Failure to comply with a statutory demand can have serious consequences for a company.  Failure to properly advise on a statutory demand can also have serious consequences for a solicitor.  Dixon J, in Dual Homes Pty Ltd v Moores Legal Pty Ltd and Anor, provides a timely reminder of the consequences that can flow from a failure to take proper action in response to a statutory demand.

In Dual Homes Pty Ltd v Moores Legal Pty Ltd & Anor¹ a solicitor’s client (Debtor) was served with a statutory demand.  In response, the solicitor did not take appropriate action to seek to have the demand set aside within the required time.  It was only following the expiry of the 21 day period that the solicitor filed an application to set aside the statutory demand which was subsequently withdrawn.  Oddly, a further statutory demand was served upon the Debtor for the same debt.  Again, the 21 day period expired at which time a winding up application was filed and a winding up order was made and liquidator appointed.

To make matters worse for the Debtor’s solicitor, not only had the time limits been breached, but the Debtor was solvent throughout the entire process and could have paid the debt.  Ultimately, the Debtor had the liquidation terminated and as a result of the losses suffered, the Debtor was awarded damages in the sum of $585,084.52.

Helpfully, the case provides a useful summary for solicitors and their clients about the matters that ought to be considered when a statutory demand is served and the importance of timing:

1. The case provides a reminder that the time period for compliance with a statutory demand cannot be extended and that after the expiry of 21 day, the company is taken to have failed to comply with the demand and deemed insolvent.  In such circumstances, action ought to be taken within that time period to file any application to set aside within that 21 day period if there is a genuine dispute about the debt or other available grounds.²
2. If any settlement negotiations are undertaken or it is alleged that there is an offsetting debt, it is crucial that any offset or partial payment reduces the statutory demand amount below the $2,000.00 threshold.³
3. For solicitors, the judgment makes it abundantly clear that when advising clients regarding statutory demands, at a minimum, the following issues ought to be addressed:⁴

• The process that follows the serving of a statutory demand and legal consequences if it is not paid, compromised, or set aside.
• That any payment or compromise must be completed before the period set by the demand expires and if negotiations are unsuccessful, a set aside application must be filed before the 21 days expires.  On this point, it is also important to note the judgment of Mossop AsJ in  Adhesive Pro Pty Ltd v Blackrock Supplies Pty Ltd⁵ which makes it clear that a sealed application to have the statutory demand set aside must be served – an unsealed copy is not sufficient. 
• That any payment or compromise must, at a minimum, reduce any remaining debt below $2,000.00. 
• If the settlement discussions or set aside applicant failed, the company should be made aware of the consequences of the presumption of insolvency and that it will be required to prove its solvency if order to avoid a winding up order.  In doing so, the company should be advised of the estimated expenses and consequences of failure.