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When a company does not or cannot pay its debts, creditors of the debtor company can take various steps to enforce their rights. One such step is the service of a statutory demand.

What is a statutory demand?

A statutory demand is a formal request for payment of a debt issued by a creditor of a company. If a debtor company fails to comply with a statutory demand within 21 days, it is presumed to be insolvent and a creditor can make an application to a court for a winding up order. If that application is successful, it will result in the company being wound up and a liquidator appointed.

When a statutory demand can be a useful tool

Statutory demands are issued under section 459E of the Corporations Act (2001) (Cth) (“Act”).

A creditor can issue a statutory demand if:

• the debtor is a company;
• the debt or debts total at least $4,000; and
• the debt is due and payable.

It is important that the debt can be recognised in a dollar amount. The debt cannot be prospective, unliquidated, or contingent. For example, if you are involved in legal proceedings and are awarded damages, but the amount in damages is not yet determined, a statutory demand cannot be issued.

It is also crucial to be conscious that statutory demands are not to be used for the improper purpose of compelling an otherwise solvent company to pay a disputed debt. Statutory demands should only be issued if you (as the creditor) are owed a debt by a company and have a reasonable suspicion that the company is insolvent.

How to issue a statutory demand

If the form of a statutory demand does not comply with the Act, it may be set aside by a court.

A statutory demand must:

• be in writing and in Form 509(H);
• be signed by, or on behalf of, the creditor;
• state the name of the debtor company, including the company’s registered office address;
• specify the amount of debt owed; and
• specify a place in Australia where the debt can be paid. This would typically be the creditor’s, or its solicitor’s, office.

If the debt sought to be recovered is not a judgment debt – that is, the debt is not the result of a court order – the demand must be accompanied by an affidavit. This affidavit verifies that the debt is due and payable by the debtor company and that there is no genuine dispute in relation to the debt.

A statutory demand must also be properly served on a company by:

• leaving it at, or posting it to the company’s registered office; or
• delivering a copy of the document personally to a director who resides in Australia.

What happens when a statutory demand is issued?

If a debtor company does not comply with a statutory demand or apply to a court to set the demand aside within 21 days of service it is presumed insolvent, and the creditor can apply to the court to have the debtor company wound up. A liquidator will then be appointed to the debtor company.

The debtor company may decide to apply to set aside the demand. To do so, the debtor company must apply to the court to have the statutory demand set aside on one of the below grounds:

Genuine dispute about the debt

The dispute can relate to debt itself or the amount. A genuine dispute will more readily arise in instances where the creditor has not obtained judgment against the debtor company. For example, if there could be some question about the agreed value of services provided.

Debtor company has genuine claim against the creditor

This includes counterclaims, cross-demands, or set-offs.

A set-off exists in situations where the debtor company has a right to balance a mutual debt with the creditor. This right is typically created by the inclusion of set-off clauses in commercial contracts.

The court does not need to be satisfied that the debtor company will be successful in their claim, only that the claim is genuine.

The statutory demand is defective or will cause substantial injustice

It is important that the debt is certain. In instances where the description of the debt is ambiguous or misleading, the court may set aside a statutory demand on the grounds that is it defective. Another example of a potential defect is where there is an inconsistency throughout the statutory demand and affidavit in support in the amount claimed by the statutory demand.

The court may also set aside a statutory demand if it will cause substantial injustice to the debtor company. This may arise in instances where the demand causes confusion, is misleading, or if it fails to comply with the requirement of the Act.

For some other reason

This ground is not commonly relied upon, but successful applications have included challenges to the statutory demand in circumstances where the underlying judgment has been stayed, is subject to a pending appeal and the amount of the demand has been paid into Court by way of security or where it can be clearly established the statutory demand is an abuse of process because the alleged debtor is plainly solvent and the creditor is aware of that fact.

Need help?

If you are a creditor and are owed money by a company, a statutory demand can be a useful tool to recover the money.

If you consider that you have an issue in relation to money owed to you, or if you have received a statutory demand, contact our experienced team and we will be able to assist you.

The information contained in this article is general in nature and cannot be relied on as legal advice nor does it create an engagement. Please contact one of our lawyers listed above for advice about your specific situation.