisance as possible for the debtor, to prioritise the creditor’s debt as one of the debts that the debtor would like to pay-off, sooner rather than later (as opposed to other potential unsecured creditors).

Statutory demands are ideal for creditors who wish to place maximum pressure on debtor companies in the shortest period of time. However, creditors must appreciate that if a debtor wishes to buy time then they can make a Court application to set aside the statutory demand, providing that they can satisfy the Court that they have an arguable defence to the claim.