In business it is not uncommon for a director of a company to be owed money by that company.
If the commercial relationship breaks down, the director may think it is an option to serve a creditor’s statutory demand on the debtor company.
However, recent court decisions demonstrate that issuing a creditor’s statutory demand is not a sure fire method of obtaining payment where the director is owed the debt personally or is a director of both the creditor and debtor companies.
Cases where statutory demands have been successfully challenged
In the first decision, the Supreme Court of New South Wales considered a statutory demand issued by a creditor company against a debtor company, where a common director of both companies had authorised the issuing of the demand.
The Court considered that the director’s position as director of both the creditor and debtor companies made it impossible for the director to comply with the general law and statutory duties owed to both companies in relation to the demand. The director was held to have been in a position of conflict when authorising the issuing of the demand.
The Court said the statutory demand was an abuse of process and set it aside.
In a more recent Queensland decision, a director of a debtor company issued a statutory demand in respect of a loan given by the director personally to the debtor company. There were only two directors of the debtor company.
The Court noted that, in pursuing the loan, the director was not necessarily in conflict with their duties as a director. Nevertheless, the demand was set aside as an abuse of process.
This was because there were only two directors of the debtor company and the other director of the debtor company lacked authority to apply on behalf of the debtor company to set aside the statutory demand. As such, there was no way the company could validly challenge the demand.
The statutory demand procedure was held to be inappropriate in these circumstances, especially when other remedies under the Corporations Act were available to the creditor director.
Carefully consider the options
These cases show how recovering debts from a company as a director can be a complicated process that needs to be carefully considered.
The procedure may not be as straightforward as simply issuing a statutory demand.
If you would like more information about these issues, please contact Graham Roberts on +61 7 3231 2404 or another member of our litigation and dispute resolution team.