A statutory demand is normally the first step that is taken by a creditor in the winding up of a company on the grounds of insolvency. 

The process of serving a statutory demand, and any subsequent winding up proceedings, can be an effective and legitimate process used by creditors to recover amounts owed by a debtor company (company).[1]

The statutory demand is one of the most frequently used (and misused) tools utilized by companies and other persons to obtain payment of debts owed to them by a company. Service of a statutory demand can be the first step towards placing insolvent companies into liquidation.

The consequences for a company that does not respond to the service of a statutory demand can be severe.

One of those consequences is that the company may find itself in the position where it is required to prove solvency before a court, in order to avoid a winding up.

Part 5.3A of the Corporations Act (Act) provides a regime for a company that is insolvent or likely to become insolvent to maximise the chance of the company continuing to trade or a proposal which results in a better return to creditors rather than its immediate liquidation.  Part 5.3A sets out the requirements for the appointment of a voluntary administrator to the distressed company with a view to the company possibly executing a deed of company arrangement (DOCA) with its creditors.

A Supreme Court of New South Wales decision in February 2014 is a timely reminder to creditors to ensure that agreements clearly articulate arrangements where funds are to be held on trust for a specific purpose.  The Court revisited the question of the entitlement to retention funds and competing creditor claims in the matter of National Buildplan Group Pty Ltd (subject to deed of company arrangement)(Buildplan)