A creditor’s statutory demand for payment of debt is a formal demand for payment of a debt owed by a company.
Statutory demands are issued pursuant to Part 5.4 of the Corporations Act 2001 (Cth).
A statutory demand is supported by a money order judgment or an affidavit attesting that the debt is due and payable and there is no genuine dispute about the existence or amount of the debt.
Once served the debtor company has 21 days in which to pay the debt, secure or compound for the debt, or apply to set the demand aside.
If they do not do any of these things, then the company is presumed to be insolvent.
With this presumption of insolvency assisting, the creditor can apply to the Supreme Court or the Federal Court for an order that the debtor company be wound up in insolvency.
NOTE – Until September 26 2020, the details in this article may not be correct because of the amendments contained in the Coronavirus Economic Response Package Omnibus Act 2020. Please call Stonegate Legal for a free COVID-19 consultation on 1300 545 133.
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Drafting a Statutory Demand Notice
A statutory demand takes a specific form. This form is a Form 509H and is located at schedule 2 of the Corporations Regulations 2001 (CTH).
The Form 509H must be 100% correct, and must:
- be signed by the creditor or director of the creditor;
- identify and particularise the debt or debts owing by the debtor company;
- correctly identify the debtor and the creditor or creditors; and
- require the debtor company to pay, secure, or compound for the debt within 21 days.
It is especially important that the Form 509H is completed correctly or the demand may be able to be set aside, more below.
Statutory Demand Threshold Limits
There are a few threshold items that should be considered when thinking about issuing a statutory demand, they are:
- The debt must be $2,000.00 or more, which is the statutory minimum;
- The debtor company must be insolvent (unable to pay its debts, as and when they become due and payable);
- The debt must be due and payable (not contingent or prospective); and
- There must be no genuine dispute about the amount or existence of the debt.
Judgment or Affidavit in Support
The statutory demand must also have a judgment or an affidavit in support.
The supporting documents crucially inform the debtor company of certain things, and contain all of the statutory requirements.
Judgment in Support of a Statutory Demand
A judgment is a money order given by the Court in legal court proceedings.
This is the strongest form of supporting document because it is harder for the demand to be set aside.
However, a statutory demand can also be served with an affidavit in support.
Affidavit in Support of a Statutory Demand
An affidavit in support must be made by a person with direct knowledge of the debt. This will usually be a director of the company, or a CFO for example.
The affidavit needs to attest to the following:
- The person swearing and the source of their knowledge;
- The debt is due and payable by the debtor company;
- They believe that there is no genuine dispute about the existence or amount of the debt.
Once all the documents are correctly completed, they need to be served on the debtor company.
Service of Statutory Demand on Company
Unless a liquidator or an administrator have been appointed to the debtor company, there are two main ways to serve the statutory demand documents.
These are prescribed at section 109X(1) of the Corporations Act 2001 (Cth), which says:
(1) For the purposes of any law, a document may be served on a company by:
(a) leaving it at, or posting it to, the company’s registered office; or
(b) delivering a copy of the document personally to a director of the company who resides in Australia or in an external Territory;
I will explain these in more details below.
Serving a Statutory Demand by Post
Probably the most common way to serve a company is to post the documents to the registered office of the company.
The registered office address is contained in a company current extract. You can buy this document from ASIC.
We recommend using an express post envelope so that you can prove when the documents were delivered.
If you cannot serve the documents in this way, you can also serve the documents by personally serving the director of the company.
Serving a Statutory Demand by Giving it to the Director
The statutory demand and supporting documents can also be served on the debtor company by personally serving the director of the company.
The address of the director is also contained in the current extract.
We recommend using a process server to attend at the address and personally serving the director. They will also provide an affidavit of service.
If you cannot find the director of the company, then you can conduct a skip trace, which is a trace performed by an investigator to locate the director.
Once served, the debtor company has 21 days to comply with the demand or make an application to set the demand aside.
Complying with the Statutory Demand
Paragraph 3 of the statutory demand states:
3. The Creditor requires the Company, within 21 days after service on the Company of this demand:
a. to pay to the Creditor the *amount of the debt/ * total of the amounts of the debts; or
b. to secure or compound for the *amount of the debt/ * total of the amounts of the debts, to the Creditor’s reasonable satisfaction.
So, the options are to pay the debt, or secure or compound for the debt. I will explain these in more detail below.
