June 22, 2023

Understanding Statutory Demands


Have you or your Company been served with a statutory demand?

Did you know that you can apply to have a statutory demand set aside?

A Statutory Demand is a creditor’s formal, written request requiring a company to pay a debt within the statutory period (currently 21 days). This is Pay the specified amount.

  • Negotiate a debt settlement with the creditor.
  • Challenge the statutory demand in court if you genuinely dispute the debt.
  • In this Article we will explain what a statutory demand is, what can happen if this demand is not complied with, the grounds for setting aside a statutory demand and when it can be withdrawn.

    Understanding Winding Up Orders

    If a debtor company fails to take any of these actions within the specified timeframe, it will be deemed insolvent. Creditors can then seek a court order to wind up the company, leading to the appointment of a liquidator to commence the liquidation process.

    A winding up order, also known as compulsory liquidation, is a court order typically issued when a debtor company’s directors are unable to repay their debts. It follows a creditor’s statutory demand, which the company has failed to comply with.

    Once a winding up application is initiated by the court at the creditor’s request, the debtor company undergoes liquidation. The proceeds from the liquidation are distributed among the creditors.

    According to the Corporations Act 2001 (Cth), a creditor can issue a statutory demand if the following conditions are met:

    1. The debtor is a company.
    2. The creditor is owed a minimum of $4,000.
    3. The debt is due and payable.
    4. There is no genuine dispute concerning the debt.

    When served with a statutory demand, it is crucial to act promptly. Failure to respond or comply within the given timeframe will result in your company being legally presumed insolvent. Creditors can then apply for a winding up order, which will be granted unless exceptional circumstances, such as evidence of solvency, can be demonstrated.

    Requirements for a Valid Statutory Demand

    The form of a valid statutory demand is specified in the Corporations Act 2001 (Cth). Failure to meet the Act’s requirements may lead to the court dismissing the statutory demand or setting it aside if it misleads the debtor company.

    A valid statutory demand must satisfy the following criteria:

    1. It must be in writing and adhere to the prescribed form (Form 509(H)).
    2. It should accurately identify the debtor company and creditor(s).
    3. It must be signed by the creditor or their representative.
    4. The demand must clearly state the name and registered office address of the debtor company.
    5. The exact amount of the debt must be specified.
    6. 6. The demand must indicate a location within Australia where the debt can be paid, typically at the debtor company’s premises or the office of their legal practitioner.

    What is Insolvency?

    Insolvency refers to a company’s inability to fulfill its financial obligations, including the inability to pay its debts. One indicator of insolvency is the failure to comply with a valid statutory demand served by a creditor.

    A statutory demand requires the debtor company to settle the outstanding debt within 21 days. Failing to comply with the demand leads to a presumption of insolvency, enabling creditors to apply to the court for the winding up of the company.

    However, a debtor company can have the statutory demand withdrawn by entering into a payment plan with the creditor. Additionally, the company can challenge the demand if there is a genuine dispute regarding the debt amount.

    If the debt remains unpaid or an agreement satisfactory to the creditor is not reached, the creditor can proceed with an application to wind up the company through court proceedings.

    Methods of Serving a Statutory Demand

    A statutory demand can be served personally or by post. If your company is registered in Australia, the demand must be delivered to the registered office address.

    In cases where the debtor company’s registered office has changed or is unknown, creditors may serve the demand to the company’s directors.

    Revised Statutory Minimum

    Previously, the statutory minimum threshold for issuing a statutory demand was $2,000. However, changes introduced in July 2021 raised the minimum amount to $4,000. Consequently, if you owe a creditor less than $4,000, they cannot issue a statutory demand against you.

    Consequences of Being Served a Statutory Demand

    Upon receiving a statutory demand, you have several options:

    1. Settle the outstanding debt by paying the specified amount, leading to the creditor withdrawing the demand.
    2. Negotiate with the creditor to establish a payment plan or alternative arrangement. Ensure any agreement reached is documented in writing.
    3. Apply to the court to have the statutory demand set aside if you believe the debt is incorrect or there are valid grounds for dispute.

    If none of these options are pursued or prove successful, and you take no action within 21 days, the creditor can initiate insolvency proceedings against your company, potentially leading to its winding up.

    Consequences of Failing to Respond to a Statutory Demand

    Failure to comply with a statutory demand within 21 days has the following ramifications:

    1. Your business will be presumed insolvent for legal purposes.
    2. The creditor who served the demand can commence a winding up application based on the presumption of insolvency.
    3. Failure to respond to a statutory demand can result in your business being considered insolvent, which is a criminal offence.

    Grounds for Setting Aside a Statutory Demand

    If you are served with a statutory demand and believe that the debt is genuinely disputed or you have an offsetting claim, you can apply to the court to have the demand set aside. To succeed, you must demonstrate valid reasons for setting aside the demand.

    The most common grounds for setting aside a statutory demand include:

    1. Genuine dispute over the debt claimed in the demand.
    2. An offsetting claim that reduces the debt amount below the statutory minimum.
    3. Defects in the statutory demand itself.

    It is crucial to initiate your application within 21 days of being served with the demand.

    Withdrawal of a Statutory Demand

    A statutory demand can be withdrawn if there are valid grounds for the debtor company to do so. The debtor company may communicate the reasons for withdrawal, such as a genuine dispute, to the creditor and request the withdrawal.

    The withdrawal of a statutory demand can be done orally or in writing. However, it is advisable for the debtor company to obtain a written confirmation of the withdrawal for future reference.

    Creditors may choose to reject the debtor company’s request for withdrawal. However, if the company successfully petitions the court to set aside the demand, the creditor may be liable for the costs associated with setting it aside.

    Our team of commercial lawyers can assist you in dealing with a Statutory Demand including assisting in setting aside a statutory demand or entering into a payment plant with the creditor.

    For a free, no obligation review of your current circumstances, simply pick up the phone or email us on;

    Call us now: 1300 550 172
    Email us now: info@bizlawyers.com.au

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