If your company has incurred outstanding debts, your creditors have the option to serve a statutory demand against you. The statutory demand is a type of debt recovery tool that when served brings consequences for your business.
When served with a statutory demand, you must act quickly even as you take the necessary time to seek professional advice to explore your options.
Definition of statutory demand
A statutory demand is a written demand served by a creditor against a debtor, as defined in Section 459E of The Corporations Act 2001 (‘the Act’). Essentially it’s a way for the creditor to get the debtor to pay their outstanding debt. The statutory demand must satisfy certain criteria:
- Minimum debt amount – The debt for which repayment is being demanded must be for more than $2,000 and should include any interest that falls due on the date of the demand.
- Mandated form – The statutory demand must be in the approved form (Form 509H).
- Type of debt – The debt must relate to debt that is already due and payable on the date of the demand. The debt must not be or include unliquidated damages or prospective liabilities.
Is it really debt?
Sometimes there will be confusion whether the debt is really debt for the purposes of a valid statutory demand. Generally, if the goods or services have already been supplied, it will be a debt for the purposes of a statutory demand. Prospective liabilities or future debts that are not yet due or payable will not be considered debt for statutory demands.
How statutory demands are served
Statutory demands are not filed with a court. They only need to be served in the approved way, as outlined in Section 109X of the Act. The demand will have been served if it is posted to, delivered to, or left at the company’s registered address (which can be determined by looking up the ASIC database), or if it is delivered personally to a director of the company.
Acting quickly: your options if you are served a statutory demand
The most important thing to know if you are served a statutory demand is the need to act quickly. It’s advisable to obtain advice from insolvency experts to explore your options. Depending on the circumstances, you might have three courses of action:
- Pay the debt – If you can pay the debt, the best option will be to repay the demanded amount to the creditor as soon as possible.
- Negotiate and agree – Another option could be to reach out to the creditor, negotiate, and reach a compromise or repayment plan. You might be able to obtain an agreeable outcome for all parties, but this will depend on the creditor’s amenability and your ability to make repayments.
- Set aside demand – A third option is to apply to the court to set aside the statutory demand (Section 459G). You will need to satisfy the grounds for having it set aside, and you will need to file the application within 21 days of the demand being served.
Implications of ignoring a statutory demand
A fourth option is to ignore the statutory demand. If you choose to do so, your company will be presumed to be insolvent (Section 459C(2)) after 21 days of the statutory demand being served (Section 459F). This is irrespective of whether or not your accounts and records show you are actually solvent.
A presumption of insolvency means that the creditor can apply to the court to wind up your company (under 459P). If you subsequently receive a wind-up notice, it is even more critical to act quickly.
Grounds for setting aside statutory demand
Courts will set aside statutory demands in certain situations. These can be cases where the statutory demand is defective or where there is a genuine dispute about the debt’s existence or amount.
- Defective statutory demand – If you can argue the statutory demand is defective in some way, you might be able to apply to the court have it set aside. This can only be raised if the defect is such that it will cause you substantial injustice, so minor defects usually cannot be raised.
- Genuine dispute about debt – The court might set aside the statutory demand if there is a genuine dispute about whether the debt exists and/or how much the debt is. If you can successfully raise this point, the creditor will be asked to pay the penalty of a costs order in addition to the court ordering the demand to be set aside.
- Offsetting claim – The statutory demand could be set aside if the debtor has an offsetting claim against the creditor that could partly or completely offset the debt.
- Other reasons – Section 459J(1)(b) says that the court can set aside the statutory demand if there is some other reason. This section might be used, for example, if the debt amount specified in the demand is exaggerated, if the statutory demand is being used as an abuse of process, or if there is some other good reason for setting aside the demand.
If you think you have good grounds to apply to have the statutory demand set aside, consult a qualified professional for advice immediately. By exploring your options and acting quickly, you might be able to apply to have the demand set aside.