Summary
- A statutory demand is a formal document issued to a debtor company under the Corporations Act 2001, requiring payment of a debt exceeding $4,000 within 21 days.
- Failure to comply creates a presumption of insolvency, enabling the creditor to commence winding up proceedings in the Federal Court or a State Supreme Court.
- The demand must strictly comply with Form 509H and be supported by a court judgement or affidavit, or a court may set it aside.
- This article is a plain-English guide to statutory demands in Australian corporate law, written for small business owners operating in Australia.
- It is produced by LegalVision, a commercial law firm that specialises in advising clients on debt recovery and corporate law matters.
Tips for Businesses
Confirm the debt exceeds $4,000 and is due and payable before issuing a statutory demand. Use Form 509H and attach a supporting judgement or affidavit. Serve the demand to the debtor’s registered address. Before proceeding, assess the debtor’s ability to pay to avoid costly winding up proceedings.
A statutory demand is a formal legal document that a creditor serves on a debtor company, requiring it to pay an outstanding debt within 21 days. Failure to comply creates a presumption of insolvency, which can trigger winding up proceedings. This article explains what a statutory demand is, as well as the risks associated with sending such a demand.
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.
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 $4,000 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.
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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 $4,000, 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.
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Frequently Asked Questions
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.
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.
If the company does not respond within 21 days, it is presumed insolvent. This allows the creditor to apply to the court to wind up the company.
Yes. The company can apply to set aside the demand within 21 days, for example if there is a genuine dispute about the debt or a defect in the document.
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