A statutory demand is a demand under section 459E of the Corporations Act 2001 (Cth) issued upon a company by a creditor for debts of at least $2000 due, payable within 21 days of service. The Act requires that statutory demands:
- Relate to either a single debt of at least $2000, or 2 or more debts totalling at least $2000,
- Must specify the amount of the debt,
- Must require compliance with the demand within 21 days of service,
- Must be in writing in compliance with Form 509H,
- Must be signed by the creditor or on behalf of the creditor, and
- Must be accompanied by an affidavit verifying the debt, unless the debt is a judgment debt.
Most commonly, statutory demands are issued for the purpose of pressuring a company to pay their debts or proving that a company is insolvent if they fail to comply with the demand.
Receiving a statutory demand
- Pay the demand in full
- Negotiate settlement with the creditor
- File an application in the court to have the demand set aside – a statutory demand may be set aside where there is a genuine dispute about the debt or where the company has an offsetting claim (section 459H); alternatively, a company may apply to have the demand set aside where it contains a defect that would lead to a substantial injustice if the demand is not set aside (section 459J).
If a company fails to comply with a statutory demand, they will be presumed to be insolvent. Therefore, any issues with the statutory demand should be raised within 21 days of being served. If no action is taken within this time, the company will have little recourse to resist being compulsorily wound up.
Insolvency and winding up
Under section 95A of the Corporations Act, a company becomes insolvent when they are unable to pay all their debts as and when they become due and payable. Once a company becomes insolvent, the company may be wound up either by Court order or an application by creditor or any other person or agency as prescribed by section 459A of the Act.
Temporary changes due to COVID-19
In response to the COVID-19 pandemic, the Government introduced the Coronavirus Economic Response Package Omnibus Act 2020 (Cth). The Act made two amendments relating to the statutory demand regime, effective from 25 March 2020 for 6 months, subject to any extensions or further amendments which may be made. The first amendment is that the statutory minimum for debt owed has been increased from $2000 to $20,000. The second amendment is that the statutory period to respond to or act upon a statutory demand has been increased from 21 days to 6 months. These changes will bring significant relief to companies struggling financially in these times. These changes are due to expire in September 2020, so debtors should be conscious that if no extension is enacted, the statutory minimum and statutory period will return to those outlined in the Corporations Act.