If your business offers goods and/or services on credit, then it is likely that you will have come across bad debts. Bad debts seriously affect a business’s cash-flow and impact the solvency of any small to medium business.
A statutory demand is a demand for payment of a debtor company pursuant to section 459E of the Corporations Act 2001 (CTH).
To be eligible to serve a statutory demand on the debtor company:
- The debt must be equal to or more than $2,000.00;
- The debtor must be a company;
- The debt must be due and payable; and
- The debt should not be disputed.
If you meet these requirements, then you can issue a statutory demand to the debtor in question.
The debtor company then has twenty-one (21) days to comply with the demand or apply to the Court to set the statutory demand aside.
Failure to do these things raises the legal presumption of insolvency which the creditor can use to assist them in an application to the Court for an order that will put the debtor’s company into insolvency.
This article will explain the statutory demand process.
Drafting a Statutory Demand
A company is insolvent if they are unable to pay their debts, as and when they become due and payable. If this is the case, then a small business creditor (aka you) can issue a statutory demand.
A statutory demand needs to be applied for correctly. You should use Form 509H which can be found at schedule 2 of the Corporations Regulations 2001 (CTH).
The Form 509H is reasonably straightforward to understand, however you should always take care when filling out an official document. Be particularly careful when filling out the statutory demand section, because Courts have sometimes ruled that a defect in a demand allows a debtor company to set the demand aside, meaning that your business will lose out.
We would always advise getting a statutory demand drafted by a solicitor who practices in this area of law.
Names of the Creditor and the Debtor Company
Make sure that the names of both the creditor and the debtor are correct. If the debt arose in the name of a creditor personally then the demand should be in that name.
Conversely, if the debt is a business debt, then the demand should be in the legal entity of the business (sole trader, company, etc.).
More importantly, the name of the debtor company must be correct. We recommend purchasing a current extract with Australian Securities and Investments Commission (ASIC). This will allow you to find the exact company name.
The current extract will provide the name of the company, the Australian Company Number (ACN) and the address of the registered office.
Description of the Debt
It is also very important to properly describe the debt. The statutory demand contains a schedule which must contain a description of the debt.
If you have a judgement debt, then sufficiently particularise the details of the judgement.
If you have unpaid invoices, then you should sufficiently particularise the details of the unpaid invoices and the work to which those invoices relate.
It is also a good idea to provide a copy of the invoices with your affidavit in support of the statutory demand.
Once you have your statutory demand drafted you will need to serve the demand.
Serving a Statutory Demand
Service of a statutory demand is made by complying with section 109X of the Corporations Act 2001 (CTH).
The main ways that service is effected on the debtor company is 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.
The most common way to serve a statutory demand is to post the demand by express post to the company’s registered office.
You can get the address of the company’s registered office from the current extract which you have already ordered from ASIC.
Put a covering letter, the statutory demand, the supporting affidavit or judgment, and your supporting documents in the envelope and simply post it.
Then check the tracking identification number on the Australia Post website to see when your envelope has been successfully delivered.
TIP – Keep copies of all of this paperwork! If you need to apply for a winding up order, then you will need to prove service of the statutory demand.
Once served, the debtor company has twenty-one (21) days to comply with the statutory demand.
Failure to do raises the legal presumption that the company is insolvent which can have very serious consequences for the debtor company.
How to Comply with a Statutory Demand
Once served the debtor company must:
- Pay the debt contained in the statutory demand;
- Secure or compound for the debt to the creditor’s reasonable satisfaction; or
- Apply to set the statutory demand aside.
Failure to do any of these things will have very serious consequences.
Pay the Debt
The debtor must pay the debt.
If a debtor company can pay the debt, then it should do so. Payment of the debt in-full satisfies the statutory demand.
Secure or Compound for the Debt
To compound for the debt means to accept an arrangement to pay the debt amount or another amount. Basically, it means coming to and accepting some form of arrangement.
A creditor can secure for the debt by offering some security – a registered mortgage for example.
The words “to the creditor’s reasonable satisfaction” contained in the Form 509H has been determined to be an objective test, and not a subjective test.
This means that if a debtor makes the creditor an offer to compound for the debt, and the debtor refuses the offer, a Court can rule that it should have been taken.
Make an Application to set the Demand Aside
A debtor company can make an application for an order that the statutory demand be set-aside by the Court.
A demand can be set aside on one or more 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 company has one of the grounds above, then the Court will likely make the order that the statutory demand be set-aside.
In practice, what usually happens is a debtor company will give notice to the creditor of their intention to make the application, along with their reasons, and ask the creditor to withdraw the demand.
Withdrawal of a Statutory Demand
A statutory demand can be withdrawn. Best practice is to withdraw the demand in writing.
If a debtor has reasonable grounds to successfully set-aside the statutory demand, then a creditor should withdraw the demand.
If not, then the creditor may be ordered to pay the debtor’s costs of the application to set the demand aside.
The law around statutory demands is very complicated and we strongly recommend seeking suitable legal advice.
If the Debtor does nothing
If the debtor does not comply with the demand, then they are deemed to be insolvent.
This legal presumption of insolvency moves the onus on the debtor to prove its solvency, rather than a creditor burdened with providing evidence that the debtor in insolvent.
With assistance with the presumption of insolvency, the creditor can apply to the Court for an order to prove the debtor company, entity or individual as insolvent.
“The opinions expressed by BizWitty Contributors are their own, not those of BizCover and should not be relied upon in place of appropriate professional advice. Please read our full disclaimer."