A company director receives a statutory demand from a supplier seeking payment of an outstanding debt. The account is overdue, but the director expects several customer payments to arrive shortly and believes the company will then have enough money to settle it. They contact their accountant to discuss whether they can negotiate more time.
Before approaching the creditor, there are several issues to establish. Is the amount claimed correct? When was the demand served? Can the company meet the debt without compromising its other financial obligations? Most importantly, how much time remains to respond?
A statutory demand is a formal legal document issued under the Corporations Act 2001. If a company fails to comply with it within the prescribed period, the creditor may be able to rely on a presumption of insolvency when applying to the Court to wind up the company.
Receiving a statutory demand does not automatically mean a company is insolvent, nor does it mean liquidation is inevitable. The immediate concern is that the legal process operates within strict timeframes, and decisions made during those first few weeks can have significant consequences.
Understanding the 21 Day Deadline
Under section 459E of the Corporations Act 2001, a creditor may serve a statutory demand on a company for a debt, or multiple debts owed to that creditor, that are due and payable and total at least the statutory minimum, currently $4,000.
A statutory demand must meet prescribed requirements, including identifying the debt and the amount claimed, using the prescribed form and being signed by or on behalf of the creditor. Where the demand concerns a debt that is not a judgment debt, it must also be accompanied by an affidavit verifying the debt.
The company generally has 21 days after service to comply with the demand or apply to the Court to have it set aside.
Compliance can involve paying the amount demanded or securing or compounding for the debt to the creditor's reasonable satisfaction. If there are grounds to challenge the demand, the company may instead apply for an order setting it aside.
Under section 459G, an application to set aside a statutory demand, together with its supporting affidavit, must be filed with the Court within 21 days after service. Copies must also be served on the creditor within that period. These requirements are strictly enforced, and the Court cannot extend the initial period for making the application.
The date of service therefore needs to be established carefully. Under section 109X of the Corporations Act, service on a company can generally be effected by leaving documents at or posting them to its registered office, or by personally delivering them to a director who resides in Australia. Where service is by post, statutory presumptions about delivery may apply, subject to contrary evidence.
The relevant date is not necessarily when a director personally reads the demand. Accountants and advisers should obtain the document, identify how it was delivered and have the service date confirmed promptly where there is any uncertainty.
The Federal Court's guidance on statutory demands explains the requirements for service, compliance and applications to set aside a demand.
Establish What the Company Actually Owes
The debt identified in the demand should be examined before the company commits to a response.
Relevant invoices, contracts, statements, payment records and correspondence can help establish whether the amount claimed is accurate and presently due and payable. It is also worth checking for payments, credits or adjustments that may not have been reflected in the creditor's records.
In some cases, the company may dispute the existence or amount of the debt. There might be an unresolved disagreement about work performed, goods supplied or the terms of an agreement. The company may also have a claim against the creditor that could be relevant to the amount recoverable.
Section 459H of the Corporations Act provides grounds for setting aside a demand where there is a genuine dispute about the existence or amount of the debt, or where the company has an offsetting claim. An offsetting claim has a particular legal meaning and may include a genuine counterclaim, set off or cross demand against the creditor.
Section 459J provides further grounds, including a defect in the demand that would cause substantial injustice if it were not set aside, or some other reason recognised by the Court.
These grounds require more than a general disagreement with the creditor. The supporting evidence and legal basis need to be assessed, particularly where the company intends to rely on a genuine dispute or offsetting claim.
A company that accepts the debt but cannot afford to pay it is in a different position from one that has grounds to challenge the demand. Financial difficulty alone does not establish a genuine dispute.
If there is any suggestion that the demand may be defective or the debt disputed, legal advice should be obtained while there is still sufficient time to prepare and serve an application.
Review the Company's Wider Financial Position
A statutory demand often brings an existing financial problem into sharper focus. The company may have been managing overdue accounts for some time, or the demand may have arisen from an isolated disagreement with a creditor.
Reviewing the company's finances will help establish whether it can satisfy the demand and continue meeting its other obligations.
For accountants and advisers, useful information includes recent management accounts, current bank balances, aged debtor and creditor reports, outstanding ATO liabilities, employee entitlements and existing finance commitments. A short-term cash flow forecast can also help identify what payments are expected and when significant obligations fall due.
Expected customer receipts deserve particular attention. An outstanding invoice may appear collectible, but its usefulness in meeting an immediate liability depends on whether payment is reasonably expected within the relevant timeframe.
Consideration should also be given to other overdue creditors, existing repayment arrangements and any enforcement action already underway. A company may be able to pay the amount demanded but have insufficient funds to meet wages, superannuation, tax or supplier obligations shortly afterwards.
Under section 95A of the Corporations Act, solvency is assessed by reference to a company's ability to pay its debts as and when they become due and payable. This requires consideration of its actual financial resources and obligations, rather than relying solely on profitability or the value of assets recorded on the balance sheet.
The financial review should provide a realistic picture of whether the business can continue meeting its commitments after the immediate creditor issue has been addressed.
