What is a Statutory Demand Process?

The most common reason for companies winding up is insolvency. The process can be initiated in a variety of ways including liquidation, administration and receivership. The party commencing proceedings also differs with company directors, creditors and the courts all provided with the right to do so under the Corporations Act 2001 (Cth). A statutory demand process refers specifically to insolvency proceedings that are initiated by a creditor. This article explains how they can be used by creditors as a tool to recover any outstanding debts.

What is a statutory demand and how is it significant?

A statutory demand form is a document that is issued by a creditor to a company because of an outstanding debt that it is owed. The significance of a statutory demand is that the company which has been served the document has 21 days to act otherwise it is presumed to be insolvent. In responding, a company is required to do one of the following:

• Pay the outstanding debt
• Come to an arrangement with the creditor
• Make it application to have the statutory demand set aside

Upon failure to respond in the prescribed period of 21 days, the next step in the statutory demand process is that a creditor is then able to commence wind up proceedings. Application can be made to the Federal Court of the relevant state Supreme Court.

The seriousness of a statutory demand should not be overlooked and underlines the importance of maintaining good relationships with creditors. When looking at how to deal with creditors, good relationships and communication will provide you with a better opportunity to negotiate any debts owed.

Who can send a statutory demand?

The Corporations Act outlines the circumstances where a statutory demand can be sent, the form it should be sent in and the way it is to be served. As a creditor you must be owed one or multiple debts that total more than the statutory minimum of $2,000 to be deemed eligible to send a statutory demand.

This is often used as a starting point where a failure to comply is followed by an application for winding up orders under s459P to have wind up proceedings initiated for insolvency as per s459A. All relevant forms can be found in the Federal Courts winding up checklist.

What are the requirements for making a statutory demand?

As a formal document a statutory demand must comply with the requirements under s459E of the Corporations Act. It specifies that a statutory demand must:

• Relate to a debt or debts that total a minimum of $2,000
• Specify the debt and exact amount payable
• Be in writing and in accordance with Form 509H
• Signed by or on behalf of the creditor

In addition to this, a statutory demand must be supported by either a judgement of the Court which outlines the debt owed or an affidavit that verifies the due date of the debt and the amount payable.

How do you serve a statutory demand?

Once you have created a statutory demand in the correct form, it is time to give it effect. This is done by serving it and the accompanied affidavit/Court judgement on the company that owed the debt. Section 109X and its containing provisions specify the requirements for serving a document on a company. A statutory demand can be legally served by:

• leaving it at, or posting it to, the company’s registered office; or
• delivering a copy of the document personally to a director of the company.

If a liquidator, administrator or restructuring practitioner has been appointed the statutory demand can be left at or posted to the most recent address that the acting party has registered with ASIC.

Under what circumstances can a statutory demand be set aside?

When a company has been served with a statutory demand, they can either comply with the demand or apply to the Court under s459G or the Corporations Act to have it set aside. Any application must be filed with the Court and served on the creditor within 21 of being served the statutory demand. A court may set aside the demand if:

• The company has an offsetting claim
• There is a dispute with respect to the debt or amount of debt owed
• There is a defect in the statutory demand that has been served
• Any other reasonable grounds found under s459J.

Does a statutory demand need to be filed?

During the statutory demand process, it is crucial to distinguish the difference between serving a statutory demand and responding to one. When serving a statutory demand on a company it does not need to be filed. If the company that has been served is applying to have the demand set aside, this application must be filed and accompanied with an affidavit which outlines the grounds on which the statutory demand is being challenged.

What do I do if I have received a statutory demand?

Similar to other important documents such as director penalty notice (DPN) it is imperative that you act accordingly. With only 21 days to respond or apply to have the demand set aside it is essential to be proactive. This means investigating the matter immediately and seeking expert advice where necessary. Ignoring a statutory demand could result in your company being declared insolvent with subsequent proceedings to have your company wound initiated. You will be made aware of this by receiving a wind up notice. If you have received any documents that you are unsure of, contact an insolvency professional.