Statutory Demands and Proving Insolvency when Winding Up a Company

The appointment of a Liquidator to wind up a Company that is unable to pay its debts is a significant enforcement option and equivalent with Bankruptcy for individuals.

The appointment of a Liquidator means that all assets of the Company come under the control of the Liquidator including any loans owing from Directors or Shareholders which would inevitably be called in by the Liquidator.

Accordingly, wherever possible a debtor Company will usually try to avoid the appointment of a Liquidator. As such, the taking of any steps towards the appointment of a Liquidator will often be enough to prompt a debtor Company to immediately prioritise payment of the debt.

An application for appointment of a Liquidator to wind up a Company must be made in relation to “an act of insolvency” committed by the debtor Company. The failure by a Company to comply with a Statutory Demand for Payment issued under Section 459E of the Corporations Act will constitute an “act of insolvency” in reliance upon which a subsequent application to wind up the Company in liquidation may be made.

Where a Company owes money to a party (“the Creditor”) the Creditor may serve a Statutory Demand for Payment on the Company. A Statutory Demand for Payment may be issued even when the debt to which it relates is not an existing Judgment debt.

The effect of a Statutory Demand for Payment is that the Company will be deemed to have committed an “act of insolvency” if the Company does not within 21 days of receiving the Statutory Demand:

  1. pay the debt,
  2. enter into an arrangement for payment satisfactory to the Creditor, or
  3. make an application to the Supreme Court for an Order setting aside the Statutory Demand for Payment.

The service of a Statutory Demand for Payment is a useful process in debt collection as:

  1. there is no Court or other filing fee payable in connection with the issue of the demand, and
  2. unless the Company has no assets or otherwise can not avoid liquidation, the Company will usually try to pay or make a payment arrangement in order to avoid committing an “act of insolvency” that might then lead to the liquidation of the Company.

However, if the debt is disputed and the Company successfully makes an application to the Court to set aside the Statutory Demand for Payment, then the Creditor will likely be ordered to pay the Company’s costs of those Court proceedings.

Whilst in most instances where a Statutory Demand is issued in relation to a debt that a Company subsequently disputes or asserts an offsetting claim in relation to, a letter will be received from the Company’s Solicitors warning the Creditor that an application to set aside the Statutory Demand will be made if the Statutory Demand is not withdrawn, in some instances the Company will instead apply directly to the Supreme Court without warning. In these circumstances, there is a risk that the Creditor will be ordered to pay legal costs of the application without any opportunity to withdraw the Statutory Demand.

Whilst the instances where a Company would make an application to the Supreme Court to set aside a Statutory Demand without prior warning are few, because there is some risk of that occurring, it is necessary and appropriate that each Creditor evaluate these matters before a Statutory Demand for Payment is served in relation to a debt.

In general, we recommend the use of Statutory Demands for Payment to compel Companies to stop ignoring undisputed debts and, in particular, Judgment debts.

By Sam Roberts,
Managing Director, Accredited Specialist (Commercial Litigation)