What to do if you are served with a statutory demand

A statutory demand is a demand for payment of a debt made with the authority of the Corporations Act 2001 and is served on a debtor company.

A debtor company has only 21 days to comply with the demand or apply to the Court for an order that the demand be set aside.

Failure to do either of these things will result in the legal presumption that the company is insolvent, then the creditor can apply to wind the company up in insolvency.

It is important that when served with a statutory demand, you take immediate steps to do what you need to do or run the risk of insolvency.

How to comply with a statutory demand

A statutory demand requires a company to:

Pay to the creditor the amount of the debt or total of the amounts of the debts; or
Secure or compound for the amount of the debt or total of the amounts of the debts, to the creditor’s reasonable satisfaction; or
Apply to the Court for an order that it be set aside.

Firstly, a debtor can simply pay the debt. This will essentially extinguish the demand.

Secure or compound for the debt

Secondly, secure or compound for the debt to the creditor’s reasonable satisfaction.

To secure for the debt means to offer the creditor some security for the debt. This might be in the form of a caveat or mortgage. The security offered must be to the creditor’s reasonable satisfaction.

To compound for the debt means to make an arrangement for payment of the amount of the debt or of a different amount, again to the creditor’s reasonable satisfaction.

These two things will usually go together, a creditor and a debtor will arrange for the debt to be repaid, secured in one form or another.

Setting aside the statutory demand

If you absolutely do not owe the debt, then you can apply to set the demand aside. This is done by making an application to the Supreme Court of your State, or the Federal Court.

You can set a statutory demand aside based upon one of the following:

There is a genuine dispute about the existence or amount of a debt; and/or
The debtor company an offsetting claim; and/or
There is a defect in the demand, causing substantial injustice; and/or
There is some other reason.

The most common ground for setting aside a statutory demand is that there is a genuine dispute about the debt. This can be that the goods/services provided were not good enough, defective works, or any number of real reasons why a debtor company did not pay.

The bar for setting aside a statutory demand is set quite low, and as long as you have a genuine reason for withholding payment, the demand will likely be set aside.

This can be very expensive, so before filing an application in the Court, write to the creditor and demand that the statutory demand be withdrawn.

Withdrawing a statutory demand

Writing to the creditor, explaining that you have a genuine dispute, and demanding that they withdraw the statutory demand does two things.

Firstly, they may withdraw the demand.

Secondly, if they do not withdraw and you are forced to make the application to set it aside, then if you are successful, they will likely be ordered to pay your legal costs.