When you make an application to enter your company into insolvency, the Court must determine whether the company is insolvent referring to the Corporations Act 2001. The Corporations Act 2001 defines “insolvency” as being unable to pay all the person’s debts when and as they become due and payable under section 95A of the Corporations Act 2001. 

A common way to have a company enter into insolvency is for a creditor to serve the company with a statutory demand. It can also be a useful way to pressure a company to pay its debts. This article will illustrate the concept of statutory demand and some options available to you in responding to a statutory demand. 

The Concept Of Statutory Demand

A statutory demand is a demand made to a company by a creditor under section 459E of the Corporations Act 2001. It can be made by a person who is owed a debt, or more than one debt, totaling more than the statutory minimum, which is currently at $2,000 (during the COVID-19 pandemic, the statutory minimum for issuing statutory demand has been temporarily raised to $20,000). A general way for a creditor to prove that a company is insolvent is to demonstrate that the debtor company fails to comply with a statutory demand.

Section 459 of the Corporations Act 2001, also set down the requirements of a statutory demand. Below are some of the requirements of a statutory demand:

Relate to either a single debt of at least $2,000;

1. Relate to either a single debt of at least $2,000;

2. Relate to 2 or more debts totalling at least $2,000;

3. Must specify the amount of the debt;

4. Must require compliance with the demand within 21 days of service;

5. Must be in writing in compliance with Form 509H;

6. Must be signed by the creditor or on behalf of the creditor; and

7. Must be accomplished by an affidavit verifying the debt, unless the debt is a judgement debt

Statutory Demand - Service

If you are planning on serving a statutory demand to a company, you can do so by either:

1. Mailing it or leaving the statutory demand at the company’s registered office; or

2. Delivering a copy of the statutory demand personally to a director of the company who resides in Australia.

Time Limit For Responding To A Statutory Demand

A company must make an application to set aside a statutory demand within 21 days of service of the statutory demand and must be filed with a supporting affidavit that identifies the factors on which the statutory demand is challenged. Once a statutory demand is set aside, it cannot be used to set up a presumption of insolvency. 

Genuine Dispute As To The Existence Of Debt

A company can challenge the statutory demand on the basis that there is a genuine dispute as to the existence of debt. The company has the onus of proving to the Court that the dispute or offsetting claims is genuine and evidence of the claim must be presented to the Court. 

In determining whether to set aside a statutory demand, the Court must calculate the substantiated amount. The Court must set aside a statutory demand if the substantiated amount is less than the statutory minimum.

Defective Statutory Demand

A company may apply for an order to set aside a statutory demand if it contains a defect. Under section 459J(2) of the Corporations Act 2001, the Court is required to set it aside on the ground where it is satisfied that it does not set the statutory demand aside and it will cause substantial injustice.

Concluding Remark

If you are served with a statutory demand and you believe there is a genuine dispute as to the amount demanded, if you have an offsetting claim against the creditor, or if there is a defect in the statutory demand, you must seek immediate legal advice to make an application to have the statutory demand set aside. Please contact the commercial litigation team of Longton Legal Melbourne on 03 9670 1199.

*Disclaimer: This is intended as general information only and not to be construed as legal advice. The above information is subject to changes over time. You should always seek professional advice before taking any course of action.*