A statutory demand is a demand sent to a debtor company, requiring that they pay their debts. A statutory demand is a tool used by creditors to pressure a company to pay their debt, or otherwise prove a company has become insolvent, if they fail to comply with the demand. As a company, if you receive a statutory demand it is imperative you take action within the time limit, or you are at risk compulsory winding up.
What is a statutory demand?
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.
Debts must be due and payable in order to issue a statutory demand for them. If the demand does not comply with the form specified under the Corporations Act it may be set aside.
How to properly serve a statutory demand
Statutory demands should be used a last resort by creditors to recover unpaid debts, and creditors should exhaust all methods of debt recovery before serving a statutory demand.
Service of a statutory demand should comply with the requirements set out in section 109X of the Corporations Act. Proper service of a statutory demand is highly important, as the court may set aside the demand if it does not comply with the proper requirements. Statutory demands may be served on a company by posting it to or leaving it at its registered office, or by personally delivering it to a director who resides in Australia.
How to respond to a statutory demand
If you receive a statutory demand, you have 21 days to raise any issues or dispute the demand. You should seek legal advice if you receive a statutory demand and want to know your options.
To avoid the presumption of insolvency, you should respond to a statutory demand within the prescribed time either by paying your debts in full, negotiating alternative arrangements with the creditor/s, or filing an application 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).
Non-compliance with a statutory demand
If you are a creditor who has served a statutory demand and no action was taken by the debtor company, the presumption of insolvency lasts for 3 months after the demand is served. You may apply to wind up the company within this time. Once these 3 months expire, creditors can no longer rely on the statutory demand as proving insolvency.
If you are a debtor company who has received a statutory demand and have taken no action, you will be presumed to be insolvent and are vulnerable to compulsory winding up.
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.