When a company cannot pay its debts on time, it might be insolvent. Creditors of a company can take various steps to enforce their rights and recover the outstanding debt. One such option involves serving a statutory demand on the company.
What is a Statutory Demand?
A statutory demand is a formal legal request for payment of a debt that is owed by a company. Creditors can issue a statutory demand if:
- The debtor is a company;
- The debt is at least $4,000;
- The debt is due and payable; and
- There’s no genuine dispute about the debt.
A statutory demand indicates the creditor is prepared to wind up your company if you fail to comply with their demands. It is an initial formality required by the law setting in motion the process which may end your business.
If you are served with a statutory demand, it’s crucial to act quickly while you still have options available to you.
What happens when my company is served a Statutory Demand?
If you are served with a statutory demand, you can choose to:
- Pay the Debt: If you can pay the full amount, do so promptly. Once paid, the creditor will typically withdraw the demand.
- Negotiate: Try to work out a payment plan or settlement with the creditor. Make sure to get any agreement in writing.
- Challenge the Demand: If you believe the debt is not valid or there is a genuine dispute as to the debt amount, you can apply to the court to have the demand set aside.
If you fail to undertake any of these three actions within 21 days, your company will be presumed insolvent, and the creditors may apply to the court for your company to be wound up and a liquidator appointed.
What is a winding up order?
When a company fails to comply with a creditor’s statutory demand, the creditor may make an application to the court seeking that the company be wound up.
Once a winding up order has been made, the company will be liquidated. The assets will be sold, and the proceeds distributed among creditors.
Can a statutory demand be withdrawn?
Yes! If you can prove the demand is invalid or there is a genuine dispute that the debt amount is owing, you may request that the creditor withdraw the statutory demand. You must always have a written copy of the withdrawal, should you need to refer to it in the future.
Creditors may still decide to reject your request to withdraw a statutory demand. If the statutory demand is not withdrawn, you must apply to the Supreme Court or Federal Court within 21 days of receiving the demand. If the Court finds there are valid reasons to dispute the debt or if there are defects in the demand itself, statutory demand will be set aside or declared invalid.
Need help?
Statutory demands are not just a debt collection tactic; it’s the first step toward shutting your company down. If you’ve been served with a statutory demand, do not ignore it.
The best thing you can do is get legal advice as soon as you have been served. Our team can help you understand your options, respond within the 21-day deadline, and protect your company’s future.
