Statutory Demand: How Does It Work?

Author: Ian Aldridge, Progressive Legal

If you’re a creditor looking to get back money that a company in Australia owes you, you might come across a formal notice called a statutory demand. This is a legal instrument used by creditors to ask for the payment of a debt, and if a company neglects such a demand, it can result in very severe consequences being initiated against the company.

We explain here on the website what a statutory demand in Australia is in detail, including information about the person who can issue the demand, the legal requirements stated in the Corporations Act 2001, the rules for giving and serving it, the risks connected with it, the response in case you receive it, and the procedures for setting aside or cancelling a statutory demand if you have to do it.

What is a Statutory Demand?

A statutory demand is a formal legal notice given in Australia to a company, requiring it to pay a debt that it owes to a creditor, in accordance with the Corporations Act 2001 (Cth). It is a strong debt-recovery tool mainly because it forces the debtor company to either pay the outstanding amount, give security for the debt, or make an application to have the demand set aside within 21 days.

The main function of statutory demands is to help stop grievances before they get out of hand: they indicate the creditor’s intention to take further steps if the debt is not settled. If the debtor company does not comply with the demand or does not successfully challenge it within the 21 days, it is considered insolvent; therefore, the creditor(s) obtain the right to initiate winding-up (liquidation) proceedings.

Knowing the ins and outs of statutory demands is essential for both parties, creditors who want an expeditious recovery of their money and companies that receive such a demand and have to respond promptly so as not to face severe legal consequences. Not doing so can lead to heavy commercial and financial losses for all the players in the game.

Who issues a Statutory Demand?

Statutory demands are, by definition, requests for payment that are mainly sent by creditors to debtors who have a clear, undisputed debt. The most frequent occurrence is where there is a liquidated debt, e.g., an unpaid invoice for goods or services that a debtor company has not paid.

If a company fails to pay a court-ordered judgment debt, a statutory demand may be issued in such a case only. Quite simply, after the creditor has won the case and obtained a judgment in their favour, the debtor is still resisting payment. At this point, a statutory demand turns into a legal device of great power, enabling the creditor to use various methods of further recovery, including starting the process of winding up the company if the debt is left unpaid.

Essentially, the issuance of a statutory demand by creditors is their direct, legally recognised bridge to debt clearance and the assertion of their rights under Australian law.

Issuing a statutory demand with Form 509h of the Corporations Act

Form 509h is the official form used to issue a statutory demand under the Act. Creating a valid statutory demand involves completing specific sections of the form accurately. When filling it out, you’ll need to provide:

Creditor Information

This includes the creditor’s name, address, and contact details.

Debtor Details

For the company owing the debt, you’ll need their name and Australian Company Number (ACN). It’s crucial to correctly identify the debtor, whether it’s a company or an individual. Avoid identifying directors or unrelated entities.

Debt Amount

Clearly state the amount owed by the company to the creditor. This amount can represent a single debt or multiple debts. Accuracy is essential to comply with Section 9 of the Corporations Act.

Due Date

Indicate when the debt became due and payable.

Security Information

Include any details about security held by the creditor concerning the debt.

Service Details

Mention the date and method used to serve the demand.

Instructions to the Debtor

Specify what actions you expect the debtor to take.

Additionally, apart from completing Form 509h, several other formal requirements must be met for a statutory demand to be valid, which we’ll discuss further below. For assistance in ensuring a valid statutory demand, reach out to us at Progressive Legal. We’re here to help you navigate this process smoothly.

What are the formal requirements of a statutory demand?

To issue a valid statutory demand in Australia, specific formal requirements must be met, including:

Debt Amount

The debt owed by the company to the creditor must be at least $4,000 (at the time of publication).

Due and Payable

The debt must be due and payable.

Written Demand

The demand must be in writing and adhere to the stipulations outlined in the Corporations Act.

Proper Service

It must be served on the company following the requirements of the Corporations Act.

Clarity

The demand must be clear and unambiguous, specifying the debt amount, its details (including the due date), and a payment deadline, which must be a minimum of 21 days from the service date.

If you’re considering issuing a statutory demand, our experienced dispute resolution lawyers will ensure it meets all legal requirements. Contact us today for expert guidance by requesting our advice below. 

