Legal blogs often look at the impact of the decisions in court cases on how people do business. As commercial lawyers we try and steer our clients clear of court and the eye-watering costs that litigation involves. Today I want to share some recent (real life) experiences that we have had with statutory demands. A statutory demand is a tool available under the Companies Act to allow a creditor to apply to have a company wound up if it doesn’t pay an undisputed bill.
For creditors it seems like a relatively cheap option – get your lawyer to prepare a short statutory demand, serve it on the company, wait for 21 days and if no payment is forthcoming, head off to court to get the debtor wound up.
The following recent examples illustrate some of the problems with statutory demands for creditors.
Scenario 1 – Our client agreed to buy out his 50% shareholder in a company they own together. The purchase price was to be paid in instalments over 12 months. After buying the shares our client discovered that the vendor had been defrauding the company. So he stopped making payments. The vendor issued a statutory demand for payment. We pointed out to the vendor’s lawyer that there was a genuine dispute and that the demand should be withdrawn. The statutory demand was withdrawn and district court proceedings were commenced by the vendor. Over 18 months later our client has still not paid a dollar to the vendor.
Scenario 2 – our client was owed money for services provided to two related companies in Australia. One was registered in New South Wales and the other in Victoria. Issue # 1 was that our client had to instruct separate law firms in each state. Both firms prepared statutory demands and served them on the debtors. Issue #2 was that the debtor companies failed to respond to the demands (or raise any issues) except by issuing their own proceedings to have the statutory demands set aside on the basis that the bills where disputed. Our client then had the problem of defending these claims (and spending significantly more money chasing the debts than it was owed). Our client settled the claim for 10 cents in the dollar rather than continue the fight. The amount recovered only just covered its costs.
Scenario 3 – Our client issued a statutory demand to a slow-paying customer. On day 21 the debtor paid the debt in full. So far, so good. 14 months later our client received a letter from the debtor’s liquidator demanding repayment of the money in full. Under the Companies Act any amount paid by a company within 6 months of the appointment of a liquidator is presumed to be a voidable payment (and has to be repaid for the benefit of all creditors). As you can imagine, our client was not happy.
What’s the lesson from all of these stories? In all three cases the debtor companies could have avoided the whole issue of non-payment. In scenario 1, the vendor could have protected its position by holding onto the shares (or taking security) until it got paid in full. In scenario 2 our client should have stopped supplying services when the debt went overdue. In scenario 3, our client was a subcontractor who should have dealt directly with the principal instead of the head contractor. All three companies have learnt expensive lessons. We hope that you can learn from their experiences too.