- A statutory demand is a formal demand for payment in relation to a debt due and payable by a company.
- A company is required to respond to the demand within 21 days. A failure to respond could lead to the company being wound up and liquidated.
- A statutory demand is not a debt recovery tool and should not be used to coerce someone to pay a debt. Misuse of the process can result in court penalties.
- From 1 July 2021, the statutory demand threshold will increase from $2,000 to $4,000.
- This change is in addition to the insolvency law reform referred to in the Information Sheet “Insolvency reforms to support small business”.
- Creditor – A person or business who is owed money.
- Debtor – A person or business who owes money.
- Solvency – A person or business is solvent only if they are able to pay all of their debts as and when they become due and payable.
- Insolvency – Being unable to pay debts when and as they become due and payable.
- Presumption of Insolvency – If a debtor fails to respond to or pay the debt subject to a statutory demand, a court may declare that the company is insolvent.
What is a statutory demand?
A statutory demand is a written demand issued under the Corporations Act requiring a company to pay money that is due and payable.
The purpose of the demand is to establish that a company is unable to pay its debts as and when they fall due. Failure to comply with a statutory demand may result in a presumption of insolvency and an order to wind up the company may be made.
A statutory demand must:
- specify the debt claimed
- indicate the nature of the debt (e.g. goods supplied and delivered)
- demand payment within 21 days of service of the demand
- be in writing and in the prescribed form (Form 509H)
- be signed by the person issuing the demand; and
- include an affidavit if the debt is not based upon a Court issued Judgment.
Example statutory demand form
Someone owes me a debt, can I serve a statutory demand?
A statutory demand may be issued if:
- the debt is due and payable
- the debt is for $4,000 or more
- there are no other proceedings on foot in relation to the debt, including proceedings against the company director’s personally.
A statutory demand should not be used as a debt recovery tool. It is an abuse of process to use the demand to coerce someone into paying a debt, and is likely to be set aside by the court with costs awarded in favour of the debtor.
Alternatives to a statutory demand include (but are not limited to):
- a letter of demand
- commencing legal proceedings and obtaining judgment by default
- issuing a claim under the relevant Security for Payment legislation in your jurisdiction.
I’ve been served with a statutory demand, what do I do?
You must respond to a statutory demand within 21 days of service to avoid a presumption of insolvency and an application to wind up your company being filed with the court.
In responding to the demand, you may:
- make payment of the demand claimed
- reach an agreement with the person claiming payment; or
- file an application to set aside the demand.
An application to set aside a statutory demand must be filed in Court and served on the creditor within the 21 day period from when you were served with the statutory demand. There are 4 grounds to set aside the statutory demand:
- There is a genuine dispute regarding the existence or amount of the debt.
- You have an offsetting claim i.e. both parties are owed money and each debt can cancel the other out.
- There is an error or issues in the demand itself for example failing to specify the amount of interest in the demand (thereby requiring the debtor to calculate the interest component) may cause substantial injustice.
- Some other reason why the demand should be set aside (such as issues regarding service of the demand).
Failure to respond to a statutory demand
If you fail to respond to the demand within the 21 days, it is likely that the creditor will file an application to wind up your company in the Supreme Court. If a company is wound up, a liquidator will be appointed and the company will be placed into liquidation. Liquidation is the process that prepares a company for deregistration, which is in essence the “death” of a company.
There are significant consequences when issuing or receiving a statutory demand.
Accordingly, it is strongly recommend that you engage an insolvency solicitor to assist in the drafting of a statutory demand or in the event you are served with a demand yourself.