The Christmas Statutory Demand: How to Stop Insolvency Notices From Ruining Your Holidays

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You're listening to Explain That by Velocity Legal, the podcast that keeps business owners and professional advisers ahead of the curve in an ever-changing legal landscape.

Welcome to a special holiday edition of Explain That by Velocity Legal.

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Every Christmas has a Grinch, but sometimes it's not green and furry. It's a statutory demand arriving in your mailbox just before the holidays.

While the rest of us are wrapping presents, someone's wrapping up an insolvency notice.

Today I'm joined by Seamus Ryan and Sascha Kenny.

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We'll be talking about how to stop the Grinch from stealing your Christmas, or at least your business's peace of mind, by understanding how statutory demands work and how they work over the holiday shutdown period.

Welcome to the show.

Thanks, Andrew.

Thanks, Andrew.

I'm wearing my special Christmas suit.

0:52
It's magical.

Thank you. I'm still not sure if it's allowed, if it's the done thing to wear a green suit in court.

The jury is out on that one, but we shall see.

Depends how much holiday spirit is being handed out on that day.

Well, thanks for joining us.

1:10
We're going to be talking about statutory demands, and particularly in the context of Christmas, but let's just start with the basics.

I'll start, Seamus, what is a statutory demand?

So a statutory demand is a notice served under the Corporations Act.

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Put simply, a creditor or someone who considers themselves a creditor serves a statutory demand on a debtor, or someone they consider to be a debtor, requiring payment of a debt.

Following service of the statutory demand, there are 21 days in which the recipient has to apply to court to set it aside or pay the debt.

1:49
If they do neither of those things, the party that serves the demand can apply to the court for the company to be wound up.

So it's a pretty powerful tool. Very obviously, if a company's wound up, that's corporate death, the end of the enterprise. So it comes with a very significant sledgehammer blow if you don't treat it seriously.

2:08
And I just want to pick up on one thing you said, "considers themselves to be". I just want to unpack that.

Sure.

What do you mean by "considers themselves to be"?

Well, people serve statutory demands in respect of debts that are disputed.

2:24
It's a ground to set aside a statutory demand if there is a genuine dispute as to the debt, either because, for example, you say that it's not owing or it's not yet owing, or you have an offsetting claim that's larger or a counterclaim that is larger than the amount claimed.

2:40
So that's why I say that it's someone who considers themselves, because all too often these things become contested.

But on face value, the notice is issued and then there's 21 days to do something.

And if nothing's done, then you're saying that the company would be presumed essentially insolvent, and action can be taken on that basis?

3:03
Yeah. And so the recipient can contest the winding up application that follows, but they're very limited in the grounds upon which they can oppose the winding up.

Often they're limited to contesting on the grounds of the solvency of the company, which they need to establish. So it's a significant own goal to miss one.

3:24
Yeah, and I can imagine this 21 days, Sasha, I'll come to you.

I'm thinking about the calendar and I'm thinking about Christmas, and people are away, right?

So what is that the play?

3:39
Is that the strategy?

I prepared a little poem to answer that question, Andrew, which goes towards the night before Christmas and all through the company's registered office, not a creature was stirring, especially not the accountant who was meant to receive the statutory demand.

3:59
So I mean, that is the landscape.

I guess the first thing you would say is that the 21-day statutory demand period differs from, say, the 30 days you might have after receiving a writ or the kinds of timelines that the court uses to determine when a certain court document is due over the holiday period.

4:26
The courts go into a vacation mode. So in Victoria, it's roughly between, I think, 24 December to 9 January, the clock stops.

Sort of a blackout period.

That's right. And the rationale is pretty obvious.

4:41
I mean, many barristers, many judges and the occasional solicitor is on holiday during that time, as are accountants and sorts of people that you would need to engage to get proper instructions to evaluate.

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Is this statutory demand something that can be contested? What steps are available to take?

And the other point is, of course, that often the registered office is the accountant's office.

So if the accountant's away.

They don't always get it.

Yes.

And drawing a little bit on what Seamus was saying, the repercussions of not taking any steps within that 21-day period are so severe.

5:22
But that's not to say that the steps you can take within the 21-day period are straightforward.

So the grounds for setting a statutory demand aside are that you're either able to prove that a genuine dispute exists in relation to the debt, or there's an offsetting claim that exists against the party issuing the demand.

