4 Grounds for Setting Aside a Creditor’s Statutory Demand

A company that has an outstanding debt may be served with a Creditor’s Statutory Demand (statutory demand). Essentially a statutory demand is a formal legal document demanding payment of an outstanding debt.

The debtor company has 21 days from the date of service to either

1. Pay the debt;
2. Come to some other suitable payment arrangement with the creditor; or
3. Make an application to set aside the statutory demand.

Failing any of the above, the debtor company is deemed insolvent, and the creditor can take steps to wind up the company.

Division 3 of Part 5.4 of the Corporations Act 2001 (Cth) (the Act) sets out four grounds on which a statutory demand may be set aside. We consider these in turn below.

1. A Genuine Dispute

The most common ground for setting aside a statutory demand is a genuine dispute about the existence or the amount of the debt to which the demand relates. The onus is on the debtor company to convince the court that there is a ‘genuine dispute‘. In practice, this is not a tall hurdle to jump. The debtor company will need to show that there is ‘a plausible contention requiring investigation’. The debtor company is not required to prove that they are likely to be successful at any final hearing.  

2. The Debtor Company Has an Offsetting Claim Against the Creditor

Under the Act, an ‘offsetting claim’ means a genuine claim the debtor company has against the creditor including a counterclaim, set-off or cross-demand. The debtor company’s claim against the creditor does not need to relate to the debt to which the statutory demand relates.

Once again, the debtor company does not need to prove that they will be successful, but rather that there is, in fact, a genuine offsetting claim.

3. Defect in the Statutory Demand and Substantial Injustice

What will be considered a defect in the statutory demand?  

Firstly, the defect must be in the demand itself and not any other supporting document. The courts have defined ‘defect’ to mean a lack or absence of something necessary or essential for completeness, a shortcoming or deficiency, or an imperfection.

What will amount to a substantial injustice?  

A demand that is likely to cause confusion, mislead the debtor company in some way or fail to inform the debtor company of the substantive requirements of the Act will cause a ‘substantial injustice’.

Minor errors will generally not amount to a substantial injustice.

Common examples of defects resulting in a statutory demand being set aside include:

• Where there is an inconsistency in the amount claimed in the demand; or
• Where the description of the debt is misleading or ambiguous.

4. Other Reasons for Setting Aside the Demand

There must be a sound reason to set aside the statutory demand for some other reason, for example: 

• Failure to provide a supporting affidavit along with the statutory demand;
• Where the affidavit in support of the demand fails to verify the amount of the debt, or that the debt is due and owing by the debtor company; or
• Where the affidavit in support and the statutory demand are not signed at the same time.

On the other hand, the fact that the debtor company is in fact solvent is not a ground for setting aside a statutory demand.

What About Ineffective Service?

Section 459G of the Act states that the court can only set aside a statutory demand served on the debtor company. This means that ineffective service is not considered grounds for setting aside a demand. Rather, the debtor company is required to raise ineffective service during any subsequent winding up application. If the debtor company can prove ineffective service, they will be successful in defending any winding up application.

When a creditor is serving a debtor company interstate, service of the statutory demand will be considered ineffective if:

• Notice required by the Service and Execution of Process Regulations 1993 (Cth) does not accompany the statutory demand; or
• The statutory demand does not contain an address for payment that is in the same state as the debtor company.

Key Takeaways

If you have been served with a creditor’s statutory demand and you believe you have grounds to have it set aside, you should seek legal advice immediately. Do not delay. You only have 21 days from the date of service of the statutory demand to make an application to set it aside. If you have any questions or need assistance making an application to the court, get in touch with our disputes lawyers on 1300 544 755.