Pay the Debt Contained in the Statutory Demand
This is obvious. The company must pay the entire debt claimed in the statutory demand.
If the debtor pays then the demand is extinguished, and the matter is over.
The debtor company can also secure or compound for the debt.
Secure or Compound for the Debt Contained in the Statutory Demand
To secure for the debt means to accept some security for the debt, such as a charge registered on the PPSR or an equitable mortgage, or a mortgage.
This security is to secure the creditor’s interest until the debtor company can repay the debt.
To compound for the debt means to enter into some form of arrangement for repayment.
In Commonwealth Bank of Australia v Parform Pty Ltd  FCA 1445 Sundberg J said:
To “compound” for a debt is to accept an arrangement for payment of the amount of the debt or of a different amount.
Usually these things will go together – some security in exchange for some repayment arrangement.
The security of arrangement must also be to the Creditor’s reasonable satisfaction. This has been deemed to posit an objective test rather than a subjective test.
Therefore, it may be possible for the Court to determine that an offer that was not accepted by the creditor, was to the Creditor’s reasonable satisfaction, and therefore should have been accepted.
The debtor company can also make an application that the statutory demand be set aside.
Setting Aside a Statutory Demand
Section 5 on the statutory demand says:
5. Section 459G of the Corporations Act 2001 provides that a company served with a demand may apply to a court having jurisdiction under the Corporations Act 2001 for an order setting the demand aside. An application must be made within 21 days after the demand is served and, within the same period:
a. an affidavit supporting the application must be filed with the court; and
b. a copy of the application and a copy of the affidavit must be served on the person who served the demand.
So, to set aside a statutory demand the debtor company must file the application and the supporting affidavit in the Court and serve sealed copies of the application and the affidavit at the address for service on the statutory demand.
There are 4 main grounds for setting the statutory demand aside, they are:
- A genuine dispute(s) about the existence or quantum of the debt; and/or
- Any offsetting claims; and/or
- Formal defects in the statutory demand; and/or
- Some other reason, like the demand was not served correctly.
I will explain these in more detail below.
A Genuine Dispute about the Existence or Quantum of the Debt
A genuine dispute is a disputed debt that is genuine or is at least arguable.
This is probably the most common ground for an application to set the demand aside.
The debtor company will quite often say that the invoices were wrong, or the good/services were defective, etc, and so on.
However, these disputes must also be genuine and cannot simply be made up without any solid ground for the allegation.
If the Court finds that there is a genuine dispute, then they will likely set the demand aside.
The debtor company may also allege that they have an offsetting claim.
Any Genuine Offsetting Claims
An offsetting claim can be any counterclaim, set-off or cross-demand that the debtor company has against the creditor.
The offsetting claim must be able to be quantified in money, and it need not arise out of the same transaction as the debt in the statutory demand.
However, the offsetting claim must be genuine and not simply made up or not found in any of the evidence.
A stat demand can also be set aside if there is a formal defect which will cause substantial injustice.
Formal Defects in the Statutory Demand
The reason we stated above that everything must be completed 100% correctly is that a statutory demand can be set aside if there is a formal defect which will cause substantial injustice.
A defect is easy to understand. A defect is any irregularity, misstatement of an amount or total, misdescription of a debt or other matter, and/or misdescription of a person or entity.
But what is substantial injustice? Some examples may include the following:
- Misstatement of a debt, amount, or total
- Debt is not due and payable
- Interest calculation is incorrect
- Defect in the names of the parties; and/or
- Incorrect number of creditors
A demand may also be set aside for some other reason.
Some Other Reason to Set the Demand Aside
Rather vague, some other reason is a reason not caught by the reasons above.
These other reasons may include any combination of things like:
- A defect in an affidavit supporting an application to set aside the statutory demand;
- Affidavit pre-dating the date on the statutory demand;
- Deponent did not swear or affirm all the elements required;
- Failure to depose that the debt is due and payable;
- Failure to depose that there is no genuine dispute;
- No knowledge of the relevant facts;
- The statutory demand was made for an improper purpose; and/or
- Unsigned affidavit by witness.
If the statutory demand is not complied with, or set aside within the 21 day period, then the debtor company is presumed to be insolvent for a period of three (3) months.
With this legal presumption assisting, the creditor can make an application to the Court that the company be wound up in insolvency.
Be contacted by Sunshine Coast commercial litigation lawyers today and get a statutory demand