Dealing with Statutory Demands

What is a statutory demand?

A statutory demand is a document that is, or purports to be, a demand served upon a company under the Australian Corporations Act 2001. The document should have the title "Creditor's Statutory Demand for Payment of Debt" on the heading of the front page. It will include a demand for the payment of an alleged debt to a person or company named in the document (the "creditor"), and will set out the consequences for failing to do so. 

The existence of the alleged debt may not come as a complete surprise; the recipient of the statutory demand may have corresponded with the creditor about the alleged debt in the weeks or even months prior to receiving the statutory demand.

The statutory demand needs to comply with strict requirements in order to be valid. These include that the demand must be in a prescribed form, and must be accompanied by an affidavit that verifies the alleged debt is payable by the recipient.

What are the consequences of not responding to a statutory demand?

The failure to do anything about a valid statutory demand can have significant consequences for the recipient; it creates a presumption that the recipient is insolvent, and the creditor can subsequently apply to the appropriate court and rely on that presumption as a ground for seeking an order placing the recipient company in liquidation. 

What are a company's options for dealing with a statutory demand?

A company registered in Australia has a number of options for responding to a statutory demand:

1. If the company admits the entire amount of the debt specified in the statutory demand, it can comply with the demand by paying the amount in full to the creditor. This must be done within 21 days of receiving the statutory demand;
2. The company can try to reach a compromise with the creditor. This option may be appropriate where it disputes part of the debt, or has an offsetting claim which reduces the total amount of the debt in the demand. If the company manages to reach a compromise with the creditor, it should be recorded in writing and include an undertaking from the creditor to withdraw the demand.
3. If the company cannot reach a compromise with the creditor, it can apply to either the Federal Court of Australia or a Supreme Court of an Australian state for an order setting aside the demand. There is no requirement to negotiate with the creditor before making this application.

There are four grounds on which a company can make an application to set aside the demand: 

1. There is a genuine dispute between the company and the creditor about the existence or amount of a debt to which the demand relates;
2. The company has a genuine offsetting claim against the creditor;
3. The demand contains a defect that will cause substantial injustice to the company unless the demand is set aside;
4. There is some other reason why the demand should be set aside. 

It is vital that the application is made within 21 days of receiving the statutory demand. This timeframe is strict and the Court will not, and cannot, entertain any application to set aside a demand made outside the 21-day period. A valid application is made only if the company files with the Court an affidavit supporting its application, and then serve a copy of the application and affidavit on the creditor. The affidavit is typically sworn by a director of the company with knowledge of the matters relating to the alleged debt, and should in some way advance, further or assist the company's case to have the demand set aside. 

After it has heard the application, the Court can set aside the demand if the Court is satisfied that the company's dispute is genuine. The Court will also set aside the demand if satisfied that the demand contains a defect causing substantial injustice, or if there is some other reason why the demand should be set aside. 

Whilst a company not registered in Australia can issue statutory demands, it cannot be served with a statutory demand. However, if the company carries on business in Australia, a separate procedure under the Corporations Act 2001 enables a creditor to apply to wind up the company upon the company's failure to pay a debt. This process is separate and distinct from the statutory demand procedure.