When a company is insolvent, it means the company cannot pay its debts as and when they fall due. In these instances, creditors of the debtor company can take various steps to enforce their rights. That includes serving statutory demands.
A statutory demand is a formal notice requesting the payment of a debt or the provision of security for that debt. If you’ve been served with a statutory demand, you should seek legal advice immediately. If a debtor company fails to comply with a statutory demand, it faces the possibility of being wound up by order of the court. So, it is important to know your rights if you are served with one.
This article by our insolvency lawyers will explore what a statutory demand is and how you should respond if you’re served one.
What is a statutory demand?
In Australia, a statutory demand is a formal request for payment of a debt that is owed by a company. Statutory demands are issued under section 459E of the Corporations Act 2001 (Cth) (Act).
A valid statutory demand is a serious document and should not be ignored. If you are served with one, you can choose to either:
Pay the requested figure;
Negotiate a settlement for the debt with your creditor; or
Set aside a statutory demand via a court application. For example, in the event of a genuine dispute about the debt claimed.
If a debtor company fails to undertake any of the three actions within the statutory period, it will be presumed insolvent. The creditors can appeal to the court for the debtor company to be wound up. A liquidator will be assigned to the debtor company to begin liquidation proceedings.
What is a winding up order?
A winding up order is a court order that is usually made when a debtor company’s directors are unable to pay the debts owed. This process is also known as compulsory liquidation.
A winding up application is made by the court at the request of a creditor. The application usually follows a company’s failure to comply with a creditor’s statutory demand.
Once a winding up application has been made, the debtor company will be liquidated. The sales from its proceeds will be distributed among creditors.
When can a statutory demand be made?
Under the Corporations Act 2001 (Cth), a creditor can issue a statutory demand if:
The debtor in question is a company;
If the creditor is owed at least $4,000;
If the debt is due and payable; and
There is no genuine dispute about the debt.
If you receive a statutory demand, you should seek professional advice as soon as possible. You must respond or comply with a statutory demand within the stipulated timeframe. If you fail to do so, your company will be legally presumed insolvent. Creditors can then make a winding up application to the court, and that order will be granted unless there are exceptional circumstances. Such exceptional circumstances include proof of the company’s solvency.
What form should a statutory demand take?
The form of a valid statutory demand is set out in the Corporations Act 2001 (Cth). A statutory demand may be thrown out by the court if it doesn’t adhere to the requirements set out by the Act. The court may also set aside a statutory demand if it is misleading to the debtor company.
A valid statutory demand must meet the following requirements:
It is in writing and uses the prescribed form, which is Form 509(H);
It accurately specifies the debtor company and the creditor(s);
It is signed by the creditor making the statutory demands or their agent;
The statutory demand states the name of the debtor company to which the statutory demands are made. This includes the company’s registered office address;
The statutory demand specifies the amount of debt owed; and
It must detail a location in Australia where the debt may be paid. This usually takes place at the debtor company or their legal practitioner’s office.
If you haven’t successfully sent a statutory demand before, you should consider getting one (or a template) prepared for you by someone with the right expertise. You will waste time (and potentially money) if you make a mistake.
What is insolvency?
A company is insolvent when it is unable to pay its bills. One of the indicators of insolvency is the company’s failure to comply with a valid statutory demand issued by a creditor.
A statutory demand requires the debtor company to pay the outstanding debt within 21 days. Failure to comply with a statutory demand can lead to a presumption of insolvency. A presumption of insolvency opens the doors for creditors to ask a court to wind up a company.
The debtor company can have the statutory demand withdrawn by entering into a payment plan with the creditor.
A debtor company may also challenge the statutory demand if there is a genuine dispute about the amount of the debt claimed.
If the debt is not paid or an agreement isn’t reached to the creditor’s satisfaction, the creditor can then apply to the court to have your company wound up.
How is a statutory demand served?
A statutory demand may be served either personally or by post. If you are registered as a company in Australia, the statutory demand must be served to your company’s registered office address.
Creditors may also serve their statutory demands to a debtor company’s directors. This option is available in the event that the company’s registered office has changed or is unknown to creditors.
What is the statutory minimum for a statutory demand?
The statutory minimum, which is the minimum threshold that must be met for a creditor to issue statutory demands, was once $2,000.
However, changes to statutory demands came into effect in July 2021. The main change is the increase in the statutory minimum from $2,000 to $4,000. That means that if you owe a creditor less than $4,000, the creditor cannot issue a statutory demand.
