Statutory Demand ' a complete guide

• Published date: 06 July 2021
• Law Firm: Stonegate Legal
• Author: Mr Wayne Davis

What Is A Statutory Demand?

A statutory demand is a demand for payment, issued by a creditor to a company debtor.

The statutory demand requires the debtor to do one of the following:

1. Pay the debt; or
2. Secure or compound for the debt; or
3. Apply to set the statutory demand aside.

The debtor company has strictly 21 days to do the above. Failure to do one of these things raises the legal presumption that the company is insolvent.

With the legal presumption raised the creditor can apply to the Federal Court or the Supreme Court for an order that the company be wound up in insolvency.

What is the Statutory Demand Process?

This complete guide will outline the formal requirements and the process of issuing a statutory demand including how to draft a statutory demand.

We will show you how to comply with the statutory demand if you have been served and the consequences of non-compliance with the demand.

We will also show you how to correctly serve the statutory demand, and how to request that the statutory demand be withdrawn.

This guide will not talk about setting aside a statutory demand, which has been addressed in our complete guide to setting aside statutory demands.

Before we start, we must first consider the elements of eligibility to issue a statutory demand.

Eligibility Requirements Of A Statutory Demand.

If you intend to send a statutory demand in Queensland, there are some requirement that must be met before you do so. These include:

1. The debtor must be a company;
2. The debt(s) must be equal to, or greater than $2,000.00;
3. The debts must due and payable; and
4. There is no genuine dispute about the existence or amount of the debt.

If you fit these criteria, then you may be entitled to serve the debtor company with a demand.

The Debtor must be a Company

Section 9 of the Corporations Act defines a company as:

"company" means a company registered under this Act

So, a creditor may serve a statutory demand on a registered company.

A company is usually characterised by the use of Pty Ltd - for example Debtor Company Pty Ltd.

A company is a separate entity in law to its directors, secretary, and shareholders.

Given this unique legal status, a company has some of the same rights as natural persons. This means that a company can incur debt, sue, be sued and be issued with a statutory demand.

The Debt(s) must be Equal to, or Greater than $2,000.00

There is a statutory minimum amount of debt which must be owed before a creditor is eligible to issue a creditor's statutory demand for payment of debt.

Section 9 of the Corporations Act defines a statutory minimum as:

"statutory minimum" means: (a) if an amount greater than $2,000 is prescribed - the prescribed amount; or (b) otherwise-$2,000.

A creditor must have a debt, or debts, equalling $2,000.00 or more to be able to issue a statutory demand.

The Debts must Due and Payable

The debts must be due and payable at the time of drafting the statutory demand Form 509H, and the Form 7 affidavit accompanying the statutory demand.

This may sound obvious, but a creditor must ensure that the time for payment has expired.

For example, if a creditor gave thirty (30) days payment terms, then those thirty (30) days need to have expired.

If you satisfy the requirements above, then you can issue the debtor company with a creditor's statutory demand for payment of debt.

Formal Requirements Of A Statutory Demand.

We would always recommend using a suitably qualified legal practitioner to draft your statutory demand.

However, if you are planning on drafting and serving creditor's statutory demands yourself, then there are several statutory demand formal requirements that you must comply with.

This part dovetails with our guide relating to formal defects in a statutory demand causing substantial injustice.

If you do not get some of these formal requirements correct, then it could be a reason for the debtor company to set the statutory demands aside.

The statutory demand formal requirements include:

1. It must be in writing and use the correct form - Form 509H;
2. It must correctly identify the debtor and the creditor or creditors;
3. It must require the debtor company to pay, secure, or compound for the debt within 21 days;
4. It must correctly and sufficiently identify and particularise the debt or debts owing by the debtor company; and
5. It must be signed by the creditor.

We will expand on each of these requirements below.

Must be in Writing and use the Correct Form - Form 509H

Form 509H is located at schedule 2 of the Corporations Regulations 2001 (CTH). If you are drafting a statutory demand yourself then you need to get a copy from there.

A statutory demand contains a header, six (6) paragraphs, a schedule, a signing section, and some notes.

