What Is a Statutory Demand? Service, Response, and Setting Aside Explained

Statutory demands are a powerful legal tool used by creditors to recover debts from companies in Australia. However, the process is highly technical, with strict compliance and timeframes. For directors and company officers, understanding statutory demands is crucial—not only to avoid the risk of liquidation but also to ensure that your company’s rights are protected. In this article, we cover everything you need to know about statutory demands, including their purpose, how to respond, the grounds for setting aside a statutory demand, and the practical steps you must take if your company is served with one.

What is a Statutory Demand?

A statutory demand is a formal, written demand issued by a creditor to a company, requiring payment of a debt that is due and payable. The statutory demand process is governed by Part 5.4 of the Corporations Act 2001 (Cth), specifically sections 459E to 459J.

Key points:

• Only companies (not individuals or partnerships) can be served with a statutory demand.

• The debt must be at least $4,000 and must be due and payable at the time of the demand.

• The demand gives the company 21 days to pay the debt, secure or compound for the debt, or apply to set the demand aside.

The statutory demand process is designed to provide creditors with a swift and effective method for recovering debts, but it also has serious consequences for companies that fail to comply.

When Can a Statutory Demand Be Issued?

A statutory demand can only be issued if:

• The debtor is a company registered under the Corporations Act 2001 (Cth).

• The debt (or debts) totals at least $4,000.

• The debt is due and payable—not contingent, prospective, or hypothetical.

• There is no genuine dispute about the debt’s existence or amount.

If these criteria are met, a creditor may serve a statutory demand on the company. However, if there is a genuine dispute about the debt, or if the debt is not actually due, the demand may be challenged and set aside.

3. Formal Requirements of a Statutory Demand

The Corporations Act 2001 and the Corporations Regulations 2001 set out strict requirements for the form and content of a statutory demand:

• The demand must be in writing and in the prescribed Form 509H.

• It must correctly identify the debtor company and the creditor.

• It must specify the amount of the debt and provide sufficient details to allow the debtor to understand the nature of the debt.

• If the debt is not a judgment debt, the demand must be accompanied by an affidavit verifying the debt.

• The demand must be signed by or on behalf of the creditor.

• It must specify a place in Australia where the debt can be paid.

Substantial Compliance vs. Technical Compliance:

Courts have held that “substantial compliance” with the form is generally sufficient, provided the demand is not misleading or prejudicial to the debtor. However, failure to comply with key requirements—such as correct identification of the parties or the amount of the debt—may render the demand defective and open to challenge.

Service of a Statutory Demand

A statutory demand must be properly served on the debtor company. Service can be effected by:

• Delivering the demand to the company’s registered office.

• Leaving it at the company’s registered office.

• Sending it by post to the registered office.

Key points:

• Service is effective when the demand is delivered or deemed delivered (e.g., seven days after posting).

• If the demand is not properly served, it may be invalid and open to challenge.

• The 21-day period for compliance begins on the date of service, not the date of issue.

Responding to a Statutory Demand

Upon receiving a statutory demand, a company has 21 days to:

• Pay the debt in full.

• Secure or compound for the debt to the creditor’s reasonable satisfaction.

• Apply to the court to have the demand set aside.

• Failure to act within this period will result in serious consequences, including a presumption of insolvency.

Grounds for Setting Aside a Statutory Demand

The Corporations Act 2001 provides several grounds on which a company can apply to set aside a statutory demand. These are:

Genuine Dispute

A company may apply to set aside a statutory demand if there is a genuine dispute about the existence or amount of the debt.

What is a genuine dispute?

• A genuine dispute exists where there is a real and substantial argument, not a spurious or illusory one.

• The dispute must be bona fide and based on reasonable grounds.

• The company must provide evidence (usually by affidavit) to support the existence of the dispute.

Examples of genuine disputes:

• Disagreement over the terms of a contract.

• Dispute over the quality or quantity of goods or services supplied.

• Disagreement over payments or credits applied to the account.

What is not a genuine dispute?

• Mere assertions or denials without supporting evidence.

