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Legal > Bankruptcy & Insolvency Law

Statutory Demand:

Overview FAQs Articles Locations

A Statutory Demand is issued under the Corporations Act 2001 (Cth). In the event that a corporate debtor has shown recalcitrance in settling an account, or has concisely defaulted on repayments, the creditor can issue a statutory demand on that debtor and force the company to take steps in relation to the outstanding moneys owed. Failure to answer a statutory demand will ground a right to seek that the debtor be wound up, and that the trustee in insolvency will then deal with the debtor’s property with a view to ensure that creditors are paid their due to the extent possible.

In the interest of justice, the Courts have a general power under section 459J(1)(b) of the Act to set aside statutory demands where appropriate. However, the most common grounds for challenging the legitimacy of a statutory demand involves disputing the merits of the debt and the existence of a set-off.

Issuing of a Statutory Demands:

A creditor (a person , including a company, who is owed money) can seek to have a statutory demand served on its corporate debtor (the person, which is a company and not a natural person, who owes money to the creditor). The provisions relating to statutory demands are contained in Part 5.4, Division 2 (and following) of the Corporations Act 2001 (Cth). Section 459E of the Act states that:

  • A statutory demand can be served in respect of one debt, or of multiple debts;
  • The statutory demand must be in writing, in the specified Form “509H” and be executed by or on behalf of the creditor;
  • In relation to the debt claimed:
    • If it is one debt, specify the debt;
    • If it is more than one debt, must specify the cumulative amount of the debts; and
    • Ensure that the debt is not below the statutory minimum of $2,000.00.
  • The demand must be supported y an Affidavit, which is the evidentiary basis for the claim against the debtor.

Under the provision of the Act, the statutory demand must be served on the company by leaving it or posting it to the registered office, or delivering it personally to the company’s director. The date of service is of the essence: the period in which the company can respond and avoid winding up proceedings starts running from the date of service.

There are serious consequences in ignoring a statutory demand or not replying to it adequately within the stipulated time of 21 days. Action should be taken immediately in the event that a statutory demand has been issued a company.

Consequence of not complying with Statutory Demand - Winding Up:

It is important to note that under section 459F of the Corporations Act 2001 (Cth) the debtor has 21 days to comply with the statutory demand or else be liable for winding up proceedings. This is because the failure to respond adequately to a statutory demand will give rise to the presumption that the company s insolvent under section 459C(2)(a) of the Act.

In the event that a statutory demand is not dealt with appropriately, the debtor will file a notice with the Australian Securities and Investments Commission. This will make your debt a matter of public record and cause embarrassment to your business. It will also open the doors to the process of winding up the debtor company. Winding up proceedings involve a trustee liquidating the company’s assets, so as to settle any of the company’s debts to the extent possible. This process will also incur significant fees and charges incurred and charged by the liquidator and potential legal costs incurred by the liquidator, as well.

Often, the reason why a company cannot repay a debt is because its business has suffered so much that its assets and property may not cover any outstanding loans. This unfortunately means that many creditors will find it difficult to have their entire debts repaid in the event that a company goes into liquidation.

Statutory demands can be set aside in certain circumstances, and these must be considered in the event that a person believes that the purported creditor is not entitled to the money that is being claimed in the demand. Because of the dire consequences of not responding to the statutory demand within the time permitted, it is of utmost importance to treat a statutory demand as a matter of priority. Urgent action must be taken or else the company may be subject to more serious processes of winding up.

Setting Aside a Statutory Demand:

Part 5.4, Division 3 of the Corporations Act 2001 (Cth) governs the setting aside of statutory demands. Generally, statutory demands can be set aside if they are defective, and where that defect causes an injustice to the debtor. The defects can include any of the following matters:

  • Under section 459J of the Act, a defect in the form itself, which can include a defect in the process of serving the form such that “substantial injustice” is suffered by the party being served;
  • A genuine dispute as to the debt owed, under section 459H(1)(a) of the Act;
  • A set-off or counter claim against the creditor, under section 459H(1)(b) of the Act; and
  • Any other matter that goes to the justice of the case, under section 459J(1)(b).

Section 459G(2) of the Act states that an application for setting aside a statutory demand can only be made within 21 days of the statutory demand being served, and under section 459G(3) that application must be supported by an Affidavit. The Affidavit is a document that provides the evidentiary basis of the objection to the statutory demand. Care must be taken when drafting this document and professional legal advice is invaluable at this stage.