How do I serve a statutory demand?

To ensure the validity of a statutory demand in Australia, proper service is crucial, as outlined in Section 109X of the Act. This can be accomplished through the following methods:

1. Hand Delivery: The demand should be hand-delivered to a director or another authorized officer of the company.
2. Postal Service: Posting the demand to the company’s registered office or primary place of business.
3. In-Person Delivery: Leaving the demand at the company’s registered office or primary place of business.
4. Notice Address: If a liquidator, administrator, or restructuring practitioner has been appointed for the company, the demand should be left at the address provided in the most recent notice lodged with ASIC.

It’s crucial to serve the demand correctly; otherwise, the company might have grounds to challenge its validity.

What are the dangers of issuing a statutory demand?

Statutory demands may be effective in debt recovery, but they come with significant legal risks to the creditors. Once a company does not comply with the demand in 21 days, it is considered to have made an act of insolvency, thus winding-up proceedings and the forced sale of its assets may follow.

Nevertheless, creditors need to exercise caution. Where the debtor company contests the debt or shows that the statutory demand has a defect (e.g., wrong details or an error in the amount claimed), it may make an application to have the demand revoked by the Court.

In that case, the creditor will be liable to pay a large sum of money in court expenses, which on some occasions, may even be more than the original debt. Furthermore, wrongful conduct in the issuing of a statutory demand, such as doing it in bad faith, for an ulterior purpose, or for a debt that is genuinely in dispute, may result in the creditor being sued for compensation or damages.

Besides, it is important that the law be carefully drafted and the debt accurately assessed in order to be free from these risks.

What do I do if I have received a statutory demand?

If your company has received a statutory demand, it’s crucial to act promptly. You can request to have the demand set aside under s 459G of the Act and you have a 21-day window from the date of receiving the demand to either pay the debt in full or apply for its removal. Failing to do so may lead to the company being seen as insolvent.

To apply for setting aside the demand, you must submit an application with an accompanying affidavit to the appropriate court within 21 days of receiving the demand. Make sure to serve the application on the person who served the affidavit.

However, there are various grounds on which you might be able to have the demand set aside, including:

• If the debt is genuinely disputed.
• If there’s a significant defect in the demand, and not setting it aside would cause substantial injustice. It’s important to note that a defect alone may not lead to setting aside the demand; the court must be convinced that it would cause substantial harm to the debtor. For instance, if the demand lacks sufficient details to identify the debt.
• If the demand is considered an abuse of the legal process.
• If the company has a legitimate offsetting claim.

If you’re thinking of applying to have the statutory demand set aside, it’s crucial to seek urgent legal advice from experts since time is of the essence. Don’t delay in taking action, reach out to our experienced litigation lawyers below.

Setting aside a statutory demand

When a statutory demand is received, a company has the option to contest it in court within 21 days of proper service. Note that no extensions are granted, even with creditor consent.

Genuine Dispute

One valid reason to challenge the demand is if there exists a genuine dispute regarding the debt’s amount or the circumstances surrounding its origin.

Offsetting Claim

Companies can seek to set aside the demand if they hold an immediate counterclaim, even if it’s not a specific sum of money (e.g., potential damages from a lawsuit).

Defect in the Demand

Errors in the demand, such as an inaccurate debt amount, misdescriptions, or other irregularities, provide a valid ground for challenge.

Other Reasons

Additional factors that may lead to setting aside the demand include an invalid supporting affidavit, a significant time gap between the affidavit and the demand, or if the demand is considered an abuse of the legal process. In such cases, prompt action is crucial.

Key Takeaways

Statutory demands can be a powerful tool for creditors seeking to recover debts from companies in Australia. However, it is important to ensure that the demand is issued in accordance with the requirements of the Corporations Act 2001 (Cth), and that it is served correctly.  

If you’ve received a statutory demand or are considering issuing one, Progressive Legal is here to assist you every step of the way. Our experienced litigation lawyers specialise in handling statutory demand matters and can provide you with expert guidance and representation.

Don’t hesitate to reach out to us today for a tailored no-obligation consultation and find out how we can help safeguard your interests and navigate the legal complexities involved. Your financial stability is our priority; contact us on 1800 820 083 or request our advice below.

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