• Arguments that are frivolous, vexatious, or lacking in substance.

Offsetting Claim

A statutory demand can also be set aside if the company has an “offsetting claim” against the creditor.

What is an offsetting claim?

• An offsetting claim is a genuine claim for damages, set-off, or cross-demand that the company has against the creditor.

• The claim must be quantifiable in monetary terms and must exist at the time of the hearing.

• The claim does not have to arise from the same transaction as the debt in the demand.

Examples of offsetting claims:

• Counterclaims for defective goods or services.

• Claims for damages arising from breach of contract.

• Claims for overpayment or credits due.

Defect in the Demand Causing Substantial Injustice

A statutory demand may be set aside if there is a defect in the demand that would cause substantial injustice if not addressed.

What is a defect?

• An irregularity, misstatement of amount, misdescription of the debt, or misdescription of a party.

• Examples include incorrect company names, wrong amounts, or failure to specify the debt clearly.

What is substantial injustice?

• The defect must be significant enough to mislead or prejudice the debtor company.

• Minor errors or technicalities will not usually be sufficient unless they cause real prejudice.

Some Other Reason

The court may also set aside a statutory demand for “some other reason”.

What are examples of “some other reason”?

• The demand was issued for an improper purpose (e.g., to pressure the company into paying a disputed debt).

• The demand is an abuse of process.

• The supporting affidavit was not properly sworn or was defective.

The Application Process: How to Set Aside a Statutory Demand

Strict 21-Day Deadline

The application to set aside a statutory demand must be filed and served within 21 days of service of the demand. This is a strict deadline—if you miss it, your company will be presumed insolvent and may be wound up.

Filing the Application

• The application is made to the Federal Court or the Supreme Court of the relevant state.

• The application must be accompanied by a supporting affidavit setting out the grounds and evidence for setting aside the demand.

• Both the application and the affidavit must be served on the creditor within the 21-day period.

The Hearing

• The court will consider whether any of the grounds for setting aside the demand are made out.

• The onus is on the applicant company to prove the grounds for setting aside.

• If successful, the court will order that the demand be set aside.

Consequences of Failing to Comply

If a company fails to comply with a statutory demand (by paying, securing, or applying to set aside), the following consequences apply:

• The company is presumed insolvent for three months.

• The creditor can apply to the court to wind up the company in insolvency.

• The presumption of insolvency can only be rebutted by evidence that the company was solvent at the relevant time.

Directors’ Duties:

Directors must act promptly and seek legal advice if their company is served with a statutory demand. Failure to do so may expose the company to liquidation and directors to potential liability.

Statutory Demands in the Construction Industry

Statutory demands are frequently used in the construction industry as a debt recovery tool. However, construction disputes often involve complex contractual issues, variations, and offsetting claims.

Key considerations:

• Many construction debts are disputed, making statutory demands risky for creditors.

• Companies must act quickly to raise genuine disputes or offsetting claims.

• The Queensland Building and Construction Commission Act 1991 and related regulations may also impact the enforceability of construction debts, including requirements for written contracts, progress payments, and statutory warranties.

Frequently Asked Questions

What is a statutory demand?

A statutory demand is a formal, written demand for payment of a debt owed by a company, issued under the Corporations Act 2001 (Cth).

How long do I have to respond to a statutory demand?

What happens if I ignore a statutory demand?

What are the grounds for setting aside a statutory demand?

Can I negotiate with the creditor?

What is a defect in a statutory demand?

What is an offsetting claim?

Can a statutory demand be served by email?

What if the debt is less than $4,000?

What is the role of the supporting affidavit?

If your company has been served with a statutory demand, time is critical. The consequences of missing the 21-day deadline can be severe, including the risk of liquidation. For urgent, expert advice on statutory demands, setting aside a statutory demand, or any aspect of corporate insolvency, contact Merlo Law’s experienced building construction lawyers today. We provide practical, strategic guidance to protect your company’s interests and ensure compliance with all legal requirements.

---

This guide is for informational purposes only and does not constitute legal advice. For advice tailored to your specific circumstances, please contact Merlo Law.