A letter not to be taken lightly
Paragraph 459(2)(e) Corporations Act 2001
Creditor's Statutory Demand for Payment of Debt
What is a statutory demand
If you have ever received a letter titled "Creditor's Statutory Demand for Payment of Debt", it is important that you attend to it with urgency. A statutory demand is a demand letter with serious consequences and can ultimately lead to the winding up of a company if it is not addressed within 21 days[i]. As a statutory demand would set into motion the proceedings for the compulsory winding up of a company, there are strict requirements that must be met when a statutory demand is issued, and there are limited grounds for setting aside a statutory demand.
Use and requirements
Statutory demands should not be used to "fast track" debt collection or an instrument of oppression over a debtor company[ii], it is a precursor to a winding up of a company and the consequences for issuing a statutory demand may come back to haunt the issuing creditor. A statutory demand should be issued if a creditor is of the opinion that the debtor company may be unable to pay its debts and to prove the debtor company's insolvency. Non-compliance with a statutory demand entitles the issuing creditor to commence winding up proceedings of the debtor company[iii].
What to do if you have received a statutory demand
If you have received a statutory demand, it is likely due to a debt your company owes to a creditor. You must take action within 21 days from the date of receipt of the statutory demand or your company may find itself subject to winding up proceedings. The options available are simply either to comply with the demand and pay the creditor or to challenge the statutory demand on the limited grounds afforded in the Corporations Act 2001 (Cth).
Setting aside a statutory demand
There are limited grounds on which a debtor company could rely on in setting aside a statutory demand. Setting it aside would require approaching the Supreme Court of the state or the Federal Court, so the debtor company needs to bear in mind the costs associated with making such an application. Grounds to set aside a statutory demand include a genuine dispute about the existence of a debt[iv], an offsetting claim[v], a defect in the demand causing substantial injustice if not set aside[vi], or some other reason why the demand should be set aside[vii].
Whether you intend to issue a statutory demand or have received one, you have obligations to meet when addressing this issue. As a creditor, strict compliance mechanisms must be met when issuing a statutory demand; and as a debtor, strict time frames and limited grounds to set it aside are afforded to you in addressing the statutory demand. It is best to seek legal advice immediately whenever a statutory demand is received and not wait to the last minute as the legal costs associated with addressing it would reflect the urgent nature of the matter.
© Kaveer Soni – 24 August 2022
[i] S459F(1) of the Corporations Act 2001 (Cth) (“Act”)
[ii] South East Water Ltd v Kitoria Pty Ltd (1996) 21 ASCR 465 [at 472]
[iii] S459Q of the Act
[iv] S459H1(1)(a) of the Act
[v] S459H(1)(b) of the Act
[vii] S459J(1)(b) of the Act