What happens when my company is served a statutory demand?
If you’re served with a statutory demand, you have several options:
Settle the amount owed. If you’re able to pay the amount specified in the statutory demand, you can do so. After that, the creditor will withdraw the statutory demand.
Negotiate with the creditor. A debtor company can try to negotiate a payment plan or other arrangement with the creditor. If you reach an agreement that meets your and the creditor’s satisfaction, make sure you get it in writing.
Apply to have the statutory demand set aside. If you think the debt owed is incorrect, a genuine dispute exists, or there are other grounds to set aside a statutory demand, you can make an application to the court.
If none of these options is possible or successful, and you don’t take any action within 21 days, the creditor can start insolvency proceedings against you. This could lead to your company being wound up.
If you’re served with a statutory demand, it’s important to get legal advice as soon as possible. Having an experienced lawyer gives you the best chance of successfully setting aside a statutory demand. Get in touch with an insolvency lawyer to discuss your options and figure out the best course of action.
What happens if I don’t respond to a statutory demand?
If you fail to comply with a statutory demand within 21 days:
Your business is presumed to be insolvent for the purposes of legal action.
The company or person who served the statutory demand can begin a winding up application against your company on the basis that your business is insolvent.
If you’re served with a statutory demand, you should seek out legal advice as soon as possible. You may be able to challenge creditors’ statutory demands if you have grounds to do so.
How serious is a statutory demand?
A statutory demand is a formal document that informs you of the debt owed and demands that you pay it. Any business, organisation or government body may issue a statutory demand without having to go to court.
Statutory demands should not be taken lightly. Receiving one indicates the creditor is prepared to wind up your business if you fail to comply with their demands. A statutory demand is simply an initial formality required by the law, and you should treat it as a legal document that sets in train a process serious enough to end your business.
If you’re served with a statutory demand, it’s important to act quickly while you still have options available to you. If you allow 21 days to pass without taking any action, your options become seriously limited.
Aside from the other considerations, failing to respond to a statutory demand could mean your business can be considered insolvent for legal purposes. And trading while insolvent is a criminal offence.
On what grounds can I set aside a statutory demand?
If you have been served with a statutory demand, and you believe that the debt is in genuine dispute, or that you have an offsetting claim, then you can apply to the court to set aside the statutory demand. To successfully set aside a statutory demand, you must demonstrate to the court there is a valid reason for the statutory demand to be set aside.
The most common grounds to set aside a statutory demand are:
The debt claimed in the creditor’s statutory demand is in genuine dispute.
You have an offsetting claim. And this claim reduces the amount of the debt claimed in the statutory demand to less than the statutory minimum.
The statutory demand is defective.
You must make your application within 21 days of being served with the statutory demand. It’s important to act quickly, as this is a serious matter that could lead to the dissolution of your company. If you’re not sure what to do, seek legal advice as soon as possible.
Can a statutory demand be withdrawn?
Yes, if there are grounds for the debtor company to set the statutory demands aside. The creditor may be informed of reasons for withdrawing the statutory demands (for example, if there is a genuine dispute), and be asked to withdraw it.
The withdrawal of statutory demands can be done either in oral or written form. However, a debtor company should always have a written copy of the withdrawal, in case they need to refer to it in the future.
Creditors may still opt to dismiss the debtor company’s request to withdraw a statutory demand. However, if the company succeeds in petitioning the court to set its statutory demand aside, the creditor may be ordered to cover the costs of setting it aside.
Expert help for when you need it most
A statutory demand is a serious legal document and should not be taken lightly. If you’re served with a statutory demand, you need to take immediate action. Ignoring or choosing not to comply with a statutory demand could lead to serious financial consequences down the road. The best thing you can do is consult an experienced legal professional. One who can help you understand your options and protect your interests.
The team at Twomey Dispute Lawyers has experience dealing with statutory demands. And we can help guide you through the process of responding to the demand. Don’t wait. Stand up for your business and get the legal support you need. Pick up the phone today and we’ll discuss your options.
Call us for a confidential chat on 1300 286 578 or email us at info@tdllaw.com.au
Important note on this article
This article discusses the general state of affairs, which could change at any time because the law can change at any time. Also, your situation is unique, so an article like this one can’t give you all your options, and some of the options discussed here might not apply to you. For those reasons and others, you mustn’t treat what you’ve read here as legal advice for you. What you should do as soon as possible is get legal advice specific to you if you are affected by anything discussed above.
Liability limited by a scheme approved under Professional Standards Legislation.
