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.

The statutory demand, however, is often used (or threatened) by creditors in an inappropriate way to place pressure on solvent companies to pay debts about which there is dispute or offsetting claims.  In these circumstances, there are mechanisms whereby the statutory demand can be set aside, and the party that served the statutory demand ordered to pay costs.

So what is a statutory demand, and what should you do if your company is served with one?

What is a statutory demand?

A statutory demand is a demand made under section 459G of the Corporations Act 2001 (Corporations Act). The statutory demand must be in a prescribed form and accompanied either by an affidavit or a copy of a judgement from a court, which can be the Magistrates Court, District Court or Supreme Court.

The statutory demand procedure can be used for only certain types of debts. The debt must be:

  • for an amount of $2,000 or more; and
  • for a liquidated sum of money that is immediately due and payable at the date of the statutory demand.

A statutory demand can be served where the company has more than one debt owing to the creditor that total $2,000 or more.

A contingent debt, which relies on something else taking place, cannot be the subject of a statutory demand.

The statutory demand should not be used where:

  • there is a genuine dispute about the debt;
  • you have an off-setting claim; and
  • it is being used to recover a debt from a company that is clearly solvent.

Setting aside a statutory demand

If your company is served with a statutory demand, then you must within 21 days either pay the debt or made make an application to either the Supreme Court or Federal Court to have the statutory demand set aside.

The courts have the power to extend the time for making the application, but only if the application to extend time is made before 21 days has passed.

There are a number of grounds upon which the court will set aside a statutory demand. These are:

  • there is a genuine dispute between the parties as to the existence of the debt;
  • there is an off-setting claim;
  • there is a defect in the demand, and because of that defect substantial injustice will be caused unless the demand is set aside; or
  • there is some other reason (which only arises in unusual situations).

The statutory demand is itself a prescribed form. For the statutory demand to be valid it must:

  • be in the prescribed form (Form 509H);
  • specify the debt and the amount claimed;
  • be signed on behalf of the creditor or the creditor’s solicitor;
  • specify an address for service in the state or territory in which the demand is served; and
  • be accompanied by an affidavit from the creditor, or if there is a judgment of the court, a copy of the judgment.

What happens after 21 days if no action is taken?

If your company fails to comply with a statutory demand, then the creditor may make an application to wind up the company.

In opposing a winding up application, a company may not rely on any matters that could have been used to set aside the statutory demand. For example, a court will not consider whether the debt was disputed, or whether the statutory demand was defective for any other reason that may have been raised in an application to set aside the statutory demand.

The consequence of this is that in order to prevent the winding up of the company by the court, the company may be required to prove to the court that it is solvent. This may involve putting into evidence the company’s balance sheet and financial statements

Can the creditor withdraw the statutory demand?

It may be possible to persuade the creditor to withdraw the statutory demand. To be effective, the statutory demand must be unequivocally withdrawn in writing. If the statutory demand is not withdrawn in those terms it remains in force. Care must be taken, however, for if the 21 day period expires while the withdrawal of the statutory demand is being negotiated, then the company’s options are very limited.

What to do next

If served with a statutory demand, you should contact your legal representatives immediately to explore whether there may be grounds for having it set aside. 

If you do not take steps in response the consequences could be extremely serious.  Early intervention is best to persuade the creditor to unequivocally withdraw the statutory demand in writing.  If, however, the 21 day period is shortly to expire, it may be necessary to make an application to the court to have the statutory demand set aside, in order to preserve your company’s rights.