What is a statutory demand and what should I do if my company gets one?

A creditor’s statutory demand is a formal written demand for payment that a creditor serves on a company under section 459E of the Corporations Act 2001. It is not an ordinary letter of demand. It starts a strict 21-day clock, and if the company does not respond properly in that time, the creditor can use it to apply to court to have the company wound up.

If your company has received one, the most important thing is the date it was served. Work out the deadline and get legal advice straight away.

What a statutory demand must include

The Federal Court’s information sheet and the prescribed form (Form 509H in the Corporations Regulations 2001) set out the requirements. A statutory demand must:

• relate to a debt, or debts, that are due and payable and that meet the statutory minimum. The Act sets this at $2,000 or a greater amount prescribed by regulation. Since 1 July 2021 the prescribed amount has been $4,000
• specify each debt and its amount
• be in the prescribed form (Form 509H)
• require the company to pay, or to secure or compound for the debt to the creditor’s reasonable satisfaction, within the statutory period, which is currently 21 days after service
• be signed by or on behalf of the creditor
• be accompanied by an affidavit verifying that the debt is due and payable, unless the debt is a judgment debt

You may have seen references to a $20,000 threshold and a six-month response period. Those were temporary COVID-19 measures. ASIC confirms that they ended on 31 March 2021 and no longer apply.

How it is served

According to the Federal Court, a demand can be served by leaving it at the company’s registered office, posting it to that address, or delivering it personally to a director who lives in Australia. If it was posted, it is presumed to have been served on the seventh working day after posting. Your lawyer can confirm the exact service date and the last day of the 21-day period.

Your options within 21 days

The company has 21 days from service to do one of the following.

1. Pay the debt

If the debt is owed and the company can pay it, paying in full within the 21 days ends the demand. Keep proof of payment and ask the creditor to confirm in writing that the demand is satisfied.

2. Reach terms the creditor accepts

The form allows the company to “secure or compound for” the debt to the creditor’s reasonable satisfaction. In practice, this means reaching an arrangement the creditor accepts, such as a payment plan or offering security. Get any agreement in writing and ask the creditor to confirm in writing that it will not rely on the demand. Your lawyer should check the wording. Negotiating does not pause the 21 days.

3. Apply to court to set the demand aside

If the company disputes the debt, it can apply to court under section 459G to have the demand set aside. The application and a supporting affidavit must be filed with the court and served on the creditor within the 21 days.

The Federal Court says this time limit has been strictly applied and that no extension of time can be given. If the application is late, it cannot be made at all.

The court may set a demand aside if there is a genuine dispute about the debt, the company has an offsetting claim, there is a substantial defect in the demand, or there is some other reason. Whether any of these applies to you is a question for a lawyer.

What happens if you ignore it

If the company does not pay, reach terms or apply to set the demand aside within 21 days, it has failed to comply with the demand. Under the Corporations Act, the company is then presumed to be insolvent.

The Federal Court explains that, within three months of the date of non-compliance, the creditor who served the demand may rely on that presumption in an application to wind up the company. The company can try to prove it is solvent, but that is much harder than responding within the 21 days.

Form 509H itself warns that failing to respond “can have very serious consequences for a company”, including the company being placed in liquidation and control passing to a liquidator. Our guide to winding up applications explains what happens next.

Step by step

1. Write down the date of service. Note how the demand arrived (registered office, post or handed to a director) and when.
2. Count the 21 days and put the deadline in every director’s calendar. If in doubt, assume the earliest possible date.
3. Call a lawyer today. Look for one with insolvency or commercial litigation experience. Bring the demand, the affidavit and any invoices, contracts or emails about the debt.
4. Decide whether the debt is owed. If you dispute it or have a claim against the creditor, your lawyer can advise whether to apply to set the demand aside. The application and affidavit must be filed and served within the 21 days.
5. If the debt is owed, check whether the company can pay it. If it can, pay and get written confirmation.
6. If it cannot pay in full, contact the creditor. Propose terms and get any agreement confirmed in writing before the deadline.
7. If the company cannot pay its debts as they fall due, speak to a registered liquidator. ASIC notes that directors have a duty to prevent insolvent trading. A registered liquidator can explain options such as small business restructuring (for eligible companies with liabilities of no more than $1 million), voluntary administration or liquidation.
8. Get free support if you need it. The Small Business Debt Helpline (1800 413 828) is a free service run by financial counsellors for small business owners in financial difficulty.

If you are a sole trader: bankruptcy notices

A statutory demand applies only to companies. If you trade as a sole trader, a creditor may instead use a bankruptcy notice, which is issued by the Australian Financial Security Authority (AFSA).

AFSA explains that a bankruptcy notice is a formal demand for payment based on a final judgment or order of $10,000 or more that is no more than six years old. It gives you 21 days to comply from the date it is served. Your options include paying the debt, reaching another agreement with the creditor or applying to court to set aside the judgment or the notice.

If you do nothing, you commit an “act of bankruptcy”, and the creditor may use it to apply to court for an order making you bankrupt. AFSA recommends speaking with a free financial counsellor through the National Debt Helpline (1800 007 007) and getting independent legal advice.

Important things to know

• The 21 days are strict. The Federal Court says no extension can be given for an application to set aside. Treat the deadline as fixed.
• Talking is not the same as responding. Negotiations with the creditor do not stop the clock unless the creditor agrees in writing to withdraw or not rely on the demand.
• Do not borrow just to make the demand go away without advice. If the demand is a symptom of wider cash flow problems, new debt can make things worse. Read when borrowing is not the answer and speak with your accountant or a registered liquidator first.
• Directors have personal duties. ASIC notes that directors must not let a company trade while insolvent. Early advice protects the company and you.
• Check the details. Errors in the demand, a disputed amount or an offsetting claim may matter, but only a lawyer can tell you whether they are enough to have the demand set aside.