What a Statutory Demand Is and How a Company Should Respond

A statutory demand is one of the most serious letters a company can receive. It is not an ordinary request for payment. It starts a short legal clock, and ignoring it can lead to the company being wound up. Every director should know what one looks like.

Statutory demands are made under the Corporations Act. The Federal Court of Australia describes one as a formal, written request requiring a company to pay a debt. This article covers demands served on companies. It explains the timing, the minimum amount and the options for responding.

What a statutory demand is

A creditor uses a statutory demand to require a company to pay a debt within a set period. The requirements for making one are in section 459E of the Act. The debts must be due and payable. Together they must total at least $4,000.

A demand can lead on to a winding up application by the creditor. The Federal Court sets out the process in its corporations information sheet on statutory demands. It says serving a demand has serious consequences. It also says a creditor should get legal advice before serving one.

The 21 day deadline

Once the demand is served, the company has 21 days to act. Within that time it must pay the debt, secure or settle it to the creditor’s reasonable satisfaction, or apply to the court to have the demand set aside. The Federal Court sheet says no extensions are given for filing and serving that application. Missing the deadline by a day can close off that option.

The clock runs from service, not from the day someone gets round to opening the mail. Section 109X of the Act deals with how documents are served on a company. Make sure mail sent to your registered office is collected and read promptly. A director who is overseas or busy still faces the same deadline.

What happens if the company does nothing

If the company does not comply, it is presumed to be insolvent. That presumption comes from section 459C(2)(a). The creditor can then apply to wind up the company. The sheet says the creditor must apply within three months of the failure to comply.

A winding up application is a serious court process. The creditor needs a liquidator’s consent and must notify ASIC. Notice is also published on the ASIC insolvency notices page. The sheet says proceedings must be decided within six months unless the court extends that time.

Grounds for setting a demand aside

A company that disputes a demand can apply to set it aside under section 459G. The application must be filed with the court and served on the creditor within the 21 days. The grounds are set out in sections 459H and 459J. Each ground has its own meaning in law, so get advice early.

• A genuine dispute about the debt.
• An offsetting claim the company has against the creditor.
• A defect in the demand that would cause substantial injustice.
• Some other reason, under section 459J(1)(b).

In plain terms, a genuine dispute is a real argument about whether the money is owed. An offsetting claim is money the creditor owes the company in return. A defect is a problem with the demand itself. These are only general descriptions, and the way courts apply them can be technical.

If the application fails

If the court dismisses the application, the company does not get a fresh 21 days. The sheet says it must comply within 7 days of the dismissal, unless the court sets another period. Section 459F deals with extending the time for compliance. Plan for that short window from the start.

What directors should do when a demand arrives

Read the demand carefully and note the date it was served. Work out the 21 day deadline straight away and put it in every diary that matters. Check the amount against your own records. Then speak to a lawyer, because the Federal Court says challenging a demand is complex.

If the debt is owed and the company can pay, paying within the time is the simplest path. If the company cannot pay, take advice about its position quickly. A demand you cannot meet raises bigger questions about the company. It may also be time to think about whether to permanently close your business.

Directors should also check whether they signed anything personally. Some supply and finance agreements include personal guarantees. A guarantee can mean the creditor looks to you as well as the company. Find those documents early so nothing comes as a surprise.

For creditors thinking about serving a demand

A statutory demand is a strong tool, and the court treats it seriously. The Federal Court sheet says a creditor should get legal advice before serving one. Any affidavit that goes with the demand must not be dated before the demand itself. A defect that causes substantial injustice is one of the grounds for setting a demand aside.

Think about whether the debt is really undisputed before you start. If the company has already raised a real complaint about the work or goods, a demand may not be the right step. A lawyer can explain other ways to recover the money. Those other paths follow their own rules, which differ by state and territory.

Checking debts before buying or running a company

Unpaid debts and demands matter if you are buying a business. Ask the seller whether any demands have been served or any creditors are pressing for payment. You can also check the ASIC insolvency notices page for published notices. Get those answers in writing before you commit.

Good systems reduce the risk of a demand in the first place. Pay suppliers on time, keep invoices organised and deal with disputes in writing as they come up. Running a company involves many legal duties, from your rights as an employer to your dealings with creditors. A clear record of each dispute is useful if a demand ever arrives.

The statutory demand process comes from federal law, but other debt recovery processes run through state and territory courts. Those processes differ by state and change over time. Court fees also apply, and the Federal Court says a party who cannot afford a fee may be able to ask the court for an exemption.

Frequently asked questions

How long does a company have to respond to a statutory demand?

The company has 21 days after the demand is served. In that time it must pay, secure or settle the debt, or apply to set the demand aside. The Federal Court says no extensions are given for that application.

What is the minimum debt for a statutory demand?

The debts must be due and payable. Together they must total at least $4,000. The amount can be made up of more than one debt.

What happens if a company ignores a statutory demand?

It is presumed to be insolvent. The creditor can then apply to have the company wound up. That application must be made within three months of the failure to comply.

Can a statutory demand be challenged?

Yes. A company can apply to set it aside on grounds such as a genuine dispute or an offsetting claim. The application must be filed and served within 21 days of service of the demand.

This article is general information only and is not legal advice. Laws and processes differ by state and territory and change over time. For advice about your own situation, speak with a qualified lawyer.