Running a business is filled with ups and downs, many of them financial. Companies that are in serious financial trouble may find themselves receiving a Statutory Demand Notice from a creditor. A Statutory Demand is a serious state of affairs that can’t be ignored when it comes to the management of financial stress. To protect your business from being liquidated, it’s important to know what you need to do to respond to a Statutory Demand. In this article we’ll explore some of the details and include simple instructions on what you need to do after receiving a Demand from a creditor.

What is a Statutory Demand?

A Creditor’s Statutory Demand is a written document that requests payment of a debt within 21 days of the notice being served. In Australia, Statutory Demands are issued according to the Corporations Act 2001, so a Demand can only be made against a debtor that is a business. Statutory Demands can only be issued to a debtor if the creditor believes that there’s no dispute over the debt they’re owed.

Because Statutory Demands carry serious consequences, they shouldn’t be used for everyday debt collection. Companies that attempt to use Statutory Demands as debt collection tools quickly run into problems with enforcing their rights.

How Statutory Demands Are Made

Because Statutory Demands are serious documents, they’re always required to comply with the regulations in the Corporations Act. A valid Statutory Demand must:

• - Relate to a debt of $2,000 or more

• - Relate to a debt that’s due

• - Specify the amount owed and where payment can be made

• - Be set out in writing according to Form 509H

• - Require compliance within 21 days

• - Include the creditor’s signature (or a signature on their behalf)

Statutory Demands are also accompanied by some sort of proof that the debt is due and payable. This usually comes in the form of a judgement debt. A judgement debt is a debt that the court has already ruled to be valid and payable. Alternatively, if the Demand doesn’t pertain to a judgement debt, the notice needs to be accompanied by the creditor’s affidavit. An affidavit is a written statement verifying the validity of the debt.

How to Respond to a Statutory Demand Notice

You have 21 days to respond to a Statutory Demand. If you receive a Demand, it can’t be ignored. Failing to respond simply means that your company will be presumed insolvent, making it easy for creditors to apply to the court to have the business wound up. Australian Courts are very strict about Statutory Demand Notices. You’re extremely unlikely to receive an extension to the 21 day period, even if the creditor agrees to it.

You have two possible options when it comes to responding to Statutory Demands: you can pay the debt, or you can apply to have the Demand set aside by the Supreme Court.

The Corporations Act 2001 lays out very specific requirements for the conduct of companies in Australia. For that reason, it’s difficult to have the court set aside a valid Statutory Demand. A creditor’s Demand will typically only be set aside if it contains an error that would cause “significant injustice” to the debtor. The only other reason that Demands are set aside is if the debtor can prove that there is a dispute regarding whether the debt exists, its amount or whether it’s payable. The court isn’t interested in the specifics of the dispute. As long as a dispute exists, it will set aside the notice.

Presumption of Insolvency

The key reason that a Statutory Demand Notice is so serious is that failure to comply leads to a “presumption of insolvency”.

When a company becomes unable to pay its debts, it’s considered insolvent. Not only does insolvency frequently result in liquidation, it’s also illegal to trade while insolvent. That means the creditors of insolvent companies often try to liquidate the business in order to recover their debts. In most cases, a creditor would have to prove that the debtor company was insolvent in order to place them into liquidation. The presumption of insolvency that comes from a Statutory Demand Notice allows the creditor to bypass this requirement. If you don’t respond to a Statutory Demand within 21 days and your company is presumed insolvent, it’s very easy for creditors to apply to the court to have your company wound up in liquidation.

The best thing you can do to protect your business from creditors is to seek professional advice early. If your company is insolvent, or if you’re concerned that it may become insolvent, talk to a financial advisor. They’ll be able to help you develop a plan of action and respond to any Statutory Demands you receive.