If your company receives a statutory demand, you should promptly confirm when it was served, review the demand and the underlying debt, and decide whether to comply with it or apply to have it set aside. Under the Corporations Act 2001 (Cth), a company has 21 days after service to comply with the demand or, where grounds exist, apply to have it set aside.
Missing this period can have significant consequences, including a presumption of insolvency that a creditor may rely on in winding-up proceedings. Because the timeframe is strict, directors should not treat a statutory demand as an ordinary debt collection notice.
What Receiving a Statutory Demand Means for Your Company
A creditor’s statutory demand is a formal demand under section 459E of the Corporations Act 2001 (Cth). It requires a company to pay a debt that is due and payable, or secure or compound the amount to the creditor’s reasonable satisfaction, within the statutory period.
According to the Federal Court of Australia’s guidance on statutory demands, the debt or total debts must be at least $4,000. The demand must also meet requirements including being in writing, using the prescribed Form 509H and being signed by or on behalf of the creditor. Where the debt is not a judgment debt, the demand must be accompanied by an affidavit verifying that the debt is due and payable.
The date of service is particularly important because it determines when the 21-day period begins. If there is uncertainty about when or how the demand was served, or the matter is likely to result in court proceedings, Warlows Legal’s Commercial Litigation & Dispute Resolution team advises on the company’s position and the applicable timeframe.
Check the Demand and the Underlying Debt
Before deciding how to respond, both the statutory demand and the debt being claimed should be reviewed.
Relevant issues may include whether the debt is due and payable, whether the statutory minimum has been met, whether the correct prescribed form has been used, whether a supporting affidavit is required and whether there are defects in the demand or issues with service.
A defect does not automatically mean that a statutory demand will be set aside. Under section 459J, the Court may set aside a demand where a defect would cause substantial injustice unless the demand were set aside. The Court may also set aside a demand if there is some other reason for doing so.
This makes it important to assess the particular circumstances rather than relying on a technical error alone.
What Can Your Company Do Within the 21-Day Period?
The appropriate response will depend on whether the company accepts the debt, disputes it or has another claim against the creditor.
Where the debt is due and undisputed, the company may comply by paying the amount or securing or compounding the debt to the creditor’s reasonable satisfaction.
In some circumstances, the company may negotiate with the creditor about payment or another commercial resolution. However, negotiations should not be assumed to suspend the statutory deadline. Any agreement should be properly documented and its effect on the statutory demand considered before the 21-day period expires.
Where there are grounds to challenge the demand, the company may apply to the Court under section 459G to have it set aside. Within the 21-day period, a supporting affidavit must be filed with the Court and copies of the application and supporting affidavit must be served on the person who served the demand.
The Federal Court confirms that this period is strictly applied and that extensions cannot be given for making the section 459G application.
When Can a Statutory Demand Be Set Aside?
Sections 459H and 459J of the Corporations Act provide several grounds on which a statutory demand may be set aside.
A genuine dispute may exist between the company and creditor about the existence or amount of the debt. Alternatively, the company may have an offsetting claim, which the Act defines as a genuine claim by way of counterclaim, set-off or cross-demand.
A demand may also be set aside where a defect would cause substantial injustice, or where there is some other reason why the demand should be set aside.
Whether any of these grounds applies will depend on the circumstances and available evidence. If your company disputes the debt or believes it has an offsetting claim, obtaining advice early provides more time to assess the position and prepare the evidence needed to support an application.
What Happens If the Company Does Nothing?
If a company fails to comply with a statutory demand within the required period, it may be presumed insolvent under section 459C of the Corporations Act. A creditor may rely on that presumption when applying to the Court for orders winding up the company.
The Federal Court identifies failure to comply with a statutory demand as the most common basis on which creditors rely on the presumption of insolvency in winding-up applications.
If receiving the demand has also raised concerns about whether the company can pay its debts as they fall due, directors may need to consider their broader obligations separately. We cover these issues in our guide to insolvent trading and the risks for company directors.
For companies experiencing broader financial distress, our separate guide to restructuring vs voluntary administration explains those formal processes without confusing them with the immediate steps required when responding to a statutory demand.
Get Advice Before the 21-Day Period Expires
Responding to a statutory demand can involve more than deciding whether the debt should be paid. The underlying debt, service of the demand, any genuine dispute or offsetting claim, and the available evidence may all need to be considered within a limited period.
Leaving legal advice until late in the 21-day period can make it more difficult to investigate the circumstances and, where appropriate, prepare, file and serve an application to have the demand set aside in time.
If your company has received a statutory demand, Warlows Legal’s Corporate & Commercial Law lawyers advise on the company’s position while our Commercial Litigation and Dispute Resolution team can also assist where the debt is disputed or court proceedings may be required.
Obtaining advice promptly can help your company understand the statutory demand, identify the deadline that applies and determine the appropriate steps to take before its options become more limited.
This article provides general information only and does not constitute legal advice. Legal advice should be obtained about your company’s particular circumstances.
