Statutory demands – what are they and how do you respond to one?

Very few documents carry as much weight and urgency as a statutory demand.   If your company receives a statutory demand and fails to address and/or comply with it within 21 days of receipt, it faces the possibility of being wound up.

Accordingly, if your company receives a statutory demand, you should act immediately to address it including by seeking urgent legal advice as the clock will already be ticking. 

What is a statutory demand?

A statutory demand is a formal demand for payment of a debt that is owed by a debtor company, requiring compliance with the demand within 21 days.  If the statutory demand is ignored and/or is not complied with within the 21-day period, there will be a presumption that the debtor company is insolvent – and, on this basis, the creditor can apply to have the debtor company wound up.

While a statutory demand is ordinarily issued after a creditor has obtained judgment against the debtor company, judgment is not strictly required before issuing a statutory demand.  However, if a statutory demand is issued in the absence of judgment against the debtor company, it is more likely that the statutory demand will contested by the debtor company and potentially set aside by the Court.

What are the requirements of a statutory demand?

Generally speaking, to be valid, a statutory demand must:

• be in writing and follow a strict format;
• specify the amount and nature of the debt;
• be accompanied by a supporting affidavit; and
• be properly served at the debtor company’s registered office.

A statutory demand can only be issued where the debt owing is over the statutory minimum (which is currently $4,000.00) and is due and payable at the time the statutory demand is issued. 

How do I respond to a statutory demand?

Upon receiving a statutory demand, the recipient company has 21 days from the date of service to do one of the following:

• pay the debt in full;
• secure or compound for the debt (i.e. negotiate a payment plan or other arrangement with the creditor), to the creditor’s satisfaction; or
• apply to have the statutory demand set aside under section 459G of the Corporations Act 2001 (Cth).

A failure to respond to the statutory demand within 21 days of it being served means that the recipient company will be presumed to be insolvent – enabling the creditor to apply to the Court for the company to be wound up.  This can ultimately lead to the liquidation of the company and the director(s) losing control over its assets and affairs.

The 21-day timeframe is strict and cannot be extended, even if there are grounds to set aside the statutory demand. 

How do you set aside a statutory demand?

To set aside a statutory demand, the debtor company will need to file an application with the Court seeking that it be set aside.

For that application to succeed, the debtor company will need to establish that:

1. there is a genuine dispute as to the debt amount claimed;
2. the debtor company is entitled to offset the amount claimed on the statutory demand (i.e. the debtor company has a claim against the creditor);
3. there is a defect in the statutory demand and a substantial injustice will be caused unless it is set aside. For example, the statutory demand may include a misdescription of the debt and/or the amount of the debt; or
4. there is some other reason that the demand ought to be set aside, which may include (by way of example), the supporting affidavit not complying with the relevant requirements.

As part of the application, the debtor company will need to file a supporting affidavit which sets out all of the evidence that it intends to rely on.  Given the complexities and technical procedural requirements involved with having a statutory demand set aside, it is recommended that you promptly contact a legal practitioner with insolvency expertise to review the statutory demand and provide tailored advice on the merits of seeking to have it set aside.

Require assistance?

If your company is served with a statutory demand, it is important that you address it and obtain legal advice as soon as possible.  Having a legal practitioner with insolvency expertise involved from the outset will give your company the best chance of successfully setting aside or dealing with a statutory demand.

If you require advice or assistance regarding a statutory demand, contact the Litigation and Dispute Resolution team at Coulter Legal today.  We will be able to discuss your options and determine the best course of action in response to a statutory demand.