A creditor's statutory demand is one of the most powerful tools available to an unsecured creditor in Australia — and one of the most dangerous documents an Australian company can receive. The 21-day timeline is non-extendable. Missing it does not just give the creditor leverage; it creates a statutory presumption that the company is insolvent, which is a near-decisive ground for a winding up order.
Directors who treat a statutory demand as a regular debtor-creditor dispute risk losing the company. Directors who treat it as the emergency it is usually have options.
What a statutory demand actually is
A statutory demand is a formal written demand issued under s 459E of the Corporations Act 2001 (Cth). It can be issued by any creditor (or group of creditors) of an Australian company for a debt or debts totalling $4,000 or more. The demand must be served on the company at its registered office and must be accompanied by an affidavit unless it is based on a judgment.
The recipient company has 21 days from service to either: (a) comply with the demand by paying the debt; (b) reach agreement with the creditor to the creditor's satisfaction; or (c) apply to the court to set the demand aside.
The consequence of doing nothing
If the company does not comply within 21 days, s 459C creates a presumption that the company is insolvent. The creditor can then file a winding up application in the Federal Court or the Supreme Court. The presumption can be rebutted, but doing so requires the company to produce comprehensive evidence of solvency — a much harder and more expensive task than acting on the demand in the first place.
Grounds to set aside a statutory demand
An application to set aside under s 459G must be filed AND served on the creditor within the 21-day period. The grounds available under ss 459H–459J include:
- —There is a genuine dispute as to the existence or amount of the debt (s 459H(1)(a)).
- —The company has an offsetting claim against the creditor (s 459H(1)(b)).
- —There is a defect in the demand that would cause substantial injustice (s 459J(1)(a)).
- —There is some other reason why the demand should be set aside (s 459J(1)(b)) — a narrow residual ground.
Importantly, the 'genuine dispute' threshold is low — the company does not have to prove it would win the underlying dispute, only that the dispute is genuine and has a real prospect of success.
What directors should do on day one
- —Confirm exactly when and how the demand was served — this fixes the 21-day deadline.
- —Engage insolvency counsel immediately. Set-aside applications are technical and the time to prepare evidence is short.
- —Assess solvency frankly. If the company is in fact insolvent, the response is different — voluntary administration, small business restructuring or creditors' voluntary liquidation may be appropriate.
- —Consider director duties — s 588G insolvent trading liability does not pause because a statutory demand has been received.
Safe harbour considerations
The safe harbour provisions in s 588GA of the Corporations Act can protect directors from personal liability for insolvent trading, but only where the director is developing a course of action reasonably likely to lead to a better outcome than immediate appointment of an administrator or liquidator. A statutory demand is precisely the kind of trigger that should prompt directors to consider whether they are eligible for, and need to invoke, safe harbour protection.
If you are a director and a statutory demand has just landed at your registered office, the right next step is a confidential conversation today — not next week.
