Operating a business will involve paying ongoing debts. Accordingly, you should be aware of the legal debt recovery processes and how best to respond. When seeking payment of debts, a business may look to initiate legal proceedings against you. Alternatively, if they believe you are insolvent, they may want to wind up your company and seek debt payment. The first stage of this process is issuing a statutory demand. This article explains what a valid statutory demand is and how you can respond to it.
What is a Statutory Demand?
A statutory demand is a formal demand to collect a debt under s 459E of the Corporations Act 2001 (Corporations Act). Statutory demands are used to determine whether a company can pay its debts as and when they fall due. Creditors wanting to initiate a compulsory winding up in insolvency will first serve a statutory demand on the company owing the debt.
A statutory demand must be issued in a form that complies with the Corporations Act requirements.
To be valid, a statutory demand must:
- be in writing;
- specify the total amount of the debt;
- require the company to pay the debt within 21 days after service;
- signed by or on behalf of the creditor; and
- be in the prescribed form (found in Schedule 2 of the Corporations Regulations 2001).
Usually, an affidavit will accompany the statutory demand. This affidavit will outline the debt details or include a court order confirming the debt is owed.
For a statutory demand to be valid, it must also meet the service requirements. You must serve a statutory demand on the company by either:
- delivering or posting the statutory demand to the company’s registered address; or
- personally serving it on the company director.
What to Do if I Receive a Statutory Demand
There are three ways to respond to a statutory demand. You can:
- pay the debt;
- attempt to negotiate with the other party (to agree to set aside the statutory demand); or
- apply to the court and dispute the debt.
If you are served with a statutory demand, you must respond to it within 21 days. If you apply to have the court set it aside, be aware that court proceedings are uncertain and can be costly and time-consuming.
In some cases, it may be more cost-effective to pay the debt rather than have the statutory demand set aside. There are three primary ways to set aside a statutory demand:
- if there is a genuine dispute regarding the existence of the statutory demand or amount that is owed;
- if the company has an offsetting claim against the party serving the demand, which consequently reduces the debt owed below the statutory minimum ($2,000); or
- if there is a defect in the demand, which would cause substantial injustice unless the court sets the demand aside.
A supporting affidavit should also accompany the application to set aside a statutory demand. The affidavit’s purpose is to provide evidence supporting why the demand should be set aside.
If you disagree with the debt owed, you should raise this with the other party as soon as possible. This can be an effective way to negotiate with the other party without going to court to set aside the statutory demand.
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This guide will help you understand the directors’ duties that apply to you within the Australian corporate law framework.
Not Paying or Responding
A company can be presumed insolvent if it fails to either pay the debt or apply to set aside the debt within 21 days. The party serving the statutory demand can rely on the presumption of insolvency and apply to wind up the company. This could mean that within a few months of the demand being served, the court can appoint liquidators to your company. Given this time frame, a statutory demand is a very fast and efficient enforcement tool.
Although a company can rebut an application for winding up, the onus of proving solvency is strict. You will need to go to court and oppose the winding up application and likely engage a forensic accountant to show that the company is solvent. Even at this stage, you can still pay the outstanding debt or continue to negotiate with your creditor to stop the winding up proceedings.
If the court makes orders against you to wind up the company, you will need to stop trading and operating the business.
As a director, you will be personally liable for the debts incurred at this time by the business.
Key Takeaways
Overall, remember that time is of the essence. You must file and serve on the creditor an application to set aside a statutory demand and the supporting affidavit within 21 days. Alternatively, negotiating with your creditors or paying the debt may be more cost-effective than going to court. If the 21 days pass, it is generally more challenging to rebut an application for the wind up.
If you need help responding to a statutory demand, our experienced dispute resolution lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A statutory demand is a formal demand to collect a debt under s459E of the Corporations Act 2001.
There are three ways to respond to a statutory demand. You can pay the debt, attempt to negotiate with the other party (to agree to set aside the statutory demand) or apply to the court and dispute the debt.
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