A Guide to Statutory Demands for both Creditors & Debtors in Australia
A statutory demand is a formal, written notice issued by a creditor to a debtor (which must be a corporation), requiring immediate payment of an outstanding debt.
Failure to comply within 21 days may result in the company being presumed insolvent open to being subject to a winding up application in the Federal Court or Supreme Court.
A statutory demand is a powerful legal instrument under the Corporations Act 2001 (Cth) and is often the first step in corporate debt enforcement and collection.
This article explains the process and implications of statutory demands, both from the perspective of a creditor seeking to recover a debt, and a company that has been served with one.
What is a statutory demand?
Under section 459E of the Corporations Act 2001, a statutory demand is a formal demand issued by a creditor which compels the debtor company, which owes a debt (or debts) totalling more than $4,000.00 to, within the statutory period:
- pay the debt or debts, in full;
- enter into an arrangement acceptable to the creditor; or
- apply to the court to have the demand set aside.
If the debtor company fails to take appropriate steps within the statutory period, the creditor can apply to wind the company up in insolvency pursuant to section 459Q of the Corporations Act 2001.
Purpose of a Statutory Demand
A statutory demand serves two primary functions:
- enforcement: It places legal pressure on the debtor to resolve or pay the debt.
- insolvency trigger: Non-compliance establishes a legal presumption of insolvency, forming the basis for a liquidation application.
Statutory demands are not intended to resolve disputes. They are only appropriate where the debt is undisputed, due, and payable.
Nevertheless, they remain an effective means of compelling payment.
Requirements of a valid statutory demand
To be effective, a statutory demand must strictly comply with the formal requirements of the Corporations Act 2001.
Non-compliance can render the demand invalid and lead to adverse cost consequences for the creditor.
Key statutory requirements (under s459E(2)):
A statutory demand must:
- be in writing;
- be in the prescribed form;
- specify the debt or total amount owing (if more than one debt);
- require the debtor company to pay, secure, or compound the debt to the creditor’s reasonable satisfaction;
- be signed by or on behalf of the creditor; and
- if the debt (or a part of the debt) is not a judgment debt, be accompanied by an affidavit verifying that the debt is due and payable.
Errors in the form, or failure to provide a supporting affidavit, can invalidate the demand.
Supporting Affidavit
For debts that are not based on a court judgment, a statutory demand must be accompanied by a properly sworn affidavit confirming:
- the creditor’s belief that the debt is due and payable;
- the basis on which the debt is claimed; and
- must comply with the rules of court.
Serving the statutory demand
Service of the statutory demand must be executed in accordance with the Corporations Act 2001. Correct service is essential to enforceability. Common methods include:
- delivering the demand to the company’s registered office; or
- leaving it with a director or authorised officer.
Service by post is permitted if addressed to the registered office. Courts regularly deal with challenges to statutory demands based on improper service, and even minor defects in service can be fatal to enforcement.
Consequences of non-compliance
If the debtor company fails to respond within 21 days of effective service, the following consequences may arise:
- a presumption of insolvency is triggered under section 459C(2)(a);
- the creditor may file an application for the company to be wound up in insolvency;
- the burden shifts to the debtor to rebut the presumption in court.
It is not necessary to prove actual insolvency at this stage. The failure to comply with the statutory demand is, on its own, sufficient evidence of insolvency for the purpose of a winding up application.
Grounds for setting aside a statutory demand
If a company wishes to challenge a statutory demand, it must apply to the court within 21 days of service to have the demand set aside. The application must be supported by an affidavit outlining the reasons.
Under section 459H, the court may set aside a statutory demand if:
1. There is a genuine dispute about the existence or amount of the debt
The dispute must be bona fide and based on real grounds, not simply a denial of the debt. A genuine dispute does not require the company to prove it will succeed, only that there is a serious question to be tried.
2. The company has an offsetting claim
An offsetting claim arises where the debtor company has a counterclaim, set-off or cross-demand against the creditor, whether liquidated or unliquidated, and whether or not the claim arises from the same transaction.
3. There is a defect in the demand causing substantial injustice
This may include errors in form, amounts, or inconsistent or unclear descriptions of the debt.
4. There is some other reason the demand should be set aside
Courts retain discretion to set aside a demand in circumstances of abuse of process, unconscionable conduct, or other equitable grounds.
5. The “Substantiated Amount”
If the court finds that part of the debt is in dispute or subject to an offsetting claim, it may assess what is called the substantiated amount – the undisputed portion of the debt. If the substantiated amount is below the statutory minimum ($4,000), the demand must be set aside.
Timeframes are strict
Strict compliance with time limits is essential. The application to set aside the demand must:
- be filed in the court within 21 days of service; and
- be served on the creditor promptly.
Late applications will not be accepted, and the statutory presumption of insolvency will remain in place.
Strategic considerations for creditors
Creditors should carefully assess the circumstances before issuing a statutory demand. Key considerations include:
- whether the debt is genuinely undisputed and payable immediately;
- whether all procedural requirements have been met;
- whether service can be effectively carried out;
- the risk of the demand being set aside and costs awarded against them.
Strategic considerations for debtors
Companies served with a statutory demand should act immediately. Key steps include:
- checking the date of service to calculate the 21-day response period;
- determining whether a genuine dispute or offsetting claim exists;
- seeking legal advice without delay.
Failure to respond in time can result in liquidation proceedings, which are expensive, time-consuming, and damaging to the company’s reputation and operations.
Final considerations
Statutory demands are a critical part of Australia’s corporate insolvency framework. When used appropriately, they offer creditors a swift and effective mechanism for recovering unpaid debts. However, misuse or non-compliance with statutory requirements can lead to costly and unsuccessful outcomes.
For companies served with a statutory demand, the 21-day window is not an opportunity to delay or negotiate; it is a strict legal deadline. Legal advice should be sought immediately to determine the appropriate course of action.
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Disclaimer: This article is general in nature and does not constitute legal advice. Please contact Allen Law for advice tailored to your particular situation.
