What to do when Faced with a Statutory Demand

If your company receives a creditor’s statutory demand, there are steps that must be taken to prevent a situation from going bad to worse.

The most important thing to remember is that you only have 21 days from receipt to deal with it. 

To avoid going to court, and having your company wound-up, you must do one of the following:

1. Satisfy the debt (i.e. pay the debt amount being demanded);
2. Persuade the issuer of the demand to withdraw it (in certain circumstances, or if you dispute the debt); or
3. Apply for the statutory demand to be set aside in accordance with the Corporations Act. 

Time is of the essence so a phone call or email to your solicitor should be your first move.  Your solicitor will consider the facts and advise which of the above approaches is most suitable. 

For example, if you owe the money, your best option is to just pay the debt.  However, if you deny the existence of the debt, or the amount being claimed, you may have good prospects of setting aside the demand.  If you can set aside the demand (discussed in greater detail below), your solicitor should articulate the reasons and present your argument to the issuer of the demand.

Failure to Set Aside the Statutory Demand – Presumption of Insolvency

If a statutory demand is not complied with within 21 days, there is a presumption that the company is insolvent and should be wound-up.  The issuer of the demand can then bring proceedings to wind-up a company based on that presumption. 

Once wind-up proceedings are commenced, you must prove your company’s solvency in order to avoid being wound-up.  Clearly, it is best to deal with the statutory demand before the situation gets this far.  There is no extension to the 21-day period, so it is important that action be taken before it expires.

Furthermore, in the event that you let the 21-day compliance period expire and then pay the debt in full, a different creditor (the supporting creditor) may rely on the presumption of insolvency and bring proceedings to wind up your company.  This presumption of insolvency lasts for three months from the date the demand was served. 

How to Set Aside the Statutory Demand

The Corporations Act provides four grounds that can be relied upon for the setting aside of a statutory demand (s458H and 459J). They are as follows:

1. Where you have a genuine dispute about the existence or amount of the debt.  For example, if a demand states that you owe $10,000 but you believe (and can demonstrate) that you only owe $1,500 (which is under the statutory minimum of $2,000) you should rely on this ground.  Or, perhaps you deny the existence of the debt altogether.  The court will not make a determination about whether the debt exists, or what the correct amount is, it just needs to be satisfied that there is a genuine dispute.  If satisfied, the demand will be set aside. 
2. Where you have an offsetting claim against the person who served the claim.  This may include a claim that you have against the issuer of the demand by way of counter-claim, set-off or cross-demand even if it does not relate directly to the circumstances to which the demand is concerned.  You must be able to show how the offsetting claim amount is calculated and that it is genuine.  The offsetting claim must reduce the amount of the claim to under $2,000.
3. Where there is a defect in the demand which will cause substantial injustice unless the demand is set aside.  A defect is defined in the Corporations Act as “an irregularity, a mis-statement of an amount or total, a misdescription of a debt or other matter and a misdescription of a person or entity”.  This could be an instance where the creditor provides an invoice that contains defects and the amount of the demand cannot be properly calculated.  Whatever defect is being relied upon, the key is to show that substantial injustice would be caused if the demand is not set aside. 
4. Some other reason.  This ground includes any valid reason that does not fall within the above three grounds and can vary.  It could be that the affidavit supporting the demand was signed on a different day to the demand.

The take-home messages here are that you should never let the 21-day compliance period expire; and ensure you engage a solicitor early on.