Please note: This article is intended to be brief information only and should not be relied or acted upon as legal advice. You should always seek legal advice tailored to your own individual circumstances. Please also note that this article is current as at the date of publication and the law may have subsequently changed since.

What is a statutory demand?

A statutory demand is a type of formal debt for the payment of a debt (or multiple debts) which is served under section 459E of the Corporations Act 2001 (the Act).

Section 459E(1) provides that a person (i.e. a creditor) may serve on a company a demand relating to:

• a single debt that the company owes to the person, that is due and payable and whose amount is at least the statutory minimum; or
  
• 2 or more debts that the company owes to the person, that are due and payable and whose amounts total at least the statutory minimum.

Who may serve a statutory demand?

A statutory demand may be served by a creditor of a company incorporated under the Act who is owed one or more debts by the company totalling the statutory minimum.

What is the statutory minimum for a debt?

The “statutory minimum” is defined (under section 9 of the Corporations Act) to mean:

  (a)  if an amount greater than $2,000 is prescribed–the prescribed amount; or

  (b)  otherwise–$2,000.

Under regulation 5.4.01AAA of the Corporations Regulations 2001 (Cth), the prescribed amount is currently $4,000 (for statutory demands served on or after 1 August 2021).

This means any debt or debts must be for a total amount at least $4,000 in order for a creditor to serve a statutory demand against a company in respect of such debt(s).

What are the requirements of the demand?

Among other things, the demand:

• if it relates to a single debt–must specify the debt and its amount;
  
• if it relates to 2 or more debts–must specify the total of the amounts of the debts;
  
• must require the company to pay the amount of the debt, or the total of the amounts of the debts, or to secure or compound for that amount or total to the creditor’s reasonable satisfaction, within the statutory period after the demand is served on the company;
  
• must be in writing;
  
• must be in the prescribed form (with Form 509H currently being the prescribed form); and
  
• must be signed by or on behalf of the creditor.

If the debt is not a judgment debt, then the statutory demand also must be accompanied by an affidavit verifying the debt is due and payable: see section 459E(3) of the Act.

A statutory demand may be more effective than seeking to pursue judgment enforcement proceedings if there is a belief that the company simply does not have the means to satisfy the debt. However, a statutory demand should not be served where it is apparent that there is a genuine dispute as to the existence or amount of a debt.

There are very technical rules regarding statutory demands (including in respect of accompanying affidavits). As such, you should seek legal advice and assistance if you are intending to serve a statutory demand.

When is a company taken to fail to comply with a statutory demand?

Under section 459F(2), the period for compliance with a statutory demand is:

• the statutory period after the demand is served (which is currently prescribed to be 21 days for statutory demands served on or after 1 August 2021: see regulation 5.4.01AAA); or
  
• if the company applies in accordance with section 459G for an order setting aside the demand:
  
  • if, on hearing the application under section 459G, or on an application by the company under this paragraph, the Court makes an order that extends the period for compliance with the demand–the period specified in the order, or in the last such order, as the case requires, as the period for such compliance; or
    
  • otherwise–the period beginning on the day when the demand is served and ending 7 days after the application under section 459G is finally determined or otherwise disposed of.

In accordance with section 459F(1) of the Act, if, as at the end of the period for compliance with a statutory demand, the demand is still in effect and the company has not complied with it, the company is taken to fail to comply with the demand at the end of that period.

What are the consequences of failing to comply with a statutory demand?

The consequence of a company failing to comply with a statutory demand is that the company will be presumed to be insolvent in any application by the creditor to wind up the company in insolvency and appoint a liquidator under section 459P. A successful winding up application has significant consequences.

Any winding up application needs to be brought within 3 months of the failure to comply in order to rely on the presumption of insolvency.

A creditor will usually bring a winding up application in the event a statutory demand is not complied with. A winding up application is usually brought to wind up a company in insolvency and appoint a liquidator.

In any winding up application made under section 459P, the Court must presume that the Company is insolvent if, during or after the 3 months ending on the day when the application was made, the company failed (as defined by section 459F) to comply with a statutory demand: see section 459C(2)(a).

If a company is presumed insolvent, the onus shifts on the company to prove that it is solvent if it wishes to oppose an winding up. In accordance with the definitions in section 95A of the Act, a company is solvent if the company is able to pay all the company’s debts, as and when they become due and payable.

If a company is experiencing financial troubles, it may be difficult for the company to otherwise prove that they are solvent.

Can a statutory demand be set aside?

A company may apply to the Court (which is defined to include the Federal Court of Australia and the Supreme Court of Western Australia) for an order setting aside a statutory demand served on the company: section 459G.

An application to set aside a statutory demand (including an affidavit supporting the application) must be lodged and served on the creditor who issued the demand within 21 days of service of the demand: see sections 459G(2) & (3).

This means a company receiving a statutory demand must act very promptly to pay the debt, reach an agreed resolution with the issuing creditor or otherwise seek to set aside the demand.

If a company applies to set aside a statutory demand, this may result in contested litigation between the company and the creditor (which may involve not insignificant legal costs). There may also be consequences in so far as that the court may order one party to pay the legal costs of the other party in relation to the application to set aside the statutory demand.

On what grounds can a statutory demand be set aside by a Court?

On an application under section 459G, a court may set aside a statutory demand if it is satisfied that:

• there is a genuine dispute or offsetting claim (however the court may vary the demand rather than set it aside if the dispute or offsetting claim does not cover the whole of the debt or debts) (see section 459H);
  
• because of a defect (such as a misdescription of the debt or misstatement of its amount) in the demand, substantial injustice will be caused unless the demand is set aside (see section 459J(1)(a)); or
  
• there is some other reason why the demand should be set aside (see section 459J(1)(b)).

An order setting aside (or varying) a demand may be made subject to conditions: section 459M of the Act.

In some circumstances, a court may also be empowered to make injunctive orders to prevent a creditor relying on any failure to comply with a statutory demand (even where the court is not empowered to make an order setting aside a demand).

Further information

If you require advice or assistance, please do not hesitate to contact us.