Be more demanding - creditor's statutory demands

What is a creditor’s statutory demand?

Under section 459E of the Corporations Act 2001 (Cth), creditors who are owed more than $2,000 are allowed to serve a creditor’s statutory demand (“a statutory demand”) on a company.

The statutory demand must be in the appropriate form (known as a form 509H), which may seem straightforward, but contains a few traps for the unwary. It must be accompanied by a supporting affidavit (unless you are pursuing a judgment debt) from or on behalf of the creditor to verify that the debt is due and owing, and that there is no dispute about the debt.

When to use a statutory demand

An example of a situation where a statutory demand would be appropriate is if you have issued an invoice to a company, the company has acknowledged the debt is due and owing, but is refusing to pay the invoice.

Once the company is served with the statutory demand, it has 21 days to do one of the following:-

• pay the amount of the demand; or
• commence an application in the Court to have the statutory demand set aside.

The 21-days deadline is very strict and cannot be extended.

What to be careful of

There are a few things to remember if you are thinking of serving a statutory demand on a company.

It can only be used as a debt collection mechanism if:-

1. there is a genuine debt due and owing by the company;
2. there is no genuine dispute about the money; and
3. there is no genuine offsetting claim.

What happens if there IS a genuine dispute and you serve a statutory demand on a company?

When using this tool of debt recovery, you must be completely sure that there is not a genuine dispute in relation to the debt or a genuine offsetting claim. If there were either of these found by the Court, the statutory demand may be set aside and you may be liable to pay the company’s costs!

We highly recommend you seek advice in relation to this if you have any doubts or concerns.

A genuine dispute may be found if the Court accepts that the debtor company has demonstrated a genuine reason why the debt has not been paid which should be the subject of a full trial to determine the dispute between the parties.

Also, if the company has a genuine offsetting claim which is more than or equal to the value of the statutory demand the Court is likely to set it aside.  If the court determines that there is a genuine offsetting claim for less than the debt, the court may amend the amount in the demand to reflect the offsetting claim.

What happens if the company doesn’t pay the debt or apply to set it aside within 21 days?

As discussed above, a company has to either pay the amount of the debt or make an application in Court to have the statutory demand set aside.  Failure to do one of these things will result in the company having committed an “act of insolvency” and the company is deemed to be insolvent.  Further, once the 21-days has expired the company is not permitted to apply to set the demand aside.

It is very important for both parties to note the date of service of the statutory demand, so that the proper action can be taken during or after the 21 days has passed!

If a company commits an “act of insolvency”, you, as the creditor, can rely on that act to bring an application to wind the company up.

Generally speaking, the only defence to a winding-up application is proving that the company is actually solvent.

You think you should serve a statutory demand – what should you do?

It is quite an expensive process to serve a statutory demand and to wind up a company. Given the serious consequences and the room for error, we recommend you seek advice in relation to this. 

If you would like any further information please contact Commercial Litigation team on (07) 4771 5664.