What Options May Still Be Available?
Where the debt is valid and the company has sufficient funds, satisfying the demand within the statutory period may resolve the immediate issue. Before making payment, however, the company should understand the effect on its remaining cash position and other commitments.
Negotiating with the creditor may also be possible. A creditor might agree to accept payment over time or enter into another arrangement, although any proposal needs to be realistic and properly documented.
Negotiations alone do not stop the statutory period from running. An informal understanding that the creditor will wait for payment should not be treated as compliance with the demand. Legal advice is needed to establish whether an agreed arrangement satisfies the statutory requirements or whether further steps are necessary to protect the company's position.
If there are grounds to challenge the demand, the company may apply to the Court to have it set aside. An application made in accordance with section 459G extends the period for compliance while the application is determined. Unless the Court orders otherwise, the compliance period ends seven days after the application is finally determined or otherwise disposed of.
Challenging a demand should be considered on its legal merits. An application involves procedural requirements, supporting evidence and potential costs, so directors need advice about the strength of their position before proceeding.
Where the company cannot satisfy the demand and its financial difficulties extend beyond the creditor involved, broader restructuring or insolvency options may need to be assessed.
Small Business Restructuring may be available to an eligible company whose total liabilities do not exceed $1 million and which meets the other legislative eligibility requirements. Before proposing a restructuring plan, the company must also have paid, or substantially complied with the requirement to pay, employee entitlements that are due and payable, and lodged, or substantially complied with the requirement to lodge, documents required under taxation laws. Outstanding tax debts do not necessarily have to be paid before a plan is proposed.
Voluntary Administration may be relevant where directors have grounds to believe the company is insolvent or likely to become insolvent and an independent administrator is needed to assess its affairs and possible outcomes for creditors. If the business cannot continue and restructuring is not viable, liquidation may need to be considered.
These processes have different eligibility requirements, effects on creditor enforcement and consequences for directors. The existence of a statutory demand does not, by itself, establish that a company qualifies for a particular process or that appointing an external administrator will resolve every issue.
If a creditor has already filed a winding-up application, the directors should obtain specific advice before arranging an appointment. Existing Court proceedings can affect how an administration or restructuring proceeds and what steps remain open to the company.
What Happens if the Demand Is Not Addressed?
If a company fails to comply with a statutory demand within the applicable period, section 459C of the Corporations Act may allow a creditor to rely on a presumption that the company is insolvent.
For a winding-up application, the relevant failure to comply must have occurred during the three months ending on the day the application is made. A creditor seeking to rely on that failure must therefore act within the relevant statutory timeframe.
The presumption can be rebutted by evidence establishing the company's solvency. In practice, this may require detailed financial records, evidence of available funds and an explanation of how the company can meet its debts as they fall due.
A company seeking to oppose a winding-up application also faces procedural and legal restrictions. Under section 459S, it generally cannot oppose the application on a ground that could have been relied upon in an application to set aside the statutory demand, unless the Court gives leave. The Court can grant leave only if satisfied that the ground is material to proving the company is solvent.
Allowing the initial 21-day period to expire can therefore limit the grounds available to resist later proceedings.
Failure to comply does not automatically place the company into liquidation. The creditor must commence the relevant proceedings, and the Court considers whether the legal requirements for a winding-up order have been established.
Nevertheless, defending a winding-up application may involve substantial legal costs, financial evidence and disruption to the business. Resolving the underlying debt at that stage may also require dealing with the proceedings themselves, rather than assuming payment will automatically bring the matter to an end.
The Role of Accountants and Professional Advisers
Accountants are often the first professionals contacted when a company receives a statutory demand. Their familiarity with the business and its financial records can be particularly useful when a director believes an upcoming payment or refinancing arrangement will resolve the debt.
The accountant can help test whether those expectations are supported by the figures and identify other commitments that may affect the company's capacity to pay. Where records are incomplete, the focus should be on obtaining enough reliable information to support the decisions that need to be made.
Lawyers have a separate role in assessing the demand's validity, advising on possible grounds for setting it aside and managing the legal requirements associated with negotiations or Court proceedings. An insolvency practitioner can assist where the company's wider financial circumstances raise concerns about its ability to continue trading.
When a settlement depends on future receipts or refinancing, the accountant's assessment can help establish whether the proposal is achievable. The lawyer can then advise on documenting the arrangement and dealing with the demand, while an insolvency practitioner can assess whether the proposed course leaves the business in a sustainable position.
Making an Informed Decision
A statutory demand can create pressure to settle quickly, particularly when directors are concerned about the possibility of winding-up proceedings. In that situation, agreeing to payment terms that cannot be honoured may create further difficulties with the creditor and the company's ongoing operations.
Directors should be cautious about making commitments based on expected funds that have not yet been secured. A settlement needs to be achievable, properly documented and capable of resolving the immediate legal issue.
Where the business cannot support the proposed arrangement, that should be recognised before further promises are made to the creditor. It gives the directors and their advisers an opportunity to address the company's difficulties on a more realistic footing.