Responding to a statutory demand: what to do and the deadline

If your company has received a creditor's statutory demand, the most important thing to know is this. The clock is running, the deadline is 21 days, and it is strict. This guide explains what a statutory demand is and what to do, quickly.

What a statutory demand is

A statutory demand is a formal written demand, under the Corporations Act 2001 (Cth), by a creditor to a company for payment of a debt. It can only be used for a debt that is due and payable, and the debt must be at least the statutory minimum, which is $4,000.

A statutory demand is a serious document, not just another invoice. It is the first step a creditor can take towards winding your company up, because failing to deal with it creates a presumption that the company is insolvent.

The 21-day deadline is strict

From the day the demand is served, your company has 21 days to do one of three things. Pay the debt, reach an agreement with the creditor that resolves the demand, or apply to the court to set the demand aside.

This deadline is the single most important point in this whole area. It is strict, and the court cannot extend it, even if the creditor agrees. An application to set the demand aside must be both filed and served within the 21 days. A delay of even one day can be fatal. We cannot stress this enough. If you have received a statutory demand, treat it as urgent and get advice the same week, not the week before the deadline.

What happens if you do nothing

If the 21 days pass and the company has not paid, settled, or applied to set the demand aside, the company is presumed to be insolvent under the Corporations Act. The creditor can then apply to the court to wind the company up, and the burden shifts to the company to prove that it is in fact solvent, which is difficult and expensive. In short, ignoring a statutory demand can end the company.

Grounds to set a demand aside

The court can set a statutory demand aside on several grounds. The main ones are that there is a genuine dispute about whether the debt is owed, or about the amount, that the company has an offsetting claim against the creditor, that there is a defect in the demand that causes substantial injustice, or that there is some other reason to set it aside.

A genuine dispute is the ground we see most often. The threshold is not high. The company does not have to prove it will win the dispute, only that there is a real dispute to be tried. But the dispute must be raised properly, within the 21 days, with the right evidence. A dispute raised late, or only after the deadline, usually cannot save the company.

What to do if you receive one

The steps are simple to state and urgent to act on. Note the exact date of service, because the 21 days runs from it. Work out whether the debt is genuinely owed, or whether there is a real dispute or an offsetting claim. Get legal advice immediately, because the options narrow with every day that passes. If the debt is plainly owed and the company can pay, paying or reaching an agreement within the 21 days is often the cleanest answer.

A note for creditors

A statutory demand can also be a powerful tool to recover a debt from a company, where the debt is clear and not genuinely disputed. Used on a disputed debt, though, it can backfire, with cost consequences. If you are thinking of issuing one, it is worth checking first that the debt is the kind a statutory demand is meant for.

Frequently asked questions

How long do I have to respond to a statutory demand? 21 days from service. The deadline is strict and cannot be extended by the court, even with the creditor's agreement.

What is the minimum debt for a statutory demand? The statutory minimum is $4,000.

What happens if I ignore it? The company is presumed insolvent, and the creditor can apply to wind it up. Ignoring a statutory demand can end the company.

Can I dispute the debt? Yes. If there is a genuine dispute or an offsetting claim, you can apply to set the demand aside, but the application must be filed and served within the 21 days.

Keep reading

• Dispute resolution
• Statutory demands and winding up: a creditor's guide
• Suing for an unpaid debt in NSW: the Local Court process

This article contains general information only and is not legal advice. For advice about your situation, please contact us. Liability limited by a scheme approved under Professional Standards Legislation.