5:47
And there's also a further ground that we'll come to, which is that there is a defect in the form of demand.

So this is not by any means as simple as asserting it in a reply email.

This is effectively commencing an application to set aside the statutory demand, producing evidence in the form of a supporting affidavit.

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And all of that evidence that you produce will eventually be the evidence that you rely on in a subsequent proceeding if it's contested.

So you can imagine how stressful that would be if it's Christmas Eve or Boxing Day, you're sitting down to watch the Boxing Day Test and suddenly you're thinking, well, was this debt calculated appropriately?

6:36
Was it actually due? Was the money advanced? All these questions that might be easy in June are very difficult in December when everyone's in Fiji.

Yeah, absolutely. Stress as well involved at that time.

6:52
And just to recap that consequence of that 21 days, essentially the play is, let's say Monday, the 22nd of December, notice is issued, a lot of offices closed already, roll through to whatever that works out to be, 10th of January-ish.

7:11
And then they can take that action.

There's one small point, and that is that it needs to be served first.

So there's a statutory presumption that it arrives on the seventh working day if it's sent by post.

But then there are other ways. Someone can, for example, go and deliver it at the premises and what have you.

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So sometimes the date upon which it's served is an issue.

We've been involved in a matter once where everyone relied on the statutory presumption of seven days, and then it emerged later that the accountant who received it had called the creditor to ask what it was about much earlier.

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And so the 21 days had actually expired by the time the application was brought, and they were shut out.

So it's usually better to err on the side of caution and assume you have fewer days than you have.

Yeah. So it's a pretty strict 21.

Oh, absolutely strict.

If you serve it late, as in you commence the proceeding but serve it a day late, you're shut out.

8:07
You've got to serve it within.

And we should say it's obviously no defence for a company to say they haven't read the statutory demand.

So I believe it's seven days, is the period?

It's seven working days.

8:24
It's presumed to be served if it's been posted by ordinary post to the company's registered office.

So yeah, just a warning for any directors hoping to perhaps get out of a statutory demand that way. It won't do you any good.

8:40
So there's obviously a lot of consequences from a litigation, solvency perspective. It's about strategy, just like any other bit of legal affairs, about strategy.

So you might think one strategy is perhaps, okay, well, if it's 21 days, then let's maximise the time where people aren't really doing anything.

9:03
But it sounds like there's possibly some dangers in doing that, which we're going to unpack here.

Yeah, that's right.

There's one case we'll focus on in particular.

The short point is that there's a number of cases that talk about the practice, and it isn't in dispute that the practice is legitimate and there's nothing you can do about the Christmas period unless there's a change to the legislation, as there was during COVID.

9:26
But there is cynicism about the practice that's expressed in some cases, and there's one that Sasha will commence the discussion about.

But the short point is it's a case where there were other issues. It was read against the party serving the demand that they tried to exploit that period.

9:46
So I'll let Sasha open the discussion on the case.

The case that Seamus was referring to is called Three Pillars Lynbrook Pty Ltd. It's a Victorian Supreme Court case, and the facts, I won't go too much into the facts.

It's sufficient to say that four different creditors issued four statutory demands to a company on 24 December.

10:06
So it's a beautiful Christmas present.

Yeah, the day before Christmas.

I'm not sure if they're wrapped. It doesn't say that in the fact set, but what it does say is that one of the companies that received that statutory demand identified what they said was a defect.

Namely, they said that there was an ambiguity in the description of the debt and there was an ambiguity in how the debt had been calculated.

10:43
What then happened was they wrote to the issuer of that statutory demand, I believe it was in early January, around the 7 or 8 January mark.

And the issuer never replied.

That issuer then relied on the company's lack of substantive response to the statutory demand to found the commencement of a winding up application.

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And the question for the court was, was a substantial injustice caused to the recipient of that statutory demand by way of that defect?

The fact that there was nobody there to answer the query about.

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Well, yeah, you asked the question, no one's there, no one's responding.

So it put the debtor, or the recipient of the notice, at a disadvantage in terms of their ability to deal with the defect, and that counted against the creditor.

Ultimately the statutory demand was set aside, and there were some really neat quotes in there that I think tell you what Associate Justice Matthews' attitude to the practice generally was.

