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Owed money by an Australian Company? A Statutory Demand could be the answer.

Over the past year or so, we have assisted in a few cases where disputes have arisen between Australian and Latin American companies. Given that more business than ever is being conducted between the two regions, it is to be expected that more disputes will arise as par the course. In a few cases, we have seen the scenario whereby an Australian company has either entered the Latin American market on its own or in a partnership with a Latin American company and then for different reasons has decided to exit or not continue in the region. Issues arise when significant debts are left owing to trade creditors, with some Australian companies perhaps assuming that Latin American companies will either not have the interest or resources to be able to pursue the debt back to Australia. 

Fortunately, we have had some great success stories in being able to get unfortunate clients’ funds returned to them, in spite of some of the difficulties associated with this. Today we are going to relate one particular case where we had success using a statutory demand and winding-up application on behalf of a South American company to have a debt worth around USD$100,000 repaid. 

What is the relevant law in Australia? 

Insolvency law is covered by statute in Part 5.4 of the Corporations Act 2001(Cth). The law in Australia demands extremely strict and precise compliance with the legislative provisions in the Act and the different timelines involved. Various parts of this legislation describe the process for statutory demands and winding up applications. 

What is a statutory demand?

In simple terms, a statutory demand is a document issued by a creditor that requires a debtor to pay a specified debt within 21 days. The debtor must either pay the debt, make some kind of agreement with the creditor, or instead make an application to the Court to set aside the demand within the 21-day period. If they fail to do one of these three things, then the company will be presumed to be insolvent. With this presumption of insolvency, the creditor is able to commence winding-up proceedings against the debtor company in the relevant state Supreme Court. 

What can the debt be?

A statutory demand can only be issued when a debt is over $2,000, is due and payable, and most importantly, there cannot be any dispute as to the debt itself or quantum.  Simply put, if there is a dispute as to the debt, then a Statutory Demand is not the appropriate legal mechanism to use. 

How is a Statutory Demand created?

It should be stressed that a Statutory Demand is an extremely technical legal document. Even one small error can lead to the Demand being later overturned on a technicality in court. For this reason, we always stress the importance of using lawyers highly experienced in this area of law. In particular, for foreign companies a number of technicalities can enter into play that will likely need to be carefully considered and resolved by an expert. These will change on a case-by-case basis. For example, in this case the debt was in a mixture of different foreign currencies over a period of time where the exchange rate had fluctuated, which required some planning on how to adequately and accurately state the total debt. 

Winding up Process

As stated above, in the event that the statutory demand is not complied with or an agreement is otherwise made, the debtor will be presumed to be insolvent and the trade creditor is able to make an application to the relevant Supreme Court for a winding up order. This is made under sections 459A and 459P of the Corporations Act 2001, and involves preparing a suite of documents to be filed in the Supreme Court and lodged with ASIC, and paying the associated filing fee. 

Can the company owing the debt dispute the winding up application?

It is possible for them to dispute it, however, it is very difficult. For this reason, if a company believes there is actually a dispute to a debt, then it should make an application to this effect within the initial 21-day time period of the statutory demand. Otherwise, case law has shown that a Court will only grant to leave for a Company to raise the argument that the debt was in dispute (as per section 459S of the Act) in very specific circumstances—the Court must be satisfied that the argument the company puts forth is material to proving solvency, i.e., that it will influence the Court’s decision in deciding the company’s solvency. However, this will likely require a deep probing of the company’s financial situation that would in most instances be undesirable to the company (and comes with its own costs and time issues). 

What happened in our case?

After the South American client had unsuccessfully tried to negotiate with the Australian company over a period of around a year or so, we were asked to step in to assist. We decided that the Statutory Demand process would be the most suitable course of action, primarily because we were able to clearly establish and demonstrate that there was no dispute as to the debt or its quantum. When the Australian company ignored the Statutory Demand, we commenced winding up proceedings on behalf of the South American client. Ultimately, we were able to negotiate a payment plan for the outstanding debt, along with an allowance for our client’s costs, outside of Court— a best-case scenario ending. 

Conclusion

Statutory demands are a powerful option for foreign companies to use if they are owed a debt by an Australian company, however, there are a number of caveats attached to this and it is only available in specific circumstances. 

If your company is currently having issues with an Australian company, get in touch with us to discuss different options for debt-recovery. 

Harris Gomez Group is a Common Law firm, with offices in Santiago, Bogotá, and Sydney. We also have legal teams in Peru, Bolivia, Ecuador, Brazil, and Argentina. Over the last 18 years, we have been supporting foreign companies with their growth in Latin America. Many of our clients are technology companies, service providers and engineering companies that focus on the mining, energy and infrastructure markets.

To better understand how we can support your management team in the Region, please contact Cody Mcfarlane at cmm@hgomezgroup.com