How to Respond to a Statutory Demand

Has your company received a statutory demand? A statutory demand is a formal demand to collect a debt, under s459E of the Corporations Act 2001. This blog explains what a valid statutory demand is, and how you can respond to a statutory demand.

What is a Statutory Demand?

A statutory demand is used to determine whether a company can pay its debts as and when they fall due.  It is a very effective way to ascertain whether a company can pay its debts as and when they fall due. If such a demand is correctly issued and served and the debtor company fails to pay the debt within 21 days from the date of service of the demand, or otherwise fails to make arrangements to pay the debt to the creditor’s satisfaction, the company is presumed “insolvent” and the creditor can make an application to wind the company up.

To be valid, a statutory demand must:

  • be in writing;
  • specify the total amount of the debt(s);
  • require the company to pay the debt(s) within 21 days after service;
  • signed by or on behalf of the creditor; and
  • be in the prescribed form (found in Schedule 2 of the Corporations Regulations 2001).

You must also serve a statutory demand on the company in the prescribed form by either:

  • leaving it at the registered office of the debtor company;
  • sending it by post to the registered office of the debtor company;
  • delivering a copy of the Statutory Demand personally to the director(s) who reside in Australia; or
  • where a creditor becomes aware that the company no longer occupies the registered address, and the creditor is aware of the new address, they should take the demand to the new address.
  • If the creditor is aware the company no longer occupies the registered address but does not know where the company has moved, it is prudent to serve the demand on the company director(s).

My Company Has Been Issued With a Statutory Demand – What Happens Next?

It is critical that you respond to the statutory demand within 21 days of service. If you believe the company should not be required to comply with the demand, you can apply to have the court set it aside.

There are 3 primary ways to set aside a statutory demand:

  • if there is a genuine dispute regarding the existence of the statutory demand or amount that is owed;
  • if the company has an offsetting claim against the party serving the demand, which consequently reduces the debt owed below the statutory minimum (being $2,000); or
  • if there is a defect in the statutory demand which would cause substantial injustice unless the Court sets the demand aside.

A supporting affidavit must also accompany the application to set aside a statutory demand. The purpose of the affidavit is to provide evidence in support as to why the demand should be set aside.

What Happens if the Company Does Not Pay Or Respond to the Statutory Demand?

A company can be presumed insolvent if it fails to either pay the debt or apply to set aside the debt within 21 days. The party serving the statutory demand can rely on the presumption of insolvency and apply to wind up the company.

Although a company can rebut an application for winding up, the onus of proving solvency is strict, and can be expensive.  Quite often, you will need an expert report from a solvency accountant to prove solvency.  Again, you must respond to the statutory demand before 21 days passes.  Seeking legal advice promptly is critical.

Important things to remember

Remember, time is of the essence! You must file and serve on the creditor an application to set aside a statutory demand and the supporting affidavit within 21 days.  A failure to do so can be disastrous, because the presumption of insolvency arises, and the onus shifts on you to disprove that the company is in fact solvent.  A letter from your accountant, in most cases, will not suffice.

Boss Lawyers’ disputes lawyers can assist your company to respond to a statutory demand, or apply to set aside a statutory demand. We can also advise you on next steps if you are unsure how to proceed with the demand. Questions? Please get in touch on 1300 267 711.

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