11:52
One of them is, "Like many judicial officers, I'm unenthused by statutory demands being served at a time designed to coincide with the Christmas New Year period where many offices are unattended", which paints a particular picture.

A statutory demand served in the Christmas New Year period is almost destined not to come to the attention of the debtor company in a prompt manner, and it is also quite likely that the company's legal advisers may also be on leave at the time.

12:18
In that context, the statutory demand, which does not clearly set out the nature of the debt, the source of the legal obligation to pay it and the manner of its calculation, places the recipient of the demand in an even more difficult situation, as they realistically have much less than the 21-day period in which to deal with the demand, get advice and decide whether and on what basis to make an application to set it aside.

12:39
So this is an example where they've adopted the practice, the court's more or less made a finding that they've done that cynically to exploit the Christmas period.

Yes, and it's backfired.

Yes.

And ultimately, had it provided perhaps enough information.

13:02
Yeah, there's a defect, and the existence of the defect or the effect of the defect on the recipient was amplified by the fact that they're not saying you can't do it, but if you're going to do it, make sure it is unambiguous.

It is completely explained.

13:24
Yeah, there is nothing that could be queried about it.

It seems to say that if there's a defect, the defect is effectively amplified by an inability to deal with the defect.

So the substantial injustice is magnified by the inability to deal with the defect.

So it's one of these cases that gives a warning to creditors as well as to debtors about this practice.

13:44
There have always been jokes in the legal profession about serving statutory demands at this time to get a precise advantage.

But certainly courts appear to be somewhat wearied by it, and it may be that it leaves you at a disadvantage as well.

And the consequences, correct me if I'm wrong, would be that if that's set aside, you've sort of got to start again from scratch.

14:00
Really on, okay, now we're going to issue you a new notice.

Yeah, that could be many weeks, if not months, later.

Certainly a time delay, but also cost consequences.

So a party that, I mean, this appears to have been a hard-fought application and each party would have spent quite a bit of money on it, and then there would have been a cost award.

14:18
So in addition to the delay in pursuing the debt, it can have adverse consequences as well.

So, I mean, there are some lessons in it for both creditors and for debtors.

In terms of creditors, it's a reminder that statutory demands aren't to be used as part of a game-playing strategy to recover debts.

14:39
They shouldn't be served flippantly.

They should be drafted with precision.

Trying to exploit the Christmas period can backfire.

And for debtors, it's a reminder that make sure your registered office is up to date, make sure there's somebody there manning it, and that things will be received even if it is during that period.

15:01
Act immediately if you receive them, and if one is received, make sure that the solicitor can help on a tight time frame.

Because if it's received over that period, you've got to assume that you have a bit less time than you think.

And you might need to get an application prepared, filed and served in a short time, within a very short time.

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And the consequences of not doing it are very high.

Plaintiffs, or creditors, always face a choice about whether they're going to commence proceedings in a court or issue a statutory demand.

And the choice will often seem much more attractive to go down the statutory demand route because it's cheaper.

15:45
It instantly puts the debtor on notice that they need to respond.

But if there is any ambiguity in that debt, then if there's, say, a dispute about how interest is calculated or when the date for the first repayment arose, that can be fatal to the statutory demand.

16:06
And I think the case we spoke about illustrates how that can be amplified even further over the Christmas period.

You have to have all your ducks in a row if you're going to do it over a period that everyone's on holiday.

16:22
This case maybe stands for the principle that the court might take a particularly dim view.

A bit of a dim view.

And if there's a way out, they may opt to enforce that essentially.

Well, it's fascinating.

I mean, I've learned the practice of issuing statutory demands over the holiday period.

16:40
As you said, the clock doesn't stop during that period. The days don't stop.

But potentially, if those notices aren't done correctly, then there could be ways that a court would essentially set those aside.

Seamus and Sascha, I wanted to thank you both for being part of this discussion.

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In conclusion, what I've learned is that statutory demands don't take holidays like the rest of us, but potentially planning ahead and engaging lawyers can keep your business out of court, either in the Christmas period or in the new year.

If you're worried about statutory demands or thinking of issuing one, I'd recommend you reach out to our disputes team.

17:18
I've been told that they can help stop the legal Grinch before it ruins your Christmas.

Thanks, Andrew.

Thanks for having us, Andrew.

Thank you.