Reading time: 7 minutes

If you are a small business, you may have clients or customers who refuse to pay their invoices. Although a statutory demand is not a traditional debt recovery tool, you can use it to recover your money from someone else. A statutory demand is a document sent to a debtor company, requiring it to pay a debt owed. 

This tool is the initiating process to wind up a company and can prompt parties to pay their debts to stop potential winding up proceedings. This article explains what a statutory demand is, as well as the risks associated with sending such a demand.

How to Recover Unpaid Invoices

Whether you’re a small business owner or the Chief Financial Officer of an ASX-listed company, one fact remains: your customers need to pay you.

This manual aims to help business owners, financial controllers and credit managers best manage and recover their debt.

Download Now

What is a Statutory Demand?

A statutory demand is a document that a creditor can issue. It requires a debtor company to pay a debt it owes within 21 days. The Corporations Act 2001 outlines the process and forms used for a statutory demand. The debtor company will be presumed insolvent if they: 

  • fail to pay their debts; 
  • fail to come to a suitable agreement with the creditor; or
  • make an application to set the debt aside within the aforementioned time period. 

Once there is a presumption of insolvency, the creditor may commence proceedings to wind up the debtor company. The Federal Court of Australia or any State Supreme Court can issue these proceedings. 

What Constitutes a Debt?

You can only issue a statutory demand when a debt is over $2,000 and is due and payable. That is, you can’t issue a statutory demand if the debt is:

  • prospective;
  • contingent; or
  • unliquidated.

The debtor company must be able to put a dollar value on what is being demanded from them. If a debtor company has more than one debt, you are not required to issue multiple statutory demands. You can issue one demand that specifies the total debt owed to you and how the debts have arisen.

What Form Should a Statutory Demand Take?

The Corporations Act specifies the form a statutory demand must take. A court may throw out a demand if it does not substantially comply with the form specified by the Act, or if the demand has misled the debtor company. You must also use Form 509H for your statutory demand and ensure the demand:

  • is in writing;
  • has been signed by you or on your behalf;
  • states the debtor’s company name and its registered office. You should obtain a new company search for the debtor company before issuing your statutory demand;
  • states the total amount of debt owed; and
  • specifies a place in Australia where the debt can be paid. Generally, this is your office or solicitor’s office.

You can also ‘support’ your statutory demand:

  • with a judgement of the Court; or
  • an affidavit.

If a judgement or affidavit does not accompany your statutory demand, a court will set it aside.

How Do You Serve a Statutory Demand?

You may serve a statutory demand to people or companies across Australia. When attempting service of a demand interstate, you must be mindful of the Service and Execution of Process Act, which provides guidance for interstate service.

The debtor company’s registered address is where you need to serve the statutory demand, either by post or personal delivery. You can also serve the demand to the company director, so long as their address is in Australia. You may decide to do this if the company has moved and you are not sure what its new registered address is.

The address for payment and the address to serve any application to set aside the default judgment must be in the same jurisdiction in which it is served. That means if you issue a statutory demand to a debtor company in NSW you need an address in NSW.

What Are the Risks of a Statutory Demand?

A debtor company may file an application to set aside a statutory demand you have served on them. If it is successful, then it may recover the legal costs of their application. You should be aware that the potential costs orders are not insignificant.

The court can set aside a statutory demand for a number of reasons:

  • the debtor company has an offsetting claim against the creditor, which would reduce the debt below the statutory minimum; or
  • there is a genuine dispute about either the amount of the debt or the debt itself.

There is also the risk of a debtor company not being able to repay the debt. You should make preliminary inquiries about the assets a company owns if you are concerned about their ability to pay. If they cannot pay your debt, you may incur the additional expense of legal proceedings.

If you have not obtained a judgement against a debtor company, it is easier for the debtor to set aside a demand. They can set the demand aside on the basis that there is some ‘genuine dispute’. A genuine dispute could include a dispute over the quality of the service provided, the agreed value of the service or other factors.  

When a Court is considering whether there is  a ‘genuine dispute’, it will not consider the  merits of the dispute or make a substantive determination on the issues. There must only be a ‘serious question to be tried’. This means it is much easier to set aside a statutory demand than it is to bring ordinary proceedings. 

