A statutory demand is a demand for payment of a debt owed by a company. Once served, the debtor company has twenty-one (21) days to take the required steps contained in the statutory demand.
If the debtor company fails to take those steps, then they are deemed to be insolvent. With the presumption of insolvency assisting, the creditor can apply to the Court for an order winding the company up in insolvency (liquidation).
This article will explain the statutory demand process.
Eligibility requirements for a statutory demand
To be eligible to serve a statutory demand on a debtor company there are a few requirements which must be met, namely:
- The debt must be equal to or more than the statutory minimum of $2,000.00;
- The debtor must be a company (Debtor Company Pty Ltd) for example;
- The debt must be due and payable – the debt must actually be owed; and
- There should not be any genuine dispute in relation to the debt.
EXAMPLE – The creditor owns a business. The business provided goods and/or services valued at $12,000.00 to the debtor company on 14-day payment terms. The creditor provides an invoice to the debtor company. The debtor company does not pay the creditor on or before the 14-day payment period. The creditor is able to serve a statutory demand on the debtor company from day 15 onward.
If a creditor meets these prerequisites, then the creditor can issue the statutory demand.
The most common reason for a creditor issuing a statutory demand is the non-payment of an invoice, and most commonly business to business.
Drafting the statutory demand
The form of the statutory demand is Form 509H.
Form 509H can be found in Schedule 2 of the Corporations Regulations 2001 (CTH).
Although relatively straightforward, failure to correctly draft the statutory demand can mean that the demand is set-aside. We would always advise getting the demand drafted by suitably qualified professionals.
Details of the Parties
The demand must correctly identify the creditor and the debtor. This includes the correct company name and Australian Company Number (ACN).
This is one of the ways in which a statutory demand has been found by the Courts to be void and set-aside. It is very important that a creditor get the name, ABN, ACN, and address of the parties correct.
EXAMPLE – The debtor company might have “Debtor Company 2 Pty Ltd” on their website and invoices. But it could be “Debtor Company 1 Pty Ltd” and they might be wrong. Also, they might have incorrectly stated their ABN or ACN on their paperwork. A creditor must always check with ASIC.
The statutory demand must also correctly identify the address of the registered office of the debtor company.
Best Practice – pay for a company current extract from Australian Securities and Investments Commission (ASIC). You will need this for service later in any case.
Details of the Debt
Finally, the statutory demand must correctly identify the debt with sufficient particularity that there can be no doubt as to what the debt relates to.
EXAMPLE – If the debt relates to unpaid invoices, then write the invoice number, the invoice date, and the amount of the invoice. Also, include copies of the invoices. This way there can be no doubt as to what the debt is for.
Failure to correctly identify the debt with sufficient particularity may mean that the statutory demand in void and can be set-aside.
Best Practice – sufficiently detail the debt and the circumstances that gave rise to the debt and include copies of unpaid invoices – for example.
Once drafted, you will need to serve the statutory demand.
Serving a statutory demand
A statutory demand is served on a debtor company by complying with section 109X of the Corporations Act 2001 (CTH).
Service is effected by either:
- Leaving it at, or posting it to, the company’s registered office; or
- Delivering a copy of the document personally to a director of the company who resides in Australia.
EXAMPLE – The easiest way is to obtain a current extract from ASIC, find the address of the company’s registered office, then posting it to that address by express post.
If there is a problem with that way, and you know where the director of the company lives, then you can engage a process server to personally serve the director of the company, however this way is a little more expensive.
Best Practice – keep copies of everything, the letter, the statutory demand, the front of the express post envelope, the Australia Post-delivery receipt, and the current extract – because you may need to draft an affidavit of service.
Once served, the company will have twenty-one (21) days to take the steps required of the legal presumption of insolvency is raised which will assist a winding up application.
Compliance with the statutory demand
The debtor company must within twenty-one (21) days:
- Pay the debt; or
- Secure or compound for the debt to the creditor’s reasonable satisfaction; or
- Make an application to set the statutory demand aside.
Failure to do so can have very serious consequences for the debtor company.
Pay the debt
The debtor must pay the debt.
Pretty self-explanatory really, but to save the real possibility of liquidation, the debtor company must pay the exact amount of the debt in the statutory demand.
EXAMPLE – If the debt in the statutory demand is for $13,694.83 then the debtor must pay exactly $13,694.83 to satisfy the statutory demand.
Secure or compound for the debt
To secure for the debt means to offer some security for the debt. A mortgage for example.
To compound for the debt means to accept an arrangement for payment of the debt amount or some other amount.
EXAMPLE – If the debt in the statutory demand is for $13,694.83 then the creditor may accept $12,000.00 if paid within two (2) days for example.
The use of the words “to the creditor’s reasonable satisfaction” has been ruled to be an objective test rather than a subjective test. This means that a Court could rule that it was a reasonable offer, even if the creditor does not think it is reasonable.
EXAMPLE – The debtor might offer $12,000.00 if paid within two (2) days as per the example above. The creditor might turn that down. A Court might rule that it was a reasonable offer which the creditor should have accepted.
Make an application to set the statutory demand aside
Lastly, a debtor can make an application to set aside the statutory demand.
A demand can be set aside on one of the following grounds:
- There is a genuine dispute about the amount of the debt, or the existence of the debt;
- The debtor has an offsetting claim; or
- There is a defect in the demand causing substantial injustice; or
- Some other reason.
If the debtor has grounds, then it can make the application.
EXAMPLE – If a contractor engages a subcontractor to provide building services and those building services are defective. The contractor may withhold the subcontractors payment until the defects are fixed. This is an example of a genuine dispute, so long as the work is actually defective.
More often than not, before incurring the cost of an application in the Federal Court or Supreme Court, the debtor will give notice of the pending application and request that the demand be withdrawn.
Withdrawal of a statutory demand
If the debtor company has reasonable grounds to set the statutory demand aside, then it will be prudent for the creditor to withdraw the demand.
If the debtor company gives notice requesting the creditor withdraws the demand – and the creditor does not withdraw the statutory demand – and the debtor is successful in its application to set the demand aside – then the creditor will likely be ordered to pay the debtors costs of the application.
EXAMPLE – If the subcontractor issues a statutory demand to the contractor and the contractor has reasonable grounds to set the demand aside because of the defective work, then the contractor can ask the subcontractor to withdraw the demand.
If the demand is not withdrawn by the subcontractor, and the contractor is successful in the application setting it aside, then the subcontractor will likely be ordered to pay the contractor’s legal costs.
If the debtor does nothing
If the debtor does not take any of these steps, then the legal presumption of insolvency is raised.
This means that in an application to wind up the debtor company, the onus is on the debtor company to prove solvency, not on the creditor to prove the company’s insolvency.
EXAMPLE – Everyone knows the legal presumption of “innocence until proven guilty” in criminal proceedings! This means that the prosecution must prove guilt, it is not for the defence to prove innocence (because he/she is presumed to be innocent).
Well, the presumption of insolvency means that the debtor company must prove it is solvent, it is not for the creditor to prove insolvency (because the company is presumed to be insolvent).
Section 95A of the Corporations Act 2001 (CTH) says that:
A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable. A person who is not solvent is insolvent.
If a debtor company is insolvent, then it is likely that the Court will make the order winding it up in insolvency.
We strongly advise getting qualified legal advice from a suitably qualified statutory demand lawyer.