Creditors statutory demand for payment of debt

What is this document?

A statutory demand is a document served on a debtor company by a creditor, requiring the company to pay an outstanding debt within 21 days of service.

The debt must be over $2,000, due and payable (not prospective, contingent, or unliquidated), and must not be in dispute.

A statutory demand must be in the prescribed form (Form 509H prescribed by the Corporations Act 2001 is the relevant template) and it must be accompanied by an affidavit from or on behalf of the creditor verifying that the debt is due and payable. If the demand does not meet formal requirements, it will not have a legal bearing on the debtor, e.g. if there is a defect in the demand which would cause substantial injustice if it were not set aside.

COVID-19 changes: The Coronavirus Economic Response Package Omnibus Act 2020 made some temporary amendments regarding statutory demands. These amendments apply for 6 months commencing on 25 March 2020:

• the minimum amount for a creditor to issue a statutory demand to a debtor is increased from $2,000 to $20,000;
• the timeframe to respond to a statutory demand is extended from 21 days to six months of service.

What are the options for a response?

A debtor served with a statutory demand has three appropriate actions to take within 21 days of service (or six months of service for statutory demands issued on or after 25 March 2020):

• Pay the debt in full;
• Negotiate a compromise of the debt or a debt payment with the creditor; or
• Apply to the Supreme Court to have the demand set aside.

The grounds on which you can rely to set aside the demand include:

1. a genuine dispute between the company and the creditor about the existence or amount of a debt to which the demand relates; 

This is considered to be the most common ground relied on by a debtor to have a statutory demand set aside. A genuine dispute as to the debt relates to a serious question to be tried as to the existence or the amount of the debt, supported by reasonable factual evidence, requiring further investigation of the alleged dispute.

Simply disagreeing with the demand or merely asserting that there is a dispute without particulars is not enough to establish a genuine dispute.

Some factual matters that the Court may consider in establishing a genuine dispute include:

• correspondences between the parties prior to the statutory demand;
• any contract, invoices or receipts between the parties; or
• a reasonable assertion challenging the sum or the existence of the debt supported by evidence.

2. the company has an offsetting claim; and

Pursuant to s 459H of the Corporations Act 2001 (Cth), an offsetting claim means a counterclaim, a set-off or a cross-demand that the debtor company has against the creditor (even if it does not arise out of the same transaction or circumstances as  the debt to which the statutory demand relates). 

3. a defect in the demand that may cause substantial injustice unless it is set aside.

A substantial injustice will occur if the effect of the defect in the demand results in the debtor company being unable to properly identify (due to the ambiguity created by the defect) what the statutory demand is in fact demanding. Some examples of defects that may mislead the debtor or cause them substantial injustice are:

• failure to specify separate debts in the demand;
• the demand is not in the correct form;
• the demand is not addressed properly to the debtor;
• the debtor’s CAN is incorrect;
• claims a debt that is not due or that the debtor is disputing; or
• it is not accompanied by an affidavit.

If a court decides to set aside a statutory demand the demand will have no further legal effect. A Court may make a costs order against the party who issued the statutory demand. “Costs follow the cause” means that a costs order is very likely to be made against the respondent creditor.

What is the legal effect of ignoring it?

If a company fails to comply with a statutory demand within the 21-day compliance period, it is presumed to be insolvent. 

Within three months of the date of non-compliance, the creditor can rely on this demand to make an application to the Court for orders to wind up the company.

What documents and information do you need to give your lawyer?

If you have been served with a statutory demand, you should seek legal advice as soon as possible and provide your lawyer with: 

• the statutory demand;
• the contract (if any) between creditor and debtor;
• any invoices issued relating to the debt;
• information and receipt of any payments made to the creditor;
• information regarding the existence of genuine dispute about the debt and the existence of an offsetting claim; 
• information regarding whether you have financial capacity to pay the debt; and
• any other additional documents required by your lawyer.