Genuine Dispute as to Debt:

For matters pertaining to the genuine dispute under section 459H(1)(a) of the Act, the following should be considered by a party seeking to set aside the statutory demand:

  • Evidence as to the existence of the alleged debt;
  • Whether or not the debt is actually owed (for example, investigations on the terms of the agreement (if any) itself may reveal that an immediate and irrevocable obligation to pay may not have arisen given a condition precedent must first have been met);
  • Whether any other party shares a liability for the debt;
  • How the alleged debt was calculated;
  • Evidence of any attempts to call on the alleged debt by the party claiming it, before the statutory demand was issued;
  • Any evidence of the terms of the alleged debt, and whether or not these terms differ from the terms of the statutory demand;
  • Evidence of the debtor’s response to the initial attempt to call on the alleged debt;
  • Any evidence of attempts to negotiate in good faith, any possible methods of repaying the debt; and
  • Any history of payment or part payment of the alleged debt.

In the event that a dispute is partly successful, so that the resulting amount is less than the statutory minimum which allows for statutory demands to be issued, the statutory demand may be set aside by Court Order under section 459H(3).

The above list is not an exhaustive list of considerations. Other issues may also give rise to a genuine dispute as to the alleged debt. Such disputes can be heavily evidence based and are complex areas of litigation. This is particularly true of cases where agreements are documented poorly, are verbal, or otherwise ambiguous on the record. It is important that appropriate legal advice be obtained before any action is taken.

Set Off against Debt:

For matters pertaining to a set-off claim under section 459H(1)(b) of the Act, the following should be considered by a party seeking to set aside the statutory demand:

  • Evidence as to the existence of the alleged debt;
  • Whether or not the debt is actually owed (for example, investigations on the terms of the agreement (if any) itself may reveal that an amount may be owed by the creditor to the debtor such that taken together, they each neutralize each other to the extent of any off-set);
  • Whether any other party shares a liability for the debt;
  • How the alleged debt was calculated;
  • Evidence of the debtor’s response to the initial attempt to call on the alleged debt;
  • Any evidence of attempts to negotiate in good faith, any possible methods of repaying the debt; and
  • Any history of payment or part payment of the alleged debt.

As with the process involved in disputing the substance of the alleged debt, in the event that an application for set-off is successful so that the resulting amount is less than the statutory minimum which allows for statutory demands to be issued, the statutory demand may be set aside by Court Order under section 459H(3).

The above is a non-exhaustive list of considerations. Other matters may also give rise to a claim in set-off. These disputes can be heavily evidence based and are complex areas of litigation. This is particularly the case in situations where agreements are documented poorly, are verbal, or otherwise ambiguous on the record. It is important that appropriate legal guidance is obtained before any action is taken.

Voluntary Withdrawal:

A statutory demand can be withdrawn voluntarily by the party filing and issuing it. This can be done when the debtor writes to the creditor outlining the reasons why an application will be made for setting it aside, or if other arrangements are made so as to make the statutory demand nugatory.

Special Information for Directors of Companies:

A “section 222AOE Notice” (which is often referred to as a “penalty notice” and is now part of the new legislative scheme) can be served on a director of a company by the Australian Taxation Office in relation to a “Pay As You Go” (PAYG) withholding. Non-compliance with the terms of the notice within 14 days creates a personal tax liability on part of the director. The notice is issued by the ATO under the Income Tax Assessment Act and is not a Court document. The notice will have the following information:

  • An option to discharge the company’s liability;
  • An option to enter into an installment agreement;
  • An option to enter into administration; or
  • An option to wind up the company.

The notice will be served on the address of the director as it appears on ASIC’s database; having the wrong address on the database is no defense against personal liability, if a response is not received by the ATO within the 14 day period. It is therefore very important that the correct details are entered and updated on the database. The “section 222AOE Notice” requires urgent attention as soon as it is received by the director. More information can be found in our “Tax Law & Superannuation Law” section.

If you are require advice in relation to a Statutory Demand or any legal matter or issue arising out of the issue of a Statutory Demand, you may wish to make an appointment with one our Banrkruptcy & Insolvency Lawyers, who will be able to see you in our Sydney office or in one of our branch offices, listed under the “Locations” tab. We look forward to being of assistance to you. 

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This webpage (and any material or wording appearing on this webpage) is provided for general information purposes only and does not constitute any Legal Advice. It does not take into account your objectives, your instructions or all of the relevant facts and/or circumstances. Navado accepts no responsibility to any person who relies on the information provided on this website. We further refer you to our Disclaimer.

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