Creditors’ Statutory Demand for Payment of Debt

Under the Corporations Act 2001, creditors owed at least $2,000 by a company may issue a creditors’ statutory demand for payment of a debt. You may have heard this referred to as a statutory demand.

Failure to comply with a statutory demand is commonly relied upon as a ground to support an application for winding up a company in insolvency.

What Is A Statutory Demand?

A statutory demand is a document issued by a creditor to a debtor company that requests payment of a debt within 21 days.

Within 21 days of service of the statutory demand, the debtor company must either:

1. pay the debt;
2. reach a compromise or payment arrangement with the creditor; or
3. apply to the Supreme Court of Queensland or the Federal Court of Australia to have the statutory demand set aside and serve that application on the creditor.

What Are the Formal Requirements of a Valid Statutory Demand?

The Corporations Act 2001 sets out strict formal requirements for statutory demands.

A statutory demand must comply with these requirements to ensure its validity. Otherwise, you risk the demand being set aside.

Failure to comply is also likely to result in a protracted argument with the debtor company. This can lead to increased time and costs, even if the underlying debt is due and payable.

Section 459E of the Corporations Act 2001 provides the formal requirements of a statutory demand, namely that it must:

• only be issued if there are one or more debts due and payable to the issuer by the debtor company that total at least $2,000;
• specify the debt(s) and the total amount of the debt(s);
• require the company to pay the amount of the debt, or the total amount of the debts, or to secure or compound for that amount or total to the creditor’s reasonable satisfaction, within 21 days after the demand is served on the debtor company;
• be in writing;
• be in the prescribed form; and
• be signed by or on behalf of the creditor.

An application for a statutory demand may or may not be based on a judgment debt. Where it is not, it must be accompanied by an affidavit of the creditor, or an agent of the creditor. The affidavit must verify the total amount of the debt(s) due and payable by the company.

How Is A Statutory Demand Served on A Debtor Company?

A statutory demand must be validly served upon a debtor company. Failure to do so may be fatal to a subsequent winding up application which relies upon non-compliance with the statutory demand.

Most commonly, creditors will effect service of a statutory demand upon a debtor company under section 109X(1)(a) of the Corporations Act 2001. This rule provides that you may serve a document on a company by leaving it at or posting it to, the company’s registered office.

Setting Aside A Statutory Demand

A debtor company can apply to set aside a statutory demand even if the creditor has validly served the demand on the company. The company can apply to the Supreme Court of Queensland or the Federal Court of Australia when:

1. there is a genuine dispute about the debt;
2. there is an offsetting claim; or
3. there is a formal defect in the statutory demand that causes substantial injustice.

 
Genuine Dispute

A statutory demand is liable to be set aside if there is a genuine dispute about the debt. The threshold to establish a genuine dispute is that there is a “plausible contention requiring investigation”. This is not a very high bar for the debtor company to reach. Statutory demands which are not issued based on a Court judgment are most susceptible to being set aside on this ground.

 
Offsetting Claim

An offsetting claim exists where the party issued with the statutory demand has a genuine claim against the issuer. This may be by way of counterclaim, set-off, or cross demand. The offsetting claim does not need to arise from the same transaction as the debt to which the statutory demand relates.

 
Formal Defect

The final ground makes clear the need to comply with the formal requirements of the Corporations Act 2001. Even if a formal defect will not cause substantial injustice, a company facing the prospect of having a creditor wind them up in insolvency will likely argue the point. Failure to comply with the formal requirements of the statutory demand process will only increase costs. At worst failure to comply could also result in the statutory demand being set aside. For this reason, it is essential to seek professional legal assistance when issuing a statutory demand.

What If the Debtor Ignores the Statutory Demand?

If a debtor company fails to take any of the above steps within 21 days, the presumption is that the company is insolvent.

Creditors can rely on this deemed insolvency to apply to have the company wound up. Winding up proceedings can be commenced in the Supreme Court of Queensland or the Federal Court of Australia.

If the application is successful, the Court will appoint a liquidator to deal with the company’s affairs.

Companies need to take statutory demands seriously given the strict 21-day deadline and drastic consequences that can result. Failure to act swiftly can have a detrimental impact on any company. If a creditor has served your company with a statutory demand, you should seek urgent legal advice.

Legislation around statutory demands was amended due to Covid-19. The minimum amount was increased to $20,000. The time to respond was extended to 6 months. Consideration will need to be given whether this would impact your situation and if the provisions still apply.

Here to Help

Proper experience in dealing with the statutory demand process is essential.

Aitken Whyte Lawyers are focused on results.

Our Litigation and Dispute Resolution team will advise you on the proper course to take if you want to issue a statutory demand to recover a debt or respond to one served on you. We have significant experience applying to wind up companies that have failed to comply with a statutory demand and committed an act of insolvency.

Aitken Whyte Lawyers can assist you with all debt recovery and insolvency matters.

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Maroochydore
Aitken Whyte Lawyers
11/8 Pikki Street,
Maroochydore Qld 4558
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