Responding to a Statutory Demand (and the COVID-19 temporary changes)

A statutory demand is a document issued by a creditor that allows a creditor to demand payment from a debtor company. If you have been served with a statutory demand, it is crucial you act quickly as you only have 21 days to respond (subject to COVID-19 temporary changes specified below)

You have two options to respond to a statutory demand. These are:

• pay the debt(s) in full; or
• apply to set aside the statutory demand.

Setting aside a statutory demand

A debtor company may apply to the court for an order to set aside a statutory demand pursuant to section 459G of the Corporations Act 2001 (Cth) (the Corporations Act). Pursuant to sections 459H and 459J of the Corporations Act, the demand may be set aside if the court is satisfied that:

• a genuine dispute exists in relation to the debt;
• the debtor company has an offsetting claim;
• a defect in the statutory demand exists which will cause substantial injustice unless the demand is set aside; or
• there is some other reason as to why the demand should be set aside.

Genuine Dispute

A debtor company may challenge a statutory demand on the grounds that there is a genuine dispute about the existence or the amount of debt owed. It was held in Aussie Hoist Property Pty Ltd v Mulqueen [2018] FCA 1493 that the debtor company is responsible for providing evidence that this dispute exists and that the dispute is not merely illusory.

Offsetting claim

An offsetting claim is defined in section 459H(5) of the Corporations Act as a genuine claim that the debtor company has against the creditor serving the demand by way of counter claim, set off or cross demand.

Defect in the Statutory Demand

Pursuant to section 459J(1)(a) of the Corporations Act, a court may set aside a statutory demand on the basis that there is a defect in the demand that will cause a substantial injustice if the demand is not set aside. Accordingly, a statutory demand will not be set aside purely because it contains a defect, there must be a substantial injustice caused by the defect.

Some examples of where a statutory demand has been set aside is if the statutory demand is not completed in the relevant form, the debtors address is not the registered office, the debtors ACN is incorrect, the debt is not adequately described or is related to a debt that is not due and payable, and the statutory demand is not accompanied by an affidavit.

Other Reasons the Court may Consider

Pursuant to section 459J(1)(b) of the Corporations Act, a court may consider other reasons as to why the statutory demand should be set aside. An example is where the accompanying affidavit has been signed before the statutory demand and no updated affidavit has been filed to rectify this, as was decided in Wollongong Coal Ltd v Gujarat Nre India Pty Ltd [2015] FCA 221.

Failure to Respond

Ignoring a statutory demand can have immense consequences for a company. Pursuant to section 459C of the Corporations Act, if a debtor company fails to respond to the statutory demand within 21 days (subject to COVID-19 temporary changes), the company will be presumed to be insolvent. As a result, the creditor may apply to the court to have the company wound up.

Further, the director may be at risk of being personally liable pursuant to the Corporations Act for continuing to trade while presumed to be insolvent.

COVID-19 Temporary Changes

At statutory demand can only be issued if there is a debt greater than $2,000.00. Until further notice during the COVID-19 outbreak, this amount has increased to $20,000.00.

A company normally has 21 days to respond to statutory demand by paying the entire amount in full, or filing an application with the Supreme Court or Federal Court to set aside the statutory demand. Until further notice during the COVID-19 outbreak, this amount has increased to $20,000.00.

If you have been served with a statutory demand, or wish to issue a statutory demand, feel free to contact us for a free consultation on (02) 9262 5495 or (03) 8899 7870; visit our Website; Like our Facebook Page.

This article is written by Belinda Kotvas and settled by Damin Murdock. This article is not legal advice and should not be relied upon as legal advice. All articles found on this website are intended to provide informative information, nevertheless, in many instances legislation and case law has been simplified and/or paraphrased. If you would like personal legal advice based on your current circumstances, you should contact MurdockCheng Legal Practice for a free consultation.