A debtor company can still oppose a wind-up application, generally on the basis that the company is solvent. If a creditor utilises a statutory demand, then the only enforcement option is winding up proceedings.

What Happens When a Debtor Company Receives a Statutory Demand?

The presumption of insolvency lasts for three months after you serve a demand. During this period, if a debtor company has not responded to your statutory demand, you may issue winding up proceedings. However, a debtor company may wish to make an application to set aside your statutory demand. It needs to do this within 21 days of service of the demand and attach a supporting affidavit to the application. The Corporations Act provides a number of reasons to set aside a statutory demand, including if:

  • the amount owed is less than $2,000, which is the statutory minimum;
  • there is a defect in the statutory demand that would cause substantial injustice if a court did not set it aside; or
  • there is ‘some other reason’ why the court should not set the demand aside.

Displacing the presumption of insolvency can be difficult. The debtor will need to lodge an application with the Court. The Court will assess whether the debtor can  meet the four grounds or reasons on which you can set aside or defend against a statutory demand.

Key Takeaways

If a company owes you money, you have the option of serving it with a statutory demand. While this is not a traditional debt recovery method, it can be an effective way to get your money back. However, you should seek legal advice before setting on this path. This will help you mitigate the associated risks.  

It is important that you understand how to set out a statutory demand and what you are expected to file with your demand. You also need to understand the process of serving a demand, as well as the risks associated with serving one. 

If you need help drafting a statutory demand, LegalVision’s experienced debt recovery 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

What is a Statutory Demand? 

A statutory demand is a document issued to a debtor company to make it pay its debts within 21 days. If the debtor is unable to pay, they may be considered insolvent. 

What is Insolvency? 

A debtor company will be presumed insolvent if they fail to pay their debts or come to a suitable agreement with the creditor. They may also be considered insolvent if they make an application to set the debt aside within the 21 days outlined in a statutory demand.

Webinars

Redundancies and Restructuring: Understanding Your Employer Obligations

Thursday 7 July | 11:00 - 11:45am

Online
If you plan on making a role redundant, it is crucial that you understand your employer obligations. Our free webinar will explain.
Register Now

How to Sponsor Foreign Workers For Your Tech Business

Wednesday 13 July | 11:00 - 11:45am

Online
Need web3 talent for your tech business? Consider sponsoring workers from overseas. Join our free webinar to learn more.
Register Now

Advertising 101: Social Media, Influencers and the Law

Thursday 21 July | 11:00 - 11:45am

Online
Learn how to promote your business on social media without breaking the law. Register for our free webinar today.
Register Now

Structuring for Certainty in Uncertain Times

Tuesday 26 July | 12:00 - 12:45pm

Online
Learn how to structure to weather storm and ensure you can take advantage of the “green shoots” opportunities arising on the other side of a recession.
Register Now

Playing for the Prize: How to Run Trade Promotions

Thursday 28 July | 11:00 - 11:45am

Online
Running a promotion with a prize? Your business has specific trade promotion obligations. Join our free webinar to learn more.
Register Now

Web3 Essentials: Understanding SAFT Agreements

Tuesday 2 August | 11:00 - 11:45am

Online
Learn how SAFT Agreements can help your Web3 business when raising capital. Register today for our free webinar.
Register Now

Understanding Your Annual Franchise Update Obligations

Wednesday 3 August | 11:00 - 11:45am

Online
Franchisors must meet annual reporting obligations each October. Understand your legal requirements by registering for our free webinar today.
Register Now

Legal Essentials for Product Manufacturers

Thursday 11 August | 11:00 - 11:45am

Online
As a product manufacturer, do you know your legal obligations if there is a product recall? Join our free webinar to learn more.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Need Legal Help? Submit an Enquiry

If you would like to get in touch with our team and learn more about how our membership can help your business, fill out the form below.

Our Awards

  • 2020 Innovation Award 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Award 2020 Employer of Choice Winner – Australasian Lawyer
  • 2020 Financial Times Award 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year Award 2021 Law Firm of the Year - Australasian Law Awards
  • 2022 Law Firm of the Year Winner 2022 Law Firm of the Year - Australasian Law Awards