If you’re a company director or shareholder in NSW, understanding statutory demands could save your business from unexpected legal action. These powerful debt collection tools can force immediate payment or potentially lead to your company being wound up if not handled properly.
What is a Statutory Demand?
A statutory demand is a formal document that creditors can serve on companies to demand payment of outstanding debts. Under the Corporations Act 2001, companies have just 21 days to respond by either paying the debt or applying to set aside the demand. If they don’t, the company is legally presumed to be insolvent, opening the door for creditors to apply for a winding-up order.
Think of it as the legal equivalent of a final notice, but with much more serious consequences than a disconnected phone service.
Key Requirements for Issuing Statutory Demands
Not every debt qualifies for a statutory demand. The law sets specific criteria:
- Minimum debt amount: The debt must exceed $5,000
- Company targets only: Statutory demands can only be served on companies, not individuals
- Due and payable: The debt must be currently owed, not future or contingent obligations
- Quantifiable amount: You must be able to specify the exact dollar amount owed
How Are Statutory Demands Served?
Proper service is crucial for a valid statutory demand. The Corporations Act requires service by:
- Post to the company’s registered address
- Personal delivery to the registered address
- Service on a company director (if their address is in Australia)
Typically, creditors include a supporting affidavit explaining the basis for the debt claim.
## Your Options When Receiving a Statutory Demand
Receiving a statutory demand isn’t the time for casual negotiations. The 21-day deadline is strict, and “responding” means taking formal legal action, not just picking up the phone to discuss payment plans.
Option 1: Pay the Debt
The simplest response is full payment within 21 days. This ends the matter immediately.
Option 2: Apply to Set Aside the Demand
If you believe the debt is disputed or invalid, you must file a formal application with the court. Simply disagreeing with the creditor isn’t enough. Courts will set aside statutory demands when:
- There’s a genuine dispute about the debt’s existence or amount
- The company has an offsetting claim that reduces the debt below $5,000
- The demand contains formal defects or lacks required supporting documents
- The supporting affidavit fails to properly verify the debt
The Consequences of Inaction
Missing the 21-day deadline creates serious problems. The company becomes presumed insolvent, allowing creditors to apply for winding-up proceedings in the Federal Court or relevant State Supreme Court. Even if your company is actually solvent, you’ll need to prove this in court while defending against the winding-up application, essentially fighting the same battle but from a much weaker position.
## Strategic Considerations Before Issuing or Responding
Whether you’re considering issuing a statutory demand or responding to one, there are significant cost and strategic risks involved.
For creditors: An invalid or defective statutory demand can result in court orders for you to pay the debtor’s legal costs.
For debtors: Failing to respond properly can lead to expensive winding-up proceedings, even when the underlying debt is genuinely disputed.
Why Professional Legal Advice is Essential
The statutory demand process involves strict procedural requirements and tight deadlines that leave little room for error. As Penrith business law specialists, we regularly help both creditors and debtors navigate these complex proceedings.
The technical requirements around service, formal validity, and court applications mean that small procedural mistakes can have expensive consequences. Whether you’re considering using a statutory demand to recover a debt or need to respond to one served on your company, experienced legal guidance is crucial.
Ready to discuss your statutory demand matter? Contact Complete Legal today for practical advice tailored to your specific situation. We’ll help you understand your options and ensure you meet all legal requirements, giving you confidence in your next steps.
