The principal ground that is available to a creditor to make an application to wind up a company in insolvency is that the company is insolvent. The Commonwealth government legislated to incorporate into the Corporations Act 2001 (Cth) presumptions of company insolvency upon the occurrence of particular events. The most widely utilised and effective event to prove company insolvency is the failure to comply with a creditor’s statutory demand for payment of debt.
What is the most effective way to prove company insolvency as the basis of a winding
If a company is unable to pay its debts as they become due and payable, creditors can apply to the Court for an order that the company be wound up on the basis of insolvency. Applications to wind up an insolvent company are made pursuant to section 459P of the Corporations Act 2001 (Cth) (the Act) and the Court has the power to make an order to wind up a company pursuant to section 459A. Applications for winding up a company in insolvency must be based on the sole ground that the company is insolvent. However, proving insolvency (i.e. that a company is unable to pay its debts when they become due and payable) is an onerous task particularly in light of the evidentiary requirements of creditors. In recognition of this difficulty faced by creditors in proving insolvency, section 459C of the Act creates presumptions of insolvency in favour of creditors that can be relied upon as grounds for a wind-up application against a company. One of the most frequently relied upon and effective means of facilitating a presumption of insolvency is the issue of a statutory demand (see section 459C (2)(a) of the Act).
A statutory demand is a demand made by a creditor to a debtor for a debt that is due and payable. The requirements of a statutory demand are strict and are set out in section 459E of the Act.
The main requirements include:
- The debt be for the “statutory minimum”, which is currently $2,000.00, and need not be a judgment debt (as opposed to a bankruptcy notice which requires a judgment debt);
- The demand must specify the debt and its amount;
- The demand must require a company to pay the debt (or otherwise provide security) within 21 days of service;
- The demand must be in writing;
- The demand must be in the prescribed form (Form 509H – Corporations Regulations 2001 (Cth) Schedule 2);
- The demand must be signed by or on behalf of the creditor (i.e. their legal representative);
- If the debt claimed is other than a judgment debt, the demand must be accompanied by an affidavit.
Service of a statutory demand
An essential requirement of the perfect issue of a statutory demand is that it is served on the debtor. The date for service is critical because it is from this date that the debtor must strictly comply with the 21 day period to either pay the debt (otherwise give security for the debt) or make an application to have the statutory demand set aside.
The service requirement for documents under the Act are set out in section 109X. Pursuant to this section a document (which includes a statutory demand) can be served on a company in the following ways:
- Leaving it at or posting the document to the company’s registered office; or
- Delivering a copy of the document personally to a director of a company.
If a statutory demand is served by post the date for service is presumed to be have been effected at which time a letter would have been received in the ordinary course of post: see section 29(1) of the Acts Interpretation Act 1901 (Cth). Further, pursuant to section 160 of the Evidence Act 1995 (Cth) the receipt of the document in the “ordinary course of post” is presumed to have occurred on the fourth working day after it was posted. If there is proof that the statutory demand was received within these four working days, then it is the actual date of receipt rather than the fourth working day.
The result of failing to comply with a statutory demand
If a company does not pay, secure or compound the demanded debt within 21 days of service, a company will be presumed to be insolvent and therefore the creditor will have grounds to make an application to wind up a company. A company may also, within the 21 day period, apply to the Court to have the statutory demand set aside pursuant to section 459F(1) of the Act.
Alternate presumptions of insolvency
Although a statutory demand is the most widely utilised and effective way of proving
company insolvency, section 459C the Act also outlines other ways that a company will be
presumed to be insolvent. These include:
- Execution of process returned wholly or partially unsatisfied;
- Appointment of a receiver, either under the power of an instrument or by court order;
- The possession or control by a person of secured property of a company, or a person appointed for this purpose.
Proving insolvency can be a difficult process, therefore the presumptions of company insolvency have the legislative purpose of assisting creditors who intend to make an application to wind up a company. The most effective way of proving company insolvency is the issue of and failure to comply with a statutory demand.