Setting Aside a Statutory Demand

If your company receives a statutory demand, it is important to act quickly. A statutory demand is a formal demand for payment issued under the Corporations Act 2001 (Cth). If the company does not respond within the required timeframe, it may be presumed to be insolvent, which can allow the creditor to commence winding up proceedings. The Federal Court describes a statutory demand as a creditor’s formal written request requiring a company to pay a debt within the statutory period, currently 21 days.

A company served with a statutory demand may apply to the Court for an order setting it aside under section 459G of the Corporations Act 2001 (Cth). That application must be made within the statutory period after service of the demand. Section 459G requires that, within that period, the company file a supporting affidavit with the Court and serve both the application and supporting affidavit on the person who served the demand.

Because the timeframe is strict, a company that receives a statutory demand should seek legal advice immediately.

Is the Statutory Demand in the Correct Form? 

The requirements for a statutory demand are set out in section 459E of the Corporations Act 2001 (Cth). Given the serious consequences that may follow if a company does not comply with a statutory demand, it is important to check whether the demand satisfies the statutory requirements. 

A statutory demand should be reviewed carefully to confirm whether: 

• the debt, or total of the debts, is at least the statutory minimum, currently $4,000; 

• the debt is due and payable; 

• the demand clearly specifies the debt and the amount claimed; 

• the demand requires the company to pay, secure or compound the debt to the creditor’s reasonable satisfaction within the statutory period; 

• the demand is in writing; 

• the demand is in the prescribed form; 

• the demand is signed by or on behalf of the creditor; and 

• if the debt is not a judgment debt, the demand is accompanied by an affidavit verifying that the debt is due and payable and complying with the rules of court. 

These requirements reflect section 459E, which provides that a demand may relate to a single debt, or multiple debts, that are due and payable and total at least the statutory minimum; must specify the debt and amount or total amount; must require payment, security or compounding within the statutory period; must be in writing and in the prescribed form; and must be signed by or on behalf of the creditor. Section 459E also requires a verifying affidavit unless the debt, or each debt, is a judgment debt.

Is There a Genuine Dispute About the Debt? 

A company may apply to set aside a statutory demand if there is a genuine dispute about the existence or amount of the debt. 

This may arise where the company disputes that the debt is owed at all, or accepts that some amount is owed but disputes the amount claimed in the demand. Section 459H applies where the Court is satisfied that there is a genuine dispute about the existence or amount of a debt to which the demand relates.

A bare assertion that the debt is disputed will not usually be enough. The company must file and serve affidavit evidence explaining the basis of the dispute. However, the application is not a final trial of the dispute. The issue is whether there is a genuine dispute sufficient to justify setting aside or varying the demand. 

Does the Company Have an Offsetting Claim? 

A company may also apply to set aside a statutory demand if it has an offsetting claim against the creditor. 

An offsetting claim is a genuine claim by the company against the creditor by way of counterclaim, set-off or cross-demand. It does not need to arise from the same transaction or circumstances as the debt claimed in the statutory demand. Section 459H expressly defines an offsetting claim in those terms.

If the offsetting claim reduces the substantiated amount of the demand below the statutory minimum, the Court must set aside the demand. If the substantiated amount remains at least the statutory minimum, the Court may vary the demand.

Is There a Defect That Would Cause Substantial Injustice? 

A defect in a statutory demand may justify setting it aside, but not every defect will be enough. 

Under section 459J, the Court may set aside a statutory demand if, because of a defect in the demand, substantial injustice will be caused unless the demand is set aside. The Court must not set aside a statutory demand merely because of a defect unless the requirements of section 459J are satisfied.

For example, a defect may be significant if it makes the demand unclear, confusing or difficult for the company to comply with. This may occur where the demand does not clearly identify the debt, does not clearly state the amount claimed, or requires the company to work out the amount for itself. 

Is There Some Other Reason to Set Aside the Demand? 

The Court also has power under section 459J to set aside a statutory demand if there is “some other reason” why the demand should be set aside.

This ground is broad and may include circumstances such as improper use of the statutory demand process, issues with service, or other matters that make it unjust for the demand to remain on foot. 

For example, a creditor should not use a statutory demand as a pressure tactic where the debt is genuinely disputed. The statutory demand process is serious and can lead to a presumption of insolvency if the company does not act within time. The Federal Court notes that if a company fails to comply with a statutory demand within the time provided, the company is presumed insolvent, and the creditor may rely on that presumption as the basis for a winding up application.

Key Takeaways 

A statutory demand should never be ignored. If your company receives one, you should promptly consider whether: 

• the demand complies with section 459E; 

• there is a genuine dispute about the debt; 

• the company has an offsetting claim; 

• there is a defect that would cause substantial injustice; or 

• there is some other reason why the demand should be set aside. 

Strict time limits apply. If an application is required, it must be filed and served within the statutory period after the demand is served. Section 459G requires the supporting affidavit to be filed and the application and affidavit to be served on the creditor within that period.