Statutory Demands in Australia

If you are a business owner that trades through a company, it’s crucial that you understand the significance and effect of statutory demands. They are an important legal tool which, if not handled correctly, can result in your company being wound up and a liquidator appointed to it.

Despite the fact that statutory demands appear to be simple documents, the law surrounding them is complex and the timeframe for compliance short. In this article, we will provide you with a comprehensive overview of statutory demands in Australia, including what they are, how they work, and what you can do to protect your business, so that you understand when you might need to consult a lawyer.

What is a Statutory Demand?

A statutory demand is a formal written demand issued by a creditor to a debtor company pursuant to Section 459E of the Corporations Act 2001 (Cth) (Act). It is a legal document that requires the debtor company to either:

1. pay to the creditor the amount of the debt (or total of the amounts of the debts) owed; or,
2. to “secure or compound” for the amount/amounts owed, to the creditor’s reasonable satisfaction.

If a debtor company fails to comply with a statutory demand within the required timeframe, a presumption of insolvency arises – which may be relied upon by the creditor should it apply to a Court to have the company wound up and a liquidator appointed to it.

In practice, the issue of a statutory demand often leads to the payment of an outstanding debt, litigation regarding the validity of the demand itself, or the winding up of an insolvent company.

When can you issue a statutory demand?

A statutory demand can be issued where a party is owed money by a company (i.e. they are a “creditor” of the company) and the following criteria are satisfied:

1. the debt is owed to the creditor by a company;
2. the debt owed (or, where there are multiple debts owed to the same creditor, the total of the amounts of the debts owed) is at least the statutory minimum amount;
3. the debt is due and payable by the debtor company;
4. there is no genuine dispute about the existence of the debt or the amount of the debt (or debts).

What are the formal requirements for a Statutory Demand?

There are several formal requirements that must be met for a statutory demand to be valid, being that the demand must:

1. be in writing;
2. be in the prescribed form – Form 509H (which can be found in Schedule 2 of the Corporations Regulations 2001 (Cth));
3. if it relates to a single debt, it must specify the debt and its amount;
4. if it relates to two (2) or more debts, it must specify the total of the amounts of the debts (in addition to the amounts of each individual debt);
5. require the company to pay the amount of the debt (or the total of the amounts of the debts) or to secure or compound for that amount (or total) to the creditor’s reasonable satisfaction, within the statutory period after the demand is served on the company;
6. be signed by (or on behalf of) the creditor;
7. be accompanied by an affidavit that verifies that the debt (or the total of the amounts of the debts) is due and payable by the company – however this is not required where the debt is a judgment debt.

What happens if you don’t comply with a statutory demand?

There are three major consequences if you don’t comply with a statutory demand.

Presumption of insolvency

Firstly, if you don’t comply with a statutory demand, your company is presumed to be insolvent.

This is not, however, a general presumption that the company is insolvent – it is a limited presumption which only applies for the purposes of:

1. applications to a Court to wind up the company;
2. applications to a Court for leave to make an application to wind up the company, pursuant to Section 459P of the Act; or,
3. applications to a Court for orders under Section 234 of the Act (which relate to disputes between shareholders of a company).

The presumption is a rebuttable presumption, meaning the starting position is that the company is insolvent unless the company can prove otherwise. Proving that your company is solvent can however be a time consuming, difficult and expensive process – and usually requires evidence from an independent expert witness.

Limitation of grounds upon which winding up proceedings may be contested

Secondly, if your company does not comply with a statutory demand and the creditor that issued the demand applies to wind up the company, the grounds upon which you may defend those winding up proceedings will be limited.

Section 459S of the Act provides that where a creditor applies to wind up a company and relies upon the company’s failure to comply with a statutory demand, in the absence of the Court’s express permission to do so the company may not oppose the winding up application by relying upon a ground that either:

1. the company relied on for the purposes of an application by it for the demand to be set aside; or
2. that the company could have relied upon, but did not (whether it made an application to set aside the demand or not),

unless the relevant ground/s are relevant to proving that the company is solvent.

Other creditors may rely upon presumption of insolvency

Finally, a lesser-known consequence of failing to comply with a statutory demand is the fact that other creditors may rely upon the presumption of insolvency that arises.

In reality, it is unlikely that any third party will know that a statutory demand has been issued, or whether or not it has been complied with, given it is simply correspondence sent from one party to another and there is no requirement to advertise the issuing of the demand.

In contrast, upon the filing of a winding up application the creditor petitioning for the company to be wound up must publish a notice of the application for a winding up order on the Australian Securities and Investments Commission (ASIC) “Insolvency Notices” website. This notice could be seen by other creditors of the company, who may seek to appear at any winding up hearing as a “supporting creditor” i.e. a creditor supporting the petitioning creditor’s application to wind up the company.

The effect of the above is that, if a statutory demand is not complied with and winding up proceedings are commenced, the company may find itself needing to pay multiple different creditors – in addition to the creditor that issued the statutory demand – or otherwise be put to the cost of defending the proceedings by proving it is solvent, in order to avoid a winding up order being made.