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24 May 2016

Failure to act on statutory demand


3 min

Victorian solicitor found negligent.

Most advisors such as solicitors and accountants should be aware of what a statutory demand is and what the consequences are for failing to act on it within the strict 21-day timeframe. However, it never ceases to amaze how much case law there is in this area!

A recent case in the Supreme Court of Victoria serves as a warning for advisors to act swiftly and provide appropriate advice when a corporate client receives a statutory demand—or they may suffer adverse consequences.

In the matter of Dual Homes Victoria Pty Ltd & Ors v Moores Legal Pty Ltd & Anor [2016] VSC 86 a Victorian solicitor was found negligent for failing to appropriately advise his client of the consequences of non-compliance with a statutory demand, which ultimately led to the winding-up of his client.

The case makes for interesting reading however, it should never have happened, as at all relevant times the client company had available funds to pay the statutory demand amount.

In his decision, Dixon J found the solicitor negligent on several grounds, including:

  • Failing to properly advise his client regarding the process that follows service of a demand, including the legal consequences of not paying the demand, or otherwise compromising it or applying to set the demand aside.

  • Failing to advise his client of the winding-up application that could follow if it failed to pay, compromise or set aside the demand and of the particular provisions of the Corporations Act 2001 that would result in a presumption of insolvency.

  • Failing to appear at the winding-up application hearing resulting from the non-compliance with the demand.

The case highlights not only the critical need to obtain prompt advice when in receipt of a statutory demand, but to seek advice from those with sufficient insolvency expertise.

For those who need a reminder regarding statutory demands, a statutory demand for payment of an outstanding debt gives a company 21 days in which to either:

  1. Pay the amount demanded; or

  2. Reach an agreement with the creditor for payment of the amount demanded; or

  3. Apply to court to set-aside the demand.

When seeking to set-aside a demand, the application must be filed and served before the demand's expiry (i.e. the 21-day period).

Failure to act on one of the above options results in a 'presumption of insolvency' and enables a creditor to apply to court to have a company wound-up.

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