A creditor's statutory demand ("statutory demand") is a demand for monies under section 459E of the Corporations Act. It cannot be used for any other remedy, such as rectification works, or to put forward an obligation under a contract. Unless the debt is a judgement debt, a statutory demand must be accompanied by an affidavit of a relevant person with knowledge of the debt, who must state that the debt is outstanding, and that there is no genuine dispute about the debt.

Use of Statutory Demand

A statutory demand must not be used as a general debt collection tool or to put pressure on a company to pay money. A statutory demand is only available to a creditor where there is no genuine dispute over the monies, no genuine offsetting claim and where it is believed that the company is insolvent.

When issuing statutory demands a creditor must consider to take legal advice about whether any genuine dispute has arisen. Generally speaking a dispute will be a genuine dispute if, on an initial examination of the evidence before it, the court considers that the company has at least an arguable dispute and should be permitted to ventilate the dispute in a hearing.

Similarly if the company is a genuine offsetting claim which exceeds or equals the value of the statutory demand the court will likely set aside the statutory demand.

What are the consequences for the company and its directors?

A statutory demand requires that a company, within 21 days of being served with a statutory demand, either:

  • Files or serves a court application to have the statutory demand set aside; or
  • Makes payment of, or secures, the full amount.

The Corporations Act provides that failure to perform one of the above actions within 21 days will mean the company has committed an act of insolvency. This time limit is not capable of being extended. It is therefore extremely important that a record is kept of the date on which the statutory demand is received and that the matter is diarised and dealt with quickly.

If the company fails to attend to the above, any creditor can rely upon the company's act of insolvency to commence an application for winding up. Generally, the only defence to an application for winding up is to prove the company is actually insolvent which requires a very detailed and public display of the company's finances.

If you have received a statutory demand and you have failed to comply with it is best to consult with your lawyer to determine your rights and obligations in relation to the statutory demand.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.