Statutory demands

I have experience with both making statutory demands for payment of debts and resisting statutory demands that have been served on me.

Making a demand

Statutory demands can be used to force a company (not an individual, where bankruptcy law applies) to pay a debt to avoid being deemed insolvent and possibly be wound up. A statutory demand can be can be issued by a creditor under s459E of the Corporations Act (Cth), requiring a debtor company to pay its debt within 21 days.

If the debtor company fails to:

pay the debt; or
come to a suitable arrangement with the creditor; or
make an application to set it aside within that time period,

within 21 days of being served the demand, the company is presumed to be insolvent.

Once there is a presumption of insolvency, the creditor can commence Federal Court or State Supreme Court proceedings to wind up the debtor company. The company’s assets (if any) can then be used to pay creditors.

The Corporations Act says that the debtor must use form 509H to make the demand, setting out:

exactly how much money is owing,
the debtor company’s correct name,
the debtor company’s registered office,
where the money is to be paid (within Australia).

A statutory demand must be supported by either a judgment of the Court confirming the debt, or an affidavit giving evidence of the debt.

It should be served, by post or by hand, on the company at its registered address, or served on a director of the company.

Setting aside a demand

Ignoring a statutory demand, or not acting quickly enough, can have dire consequences for a company. If the debt is not paid or an arrangement agreed to, and the demand is not set aside by a court, the creditor has three months after service of the demand to issue winding up proceedings.

An application to set aside a statutory demand must be filed and served on the creditor within 21 days of receiving the demand. The court application must include an affidavit setting out why the demand should be set aside. The Corporations Act provides a list of reasons a statutory demand could be set aside. The most commonly applied reasons are:

The amount owed is less than $2,000 (the statutory minimum)
The debtor company has an offsetting claim against the creditor (which would reduce the debt below the statutory minimum)
There is a genuine dispute about the existence or the amount of the debt
There is a defect in the statutory demand that would cause substantial injustice if it is not set aside.
There is ‘some other reason’ why the demand should be set side.

Unless the application to set aside the demand is withdrawn, there will be a hearing before a judge, who will rule on whether the demand should be set aside or not. Preparing for and appearing at the hearing will incur some thousands of dollars in legal and court fees. If the application fails, the applicant will probably also have to pay the legal costs of the creditor. So you should only attempt to set aside a demand if you are likely to succeed.

Summary

Although the Courts have said that statutory demands are not meant to be used as a debt recovery mechanism, they can be a fast way to bring questions of insolvency to a head.

However, if you do not have a judgment against the debtor, it is often easy for the debtor to claim there is a ‘genuine dispute’ over the debt. The Court is not required to delve into the merits of an alleged dispute, there just needs to be a ‘serious question to be tried’. Remember that if your statutory demand is set aside, you will probably be required to pay the debtor’s legal costs of getting it set aside, which could be thousands of dollars.

You should also keep in mind that even if the debtor gets wound up, it may not have any funds to pay what you are owed, other creditors might rank ahead of you, including the tax office and the administrator/liquidator, and you might not receive all or any of what you are owed.

You should discuss all these issues with an experienced lawyer before either serving a statutory demand or resisting one.