So, your company has been served with a creditor’s statutory demand for payment of debt under the Corporations Act.
It rocks up on the doorstep and claims your company has a debt (which amounts to at least the statutory minimum, currently $4,000) that is due and payable. You have 21 days to ”comply”.
While the timeframe is short and the consequences significant, you don’t need to panic.
What to do from here?
The good news is that while it’s easy for creditors to send you a Statutory Demand, it’s also fairly common for them to get it wrong in some way (for a recap on the risks associated with issuing a Statutory Demand in the wrong circumstances, please read “5 Times you Shouldn’t issue a Statutory Demand”).
After being served with a Statutory Demand, your company will have 21 days after the date of service to:
- Comply with the demand and pay the debt; OR
- Secure (offer security) or compound (enter an agreement) for the total amount of the debt to the creditor’s satisfaction (i.e. negotiate some kind of deal); OR
- Apply to the Court to set aside the demand.
If you don’t take any of the above actions, there is a risk that your company will be presumed to be insolvent.
This can be serious as it may result in an application to wind up your company and appoint liquidators to it. Even if you are not actually insolvent, defending that application will be costly and time consuming.
However, if you have received a demand but dispute the amount claimed in it, your best bet may well be to apply to the Court to set the demand aside.
Grounds to apply for setting aside a Statutory Demand
A Court may set aside a Statutory Demand if there is:
- a defect;
- an offsetting claim;
- a genuine dispute as to the debt amount claimed; or
- some other reason.
If you (and your lawyers!) believe one of those applies, the best and cheapest first step is to write to the company who served you with the Statutory Demand, setting out the reason why the demand is vulnerable to being set aside, and call for the demand to be withdrawn.
If they fail to withdraw the demand, the provisions of the Corporations Act 2001 (Cth) step in to allow you to make an application to set aside the demand (within 21 days after service).
Important Note: You must file and serve both your application to set aside the demand and its accompanying affidavit material within 21 days of being served with a statutory demand. This is a strict deadline and there are no extensions.
Now we’ll take a look at each of the grounds to set aside a statutory demand in some more detail.
A defective demand
A demand may be set aside if there is a defect in the demand causing ‘substantial injustice’ which cannot otherwise be remedied. This can extend to:
- a technical defect in the demand (i.e., the Statutory Demand was not made in the correct form or was not signed)
- a defect in the nature of the debt (for example, the demand includes debts that are not yet due for payment)
- a defect in service of the demand (for example, if the demand was not served on the correct registered address of your company)
However, any defect must cause ‘substantial injustice’. Even though there might be a defect in the demand, it might not necessarily cause ‘substantial injustice’.
In other words, the gravity of such defects must be sufficiently significant to warrant that the demand be set aside.
An offsetting claim
A Statutory Demand may be set aside if your company has an offsetting claim that is equal to or exceeds the debt.
In determining whether you have an offsetting claim, the Court will calculate the ‘Substantiated Amount’ of the demand.
Substantiated Amount = Admitted Total (being the amount of the debt) – Offsetting Total (the amount of your offsetting claim)
If the Substantiated Amount is less than the statutory minimum (currently $4,000 as at November 2024), the Court can set aside the demand.
The offsetting claim must be genuine and cannot be one that arises in the future.
However, even if you have an offsetting claim that is less than the total of the demand, this can still be raised. The demand may survive your application to set it aside, but if your claim is established then the effective amount of the demand will be reduced. So, for example, if the demand claims $100,000 and you have an offsetting claim of $80,000, only the difference ($20,000) will “survive” the application.
A genuine dispute
A statutory demand is only typically used for uncontested, unpaid debts that were clearly due and owing.
Therefore, a demand may be set aside if there is a genuine dispute over the amount or existence of the debt. The basic principles of a genuine dispute are::
- the threshold for a genuine dispute is low and is by no means difficult or demanding;
- to prove a genuine dispute:
- the dispute must be in good faith and truly exist in fact; and
- the grounds for alleging the existence of the dispute must be real and not spurious, hypothetical, illusory or misconceived.
As a general guideline, the bar for establishing a genuine dispute is fairly low. In an application to set aside a statutory demand, the Court will not embark on a detailed enquiry about contested facts or complex issues – if those are found to exist and be sufficient to establish a genuine dispute, then the Court will more likely set aside the demand. This then requires the parties to go through the more normal process of a Court dispute which is designed to litigate contested disputes.
Similarly to an offsetting claim, if you have a genuine dispute about the quantum of the debt (as opposed to the existence of it), the amount of that dispute is important. The Court will not set aside a demand for $100,000 because you dispute $10 of the total – instead, the demand will “survive” to the value of $99,990.
Some other reason
An application made on the basis of “some other reason” seems intuitively broad. There is no rigid rule that confines the court’s scope of power in this regard.
Nonetheless, the power must be exercised on a good reason.
For example, the courts have previously held that an affidavit supporting the debt which was signed before the Statutory Demand cannot verify the demand and will justify the setting aside of the demand for ‘some other reason’.
Similarly, if the issuing of the Statutory Demand is found to be an abuse of process (for example, to exert unrelated commercial leverage rather than for a genuine reason) then the Court may consider setting aside the demand.
But Always Consider the Commercial Side
If you have been served with a Statutory Demand it is important to get prompt advice on your next steps.
One common recommendation if the debt is disputed will be that you should consider applying to the Court to set aside the demand if it is not withdrawn first. But as to whether your situation warrants a potentially expensive Court action will require a sensible, commercial discussion with your lawyers who can guide you through the costs and risks.
