In cases of insolvency, a company lacks the capacity to settle its debts promptly when they come due. During such circumstances, creditors of the insolvent company have several options to assert their rights, one of which involves issuing statutory demands.

What Is a Statutory Demand and Why Are They Issued?

A statutory demand is an official document that a creditor can serve on a company where debt is owing but has not been paid. Creditors can serve statutory demands on debtors under section 459E of the Corporations Act 2001 (Cth). Additionally, it serves as the initial step for a creditor intending to liquidate a company due to unpaid debts.

In circumstances where the company upon which a statutory demand is served does not pay the debt within 21 days of the date of service and does not successfully lodge a defence proving that there are reasons for the statutory demand to be set aside, the company upon which the statutory demand was served is deemed to be insolvent.

On expiration of the 21-day timeframe, a creditor can then apply to the court to have the debtor company wound up on the basis of insolvency.  A creditor can apply to wind up a company in this circumstance in accordance with section 459P of the Corporations Act 2001. Under section 459A of the Corporations Act 2001, the court has the power to wind up the company.

What Are the Reasons for Setting Aside a Statutory Demand?

Within 21 days of a demand being properly served upon a company, the company can petition the court to set aside the statutory demand. The court does not entertain requests for deadline extensions, even if the creditor consents to an application regarding this.

An application to set aside a statutory demand can be made based on one or more of the following grounds:

1. A “genuine dispute” regarding the debt’s amount and/or the circumstances of its origination;
2. The recipient company holds a legitimate claim to offset the debt. This may not necessarily be in a liquidated sum, but it must be an immediate claim;
3. Defects within the demand, including misstated debt amounts, misdescription of the debt or party being served, or other irregularities;
4. The company presents “some other reason” to justify that the demand be set aside. This includes but is not limited to: faulty supporting affidavits, undue delays between affidavit swearing and demand issuance, lack of deponent’s access to creditor records for affidavit preparation, or if the statutory demand is brought for an improper purpose (e.g. deemed an abuse of process).

What to Do if My Company Receives a Statutory Demand?

A statutory demand is a serious document that should not be ignored. There are several options available to companies upon receipt of a statutory demand:

1. Pay the figure requested: This will discharge the debt and resolve the matter;
2. Engage in negotiations to settle the debt with your creditor: This can lead to an agreement that might avoid the need for further legal action;
3. Set aside the statutory demand through a court application: If there is a legitimate disagreement regarding the claimed debt or if there are valid grounds to challenge the demand.

If your company is served with a statutory demand, it’s important to act quickly while you still have options available to you. If the 21-day time limitation for compliance with a statutory demand lapses without any of the abovementioned options being exercised, then the creditor may rely on the presumption of insolvency to commence a winding up application to wind up the company in insolvency. It is crucial that you obtain legal advice as soon as possible.

Conclusion

Receiving a statutory demand is a critical event for any company and requires immediate attention. The consequences of ignoring a statutory demand can be severe, potentially leading to the liquidation of the company. Therefore, it is essential to understand your options and act swiftly.

Rose Litigation Lawyers has significant experience dealing with statutory demands, and we can help guide you through the process of issuing or responding to a demand. For expert legal advice and assistance, contact us today. Our team is here to help you navigate this complex area of law and protect your interests.

The content of this publication is intended to provide a summary and commentary only. It is not intended to be comprehensive nor does it constitute legal advice, and has been prepared based on applicable legislation and case authority at the date of publication. You should seek legal advice on specific circumstances before taking any action.