What to do when a statutory demand is served

A creditor's statutory demand gives a company 21 days from service to pay the debt, to secure or compound it to the creditor's satisfaction, or to file and serve an application to set the demand aside. Let all three pass and the company is presumed insolvent, and for the next three months that presumption is enough for the creditor to apply to the court to wind it up.

What the document actually is

A statutory demand is not a court order. No judge has read it, no court has decided that the debt is owed, and in most cases the creditor has never sued anybody. It is a document the creditor writes, signs and serves under section 459E of the Corporations Act, and its power comes entirely from what happens next if it is ignored.

That is also why it has rules. The demand has to relate to a debt, or debts added together, that are due and payable and total at least $4,000 — the minimum for demands served on or after 1 July 2021, lifted from the $2,000 that had stood since 1992. It has to specify the debt and the amount, be in writing in the prescribed form, Form 509H, and be signed by or on behalf of the creditor. Where the debt is not a judgment debt, the demand must come with an affidavit verifying that the debt is due and payable, and that affidavit must not be dated earlier than the demand itself.

None of that makes a defective demand harmless. It means a solicitor reading the document in the first days has something to work with, which is a different thing from hoping a mistake will be forgiven later.

You are not the first one this week

Almost everybody rings their bank first. The bank is slow by design, and three weeks is not a timeframe it works in — and if it does look, it usually says no for reasons that have nothing to do with whether the loan would be repaid: the last financials look wrong, a lodgement is late, the credit file has a mark on it. Those are reasons a bank exists to care about. None of them says anything about whether there is equity in the property.

That gap is where HomeSec has been since 2004. We are not here to judge how the debt got there, and we have seen enough demands that they do not surprise us. What we look at is whether there is enough unused equity in Australian real property and whether the purpose is a genuine business one — from $20,000 to $5,000,000 against that equity. No financial statements, no credit score threshold, no interrogation about the last two years. From a clean, complete scenario funds can be available in as little as 24 hours, and interest can be capitalised for up to six months so there is nothing payable while the business steadies. The mechanics of that are set out on our statutory demand funding page.

Back to the demand, because the clock on it runs whatever anybody decides about money.

When the 21 days actually started

The period runs from service, not from the date printed on the demand and not from the day a director opened it. A document is generally served on a company by leaving it at, or posting it to, the address the company has registered with ASIC, or by handing it to a director who lives in Australia. Where it went by post, a posted document is presumed to have been served on the seventh working day after posting unless there is evidence to the contrary.

Two consequences follow, and they point in opposite directions. If the registered office is a former accountant's suite or an address the company left years ago, the clock has been running while the envelope sat in someone else's tray. And if the creditor is counting from the day it posted the demand rather than from the day service is taken to have happened, the creditor may be counting the deadline wrong in its own favour. Both are questions for a solicitor with the envelope in front of them, and both are worth asking on the first day rather than the twentieth.

The four grounds, and the one deadline that cannot move

A company served with a demand has the statutory period to do one of two things: comply with it, or apply to the court to set it aside. The court can set a demand aside on four grounds.

1. 1
   There is a genuine dispute about the debt.Section 459H(1)(a). The company does not have to win the argument at this stage — it has to show the dispute is real rather than manufactured for the occasion.
2. 2
   The company has an offsetting claim.Section 459H(1)(b). A claim the company has against the same creditor, which reduces what is actually owed.
3. 3
   A defect in the demand would cause substantial injustice.Section 459J(1)(a). Not any defect — one that would do real harm if the demand were allowed to stand.
4. 4
   Some other reason.Section 459J(1)(b). Narrow, and argued on the facts of the particular demand.

The deadline on that application is the unforgiving part. It must be filed with the court and served on the creditor inside the statutory period, and the Federal Court's own guidance records that the courts apply this strictly: no extensions of time, and no dispensing with either limb. Filing on the last day and serving the next morning is a failure.

Once the application is properly on foot, the time to comply with the demand is extended automatically while the court deals with it. If the application is dismissed, the company gets seven days from the dismissal to comply, unless the court sets a different period. A creditor saying informally that it is in no hurry extends nothing at all; what a creditor can do is accept an arrangement, which is a different thing and needs to be in writing.

What happens on day 22

Failing to comply does not itself wind the company up. It creates a presumption of insolvency under section 459C(2)(a), and for three months from the date of non-compliance the creditor who served the demand can rely on that presumption to apply to the court for a winding up order. The effect of the presumption is that the court must treat the company as insolvent unless the company puts up evidence to the contrary — which means proving solvency, with figures, at short notice, and at the company's cost.

A winding up application once filed has its own momentum. It is advertised on ASIC's insolvency notices page, which suppliers, banks and customers can and do read. Other creditors can substitute themselves for the original applicant. Proceedings must be determined within six months unless the court extends that period. Directors should also understand that a company presumed insolvent is a company whose directors need advice about insolvent trading, and that is a conversation with a registered liquidator rather than with a lender.

The first 48 hours

1. 1
   Write the service date on the front of the demand.Not the date printed on it. Work out when it was served — delivered to the registered office, or posted and presumed served seven working days later — and count from there. If you cannot tell, that uncertainty is the first thing to take to a solicitor.
2. 2
   Check the company's registered address on ASIC's register.If it is wrong, this demand went somewhere you do not collect mail and so will the next one. Fix it whatever else you decide.
3. 3
   Decide, honestly, whether the debt is disputed.A genuine dispute or an offsetting claim is a legal path with a hard deadline, and it is the one path funding does not help with. If the debt is simply owed and unpaid, say so to yourself early — it saves a fortnight.
4. 4
   Speak to an insolvency lawyer or a registered liquidator this week.Not because the answer is insolvency, but because a set-aside application has to be prepared and served inside the period, and because someone should tell you plainly whether the business is viable.
5. 5
   Ask the creditor, in writing, what it will accept.Payment in full, or security, or an arrangement it will put in writing. Anything agreed by phone and not confirmed does not exist when the period expires.
6. 6
   Work out what the property could release, in parallel.If paying is the answer, the only real questions are whether there is equity and how quickly it can be reached. That part can be answered the same day, and it does not commit you to anything.

When paying it out is the right answer, and when it is not

Borrowing to satisfy a demand makes sense when the debt is real, the business behind it works, and the demand is the residue of a bad quarter rather than a symptom of something structural. It makes sense when there is an exit that can be seen from here: a property to be sold, a refinance that will complete once this is cleared, a contract that settles. Paying inside the period also means no presumption of insolvency arises at all, which is worth more than the money — get the creditor's confirmation in writing.

It does not make sense in three situations, and we would rather say so here than after a valuation. If the debt is genuinely disputed, borrowing to pay it is paying for something you may not owe: that is a solicitor's problem with a hard deadline, and the deadline is the reason to move today. If this creditor is one of many and the company cannot pay the others either, paying one of them does not fix insolvency, and in a later liquidation a payment made in that position can be examined as a preference — a registered liquidator or a small business restructuring practitioner is the person to speak to. And if there is no meaningful equity in real property, this is not our answer, and we will tell you so on the first call rather than the third.

This page explains what a statutory demand is and what the options are. It is general information, not legal or insolvency advice: what applies to your company is a question for an insolvency lawyer or a registered liquidator, and the Federal Court's Corporations Information Sheet 1 and the Corporations Act itself are the primary sources behind everything above.

Reviewed by Catriona Anderson, General Manager