If you owe another business money, you may have received a statutory demand. This is a legal document which requires you to pay the outstanding debt. Here, you must respond to it quickly, or your business will face consequences. This article will set out the options you have available when your company receives a statutory demand.

What is a Statutory Demand? 

A statutory demand is a written demand for payment. Companies can use it to facilitate proof that your company is unable to pay its debts when they fall due. 

Any creditor can prepare and serve a statutory demand upon a company. If you do not pay the debt within 21 days of receiving the demand, your company will be presumed to be insolvent. This entitles a creditor to commence proceedings to wind up your company.

The purpose of a statutory demand is often to act as a debt recovery mechanism.

How Do I Know if I Have Received a Statutory Demand?

A statutory demand is different from a standard legal letter as it has a particular format and follows specific rules.

You will know if you have received one because it will be sent to your registered company address and will look something like this: 

Form 509H

(paragraph 459E (2)(e))

CREDITOR’S STATUTORY DEMAND FOR PAYMENT OF DEBT

Corporations Act 2001

To: [your company, your company’s ABN/ACN] of [your company’s address]

The document will then set out the debt that you owe. It will also be accompanied by either:

  • an affidavit which outlines the debt if the other party believes here is no genuine dispute about the existence of it; or
  • a court order which confirms that you owe the debt.

How Does a Statutory Demand Work?

The statutory demand is the beginning of a process where the creditor may potentially begin a winding-up application for your company.

If your business receives one, you will need to act quickly. If you do not respond in 21 days, your company will be presumed to be insolvent. This could mean that within a few months of the demand being served, the court can appoint liquidators to your company. Because of this time frame, a statutory demand is a very fast and efficient enforcement tool.

In principle, a statutory demand should only be issued if the existence of the debt is unambiguous and undisputed. However, in practice, creditors do not always follow this rule. Either way, you will need to respond quickly.

I Have Received a Statutory Demand – What Should I Do?

When you receive a statutory demand, you will usually have three options:

1. Pay the debt

If you genuinely owe the money, then you will need to pay. If you were issued the demand alongside a court order, this would likely be your only option, other than appealing the judgement debt itself.

2. Apply to the Court

By sending a statutory demand, the creditor has already gone on the record stating that they believe there is no dispute over the fact that you owe them money. However, if they have not substantiated it with a court order, you can attempt to refute this point.

The line between a ‘debt’ and a ‘dispute’ is typically a blurry one. Assuming the demand was not issued alongside a judgement, it may be possible to satisfy the court that there is a genuine dispute over whether the debt exists.

For example, if the alleged debt arose due to non-payment for services under a contract, you could argue that you were unhappy with the quality of services that you received. Here, it will often be difficult for the creditor to prove that there is no dispute whatsoever.

If you go down this path, and the court sets aside the demand, you will potentially be able to seek costs from the creditor to cover your legal fees up until that point. In theory, this should discourage people from sending frivolous demands to try and force your hand during a genuinely unresolved contractual dispute.

However, setting aside a statutory demand is not the end of the road. While this may provide you with some time, the creditor is still likely to take further steps to recover the money they believe they are owed, such as filing a court claim for damages. 

3. Negotiate With the Creditor Directly

Rather than going straight to court, you can request that the creditor withdraw the statutory demand themselves so that you can negotiate the issue.

If you assert to the creditor that there is a genuine dispute, they may agree to try and resolve the matter outside of court. You will then have the opportunity to negotiate a settlement with them. 

For example, this may involve paying a portion of the demand, or the full amount on a payment plan.

If you take this approach, be mindful that it is still important to act quickly. If talks fall through and the creditors have not withdrawn the demand, you will still need to apply to set it aside, or pay the full amount.

Can I Get an Extension on the 21 Days?

This rule is unfortunately inflexible, so you need to make sure to act before the time runs out. Make sure to always keep your registered company address updated with ASIC and to check it frequently. If you are travelling, even for work purposes, you will still need to have somebody to check your mail.

What if I Take Longer Than 21 Days to Respond?

If the 21-day limit after receiving the statutory demand lapses, your company will automatically be presumed insolvent. The creditor will then have a three-month window where they can apply to the court to wind up your company.

However, even at this stage, you can still attempt to:

  • negotiate with the creditor; or
  • got to court by opposing the winding up application. Here, you will need to prove that your company is not insolvent, which may involve engaging forensic accountants.

Ultimately, if the court issues a winding-up order, you are out of options. You will have to stop trading, and liquidators will be appointed to sell your assets and settle your outstanding debts.

It is also worth keeping in mind that if you continue to trade while presumed insolvent, you will be in breach of your director’s duties under the Corporations Act. This means that you could become personally responsible for any further debts that your company incurs during this time.

If the creditor does not apply to wind up your company within the three months, you will no longer be presumed insolvent. They will have to issue another demand if they want to pursue the debt.

Key Takeaways

A statutory demand is a powerful tool for enforcing a legitimate debt. Ignoring a statutory demand can have serious consequences for your business, so it is crucial that you act fast. If you do not respond within 21 days, your company will be declared insolvent. If you receive a statutory demand and are unsure what to do, contact LegalVision’s debt recovery lawyers on 1300 544 755 or fill out the form on this page.

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