These need to be correctly edited or face an application to set it aside, or a request that you withdraw the demand.

The Header

The header of a statutory demand contains the name of the form, the section of the Corporations Act applicable, the title, and the name and registered office of the debtor company.

Just leave all of this in the demand.

The most important thing to get the name, ACN, and address of the registered office correct.

You can order a company current extract from ASIC which contains all of this information. Best practice is to simply copy (ctrl + c) and paste (ctrl + v) onto the demand.

Correctly Identify the Creditor

Paragraph 1 identifies the creditor. It is important that you get this correct.

This seems like it should be easy. However, you might be a director of several different companies, with maybe a dozen business names, etc.

You must ensure that the legal entity that you add to part 1, is the same legal entity that you contracted with, and is the legal entity that is owed the debt.

If you are owed one amount (an unpaid invoice for example) then you can use the first option and delete the second.

If you are owed more than one debt (several invoices for different work) then you can use the second option and delete the first.

It is important that you get this right as misidentification of parties, and misdescription of the debt (or debts) have been found to be a defect causing substantial injustice.

In Scandon Pty Ltd v Dome Supplies Pty Ltd (1995) 17 ACSR 662 the statutory demand did not have the correct name of the creditor, did not include the ABN of the creditor; and did not include an address for service in the same State in which the statutory demand was served.

In this case, the demand was set aside with Senior Master Mahony saying:

[T]he statutory demand the subject of this proceeding will be set aside under s459j(1)(b) because of the significance of the defects in the demand, albeit not productive in this case of "substantial injustice" to the applicant to which s 459j(1)(a) could apply.

So, it important that you correctly identify your company if you want to successfully serve a compliant statutory demand.

Debt is Due and Payable by the Company

Paragraph 2 gives you options to inform the debtor that the amount of the debt is due and payable by the debtor company.

If you are serving the debtor company with a statutory demand and supporting affidavit, then you complete the second option and delete the first.

Tip - best practice is for the date of the affidavit accompanying a statutory demand, and the date of the statutory demand should be the same.

The debt(s) must be due and payable by the debtor company. You cannot include debts which are not due and payable (invoices with 30-day payment terms, before the expiry of 30 days, for example).

Failure to declare that the debt or debts are due and payable has been met with mixed case law, and there have been various interpretations as to whether this omission caused substantial injustice.

There have been cases where the inclusion of invoices with the words "amount due" was enough to not cause substantial injustice.

There have been cases where the inclusion of the debt being "due and payable" on the demand, but omitted from the affidavit in support, was enough to set the demand aside.

Best Practice - make sure that paragraph 2 is included in the statutory demand. Failure to do so and the debtor company may attempt to set it aside, creating more costs for you.

Pay, Secure, or Compound for the Debt Within 21 Days

Paragraph 3 puts the debtor company on notice that they have 21 days to pay, secure, or compound for the debt.

Payment of the debt means that the total amount of the debt contained in the statutory demand is paid in-full.

To secure for the debt means to accept security for the debt.

To compound for the debt means to accept an arrangement for payment of the debt amount, or some other amount.

The use of the word "reasonable" is an objective test rather than a subjective test, so care should be taken when negotiating offers.

Company can be Wound Up in Insolvency

Paragraph 4 of the demand lets the debtor know that failure to comply with the statutory demand allows the creditor to make an application to the Court to wind the debtor company up in insolvency.

Non-compliance with a statutory demand raises the legal presumption of insolvency. It is with the assistance of that legal presumption that a creditor of an insolvent company can apply to wind it up.

Just leave paragraph 4 in the statutory demand and make no amendments.

Application to Set the Demand Aside

Paragraph 5 lets the debtor company know that they can make an application to the Court for an order setting aside the statutory demand (if they have sufficient grounds).

If the debtor company wants to set the demand aside, then strictly within the 21-day period, they must apply to the Court, and the sealed application and supporting affidavit be served on the creditor.

Just leave paragraph 5 in the statutory demand and make no amendments.

The Warning Box

There is a requirement for the warning box to be included in the statutory demand. This warning box puts the debtor company on notice that they could be placed into...