Navigating Statutory Demands in Australia: A Guide for Debtor Companies

Facing a statutory demand can be a daunting experience for any company. In Australia, a statutory demand, issued by a creditor, compels a debtor company to pay an owed debt. Ignoring this demand may lead to severe consequences like a winding-up application under the assumption of insolvency. However, there are strategic ways to counter such demands.

What Constitutes a Genuine Dispute?

The concept of a 'genuine dispute' is crucial in challenging a statutory demand. This term was defined in the landmark case Eyota Pty Ltd v Hanave Pty Ltd (1994) as a dispute requiring "plausible contention requiring investigation." It means the dispute should be real and substantial, not hypothetical or artificial. The courts require a balance of probabilities to establish this, and any arguable case against the debt may suffice.

In Creata (Aust) Pty Ltd v Faull (2017), the court clarified that an applicant need not provide a fully evidenced claim but merely enough to demonstrate a genuine dispute or an offsetting claim. This legal threshold is intentionally set low to ensure fairness in these proceedings.

Scenarios for a Genuine Dispute

A genuine dispute can arise in various situations:

• Existence of Debt: Questions over the actual existence or ownership of the alleged debt.
• Concluded Agreement: Disputes about the binding nature or completion of an agreement.
• Contract Interpretation: Differing interpretations of a contract's terms.
• Quality of Services: Issues regarding the provision of services without due care or at all.
• Ambiguous Court Judgments: Unclear terms in a judgment or order.
• Pending Appeals: Situations where an appeal against a judgment is pending.

The Role of Offsetting Claims

An offsetting claim, under section 459H(1)(b) of the Corporations Act, is another ground to contest a statutory demand. This could be a counterclaim, set-off, or cross-demand. The essence of an offsetting claim is to reduce or nullify the debt amount in the statutory demand. The claim must be genuine, quantifiable, and not necessarily related to the transaction of the debt.

Other Grounds for Disputing Statutory Demands

Apart from genuine disputes and offsetting claims, a company can challenge a statutory demand based on substantial defects in the demand's form under section 459J(1)(a). These defects should be significantly unjust, like missing signatures, incorrect details, or improper affidavits.

The Process of Disputing a Statutory Demand

To dispute a statutory demand, a company must file an application and supporting affidavit in a State Supreme Court or the Federal Court. This affidavit should detail the basis of the genuine dispute or offsetting claim and include relevant documents. Additional evidence can be filed later, provided it aligns with the initial affidavit's arguments.

Outcomes of Disputing a Statutory Demand

Successful applications may result in the court setting aside or varying the statutory demand. If the amended debt is below $4,000, the demand might be entirely set aside. Conversely, a failed application could extend the compliance timeframe by seven days.

Connect with us at Allied Legal on 03 8691 3111 or drop us an email at hello@alliedlegal.com.au to discuss how we can assist you in handling a statutory demand.

The insights presented in this article are derived from ‘Received a statutory demand? Consider these three proven grounds to dispute the debt’ published to Mondaq by Toby Boys, Tom Goodwin and Thao Nguyen on 24 April 2023.