Statutory Demands Explained: What Every Business Should Know

 

Running a business in Australia can be exciting and rewarding, but it also comes with challenges — one of the most serious being debt disputes. If you’ve ever had a client who refuses to pay, or if your business has been on the receiving end of collection actions, you may have heard of a statutory demand.

Statutory demands are powerful legal tools under the Corporations Act 2001 (Cth). They are not just formal letters — they are official notices that can quickly escalate into winding-up proceedings if ignored. For business owners, directors, and creditors alike, understanding how statutory demands work is critical to protecting your rights and avoiding severe financial consequences.

In this guide, we’ll break down everything you need to know about statutory demands in Australia — how they work, when to use them, how to respond, and the risks for both sides.

What Is a Statutory Demand?

A statutory demand is a formal notice issued under section 459E of the Corporations Act 2001 (Cth). It allows a creditor to demand payment of a debt from a company. The debt must:

• Be undisputed (not subject to genuine dispute).

• Be due and payable.

• Be at least $4,000 (as of July 2021, increased from $2,000).

The creditor serves the demand on the company, giving the company 21 days to:

1. Pay the debt in full;

2. Come to an acceptable repayment arrangement; or

3. Apply to the court to have the demand set aside (if there are valid reasons).

If the company does nothing, it is presumed to be insolvent. This allows the creditor to file an application in court to wind up (liquidate) the company.

Why Are Statutory Demands So Serious?

Unlike a standard debt collection letter, a statutory demand has legal force. If ignored, it creates a presumption that the company cannot pay its debts. Insolvency carries serious consequences, including:

• Loss of control: A liquidator can be appointed to take over the company.

• Asset sales: Business assets may be sold to repay creditors.

• Reputation damage: Court actions and insolvency proceedings become public record.

• Director risks: While directors are generally protected from company debts, they may face scrutiny if insolvent trading is suspected.

This is why both creditors and company directors must act quickly when a statutory demand is involved.

Who Can Issue a Statutory Demand?

Not everyone can use a statutory demand. To serve one, you must:

• Be a creditor of the company.

• Be owed at least $4,000.

• Have a debt that is clear, due, and not in genuine dispute.

Common situations where statutory demands are issued include:

• Suppliers or contractors owed money for goods or services.

• Landlords seeking unpaid rent.

• Lenders collecting on loans or guarantees.

• Businesses seeking repayment from customers who refuse to pay.

How to Serve a Statutory Demand

Serving a statutory demand is a formal legal process. If not done correctly, the demand can be set aside. Typically, the process involves:

1. Drafting the demand – The demand must use the official Form 509H from the Corporations Regulations.

2. Specifying the debt – Clearly describe the amount owed and the basis of the debt.

3. Attaching supporting documents – If the debt is not a judgment debt, an affidavit verifying the debt must be included.

4. Serving the demand – It must be delivered to the company’s registered office, usually via post or personal service.

Because errors can render the demand invalid, many creditors engage lawyers to prepare and serve the notice.

Responding to a Statutory Demand

If your company receives a statutory demand, do not ignore it. You only have 21 days to act, and the court will not extend the deadline except in rare cases.

Your options include:

1. Pay the Debt

The simplest way to resolve a statutory demand is to pay the amount owed. If the debt is undisputed and the company has the means, this avoids legal escalation.

2. Negotiate a Settlement

Sometimes, creditors are open to repayment plans or partial settlements. If negotiations succeed, the creditor may agree not to pursue further action.

3. Apply to Set Aside the Demand

A company can apply to the court to set aside a statutory demand. Common grounds include:

• Genuine dispute: The company disputes the debt or the amount claimed.

• Offsetting claim: The company has a counterclaim against the creditor.

• Defect in the demand: The demand is unclear, misleading, or contains errors that cause substantial injustice.

• Other reasons: For example, abuse of process or improper purpose.

Applications must be filed within the 21-day period, or the company loses the right to challenge the demand.

Consequences of Ignoring a Statutory Demand

If a company ignores a statutory demand and takes no action, the creditor can apply to the Federal Court or a state Supreme Court to have the company wound up.

This process involves:

• Filing an application for winding up.

• Appointment of a liquidator to take control of the business.

• Asset realisation to pay creditors in order of priority.

Once liquidation starts, it is very difficult for directors to reverse it. This is why early action is crucial.

Common Mistakes Businesses Make

Many companies get into trouble because they underestimate the seriousness of a statutory demand. Some common mistakes include:

• Ignoring the notice: Hoping the problem will go away only makes it worse.

• Missing the deadline: The 21-day limit is strict and unforgiving.

• Not seeking legal advice: Business owners sometimes try to handle the matter themselves, leading to errors.

• Confusing statutory demands with ordinary letters of demand: They are very different, and statutory demands have far greater consequences.

Practical Tips for Creditors

If you are a creditor considering issuing a statutory demand, keep these tips in mind:

• Make sure the debt is clear and undisputed. If the company disputes it, you may waste time and money.

• Prepare documents carefully — errors can invalidate the demand.

• Consider whether a statutory demand is the best strategy. Sometimes, negotiation or mediation achieves better results.

• Always seek legal advice before serving the notice.

Practical Tips for Companies

If your company receives a statutory demand:

• Act immediately — do not delay even a single day.

• Review whether the debt is legitimate.

• Seek advice from an insolvency lawyer.

• Consider whether to pay, negotiate, or apply to set aside the demand.

• Ensure directors understand their responsibilities and potential risks.

Statutory Demands During COVID-19

During the COVID-19 pandemic, the Australian Government temporarily changed statutory demand thresholds and deadlines to give businesses breathing space. For example, the minimum debt was increased to $20,000, and companies had six months to respond.

These temporary measures have now ended, and the threshold has reverted to $4,000 with a 21-day timeframe. Business owners should not assume extended protections are still available.

When to Seek Professional Help

Both creditors and company directors should treat statutory demands as urgent legal matters. Professional assistance is often required from:

• Commercial lawyers – to draft or respond to demands.

• Insolvency practitioners – to advise on company solvency and liquidation risks.

• Accountants – to prepare financial records and assess repayment capacity.

The cost of early advice is far less than the cost of liquidation or protracted court battles.

Final Thoughts

Statutory demands are one of the most powerful debt collection tools available in Australia. For creditors, they provide a direct pathway to recover money owed. For companies, they are a red flag that insolvency action is imminent if ignored.

Whether you are issuing a statutory demand or responding to one, the key is speed and accuracy. Missteps can lead to devastating financial outcomes.