By Anica Cunanan, Solicitor at Matthews Folbigg in the Insolvency, Restructuring and Debt Recovery Group
Debt collection is winding up as interest rates increase and margins are squeezed. Generally, creditors want a debt collection process which will recover the maximum amount of any debt for the least amount of work and cost.
Well, what debt collection short cuts are there? When reviewing your debt collection process, what other options exist besides litigation?
Debt collection should not be a “one size, fits all.” When formulating or reviewing your debt collection processes, make sure you understand the advantages and disadvantages of each debt collection avenue and tailor this to particular debt collection situation. A good debt collection system will factor in multiple issues such as the nature and amount of the debt, as well as the circumstances attitude and likely response of the debtor company. A good debt collection system will help you determine which debt collection avenue is appropriate.
One important debt collection short cut that should be considered for company debtors is a creditor’s statutory demand.
What is a statutory demand?
A statutory demand is a shortcut to debt collection for corporate debtors. It is a debt collection strategy that says ‘there is no genuine reason you can’t pay my debt so you must be insolvent’. Such a debt collection demand puts a significant amount of pressure on the debtor company for payment. The alternatives are to pay the debt, or to apply within a very short period – only 21 days – to the Supreme Court or Federal Court of Australia to set aside the demand. If this is not done then the debtor company is presumed to be insolvent and any creditor may apply to court to wind up the debtor. As a debt collection tool this can be powerful. The statutory threshold for a demand to $4,000, which can make debt collection from companies easier in some ways than from personal debtors (where a bankruptcy notice threshold is $10,000).
Do you need a judgment to issue a statutory demand?
Debt collection by a statutory demand can be a useful debt collection shortcut as it is not necessary to have a judgment, or even to have commenced proceedings. If a debtor company applies to the Court to set aside the demand, the onus is then on the debtor company to establish that there is a ‘genuine dispute’ about the debt.
Although a judgment is not required, it is also possible to use a statutory demand in debt collection after a judgment has been obtained, which can make it harder for a debtor to establish any ‘genuine dispute’.
Many creditors do not consider issuing a statutory demand at the beginning of their debt collection process, but rather after the creditor has already obtained judgment against the debtor company, that is, at the end of the debt collection process. In the right circumstances however, this debt collection avenue can be a powerful weapon against recalcitrant debtors and is well worth considering at the outset of the debt collection process.
Compliance by the Debtor Company
Once the statutory demand has been served on the Company’s registered office, the debtor company has a period of 21 days from the date of service to comply with the demand, by:
- Paying the amount in the Demand;
- Reaching an agreement with the Creditor regarding the debt; or
- Applying to Court to set aside the Demand.
With Great Debt Collection Power Comes Great Debt Collection Responsibility
Debt collection by statutory demand is a powerful tool. However it is important to understand that it is only useful in debt collection matters where there is no dispute about the debt – ideally where the debtor has acknowledged liability and has just failed to pay. This is because debt collection by short cut statutory demand comes at a cost. That cost is that the bar to set aside a statutory demand is relatively low. If a debtor establishes that there is a ‘genuine dispute’ the Court will not decide who is right or wrong about the issue, but will set aside the statutory demand, leaving the creditor to go about debt collection the ‘long way’ commencing proceedings and obtaining a judgment in respect of their debt.
For debt collection in small debts this can be significant, because in setting aside a statutory demand the Court is likely to order costs against the creditor, which may equal or be more than the amount of the debt. Debt collection by statutory demand is therefore a strategic short cut to use after you have considered all the relevant circumstances. Like the surgeon’s knife debt collection using a statutory demand is a powerful but dangerous tool to be used with skill and to operate with precision.
All in all a statutory demand is definitely an option that should be considered at an early stage of a creditor’s debt collection process!
