Issuing a statutory demand: a step-by-step guide for construction contractors
When a company owes you money and won’t pay, a statutory demand can be one of the fastest and most effective ways to bring matters to a head. However, used in the wrong circumstances, it can be set aside, and you may be ordered to pay the other side’s costs of the Court proceeding.
This article explains generally when a statutory demand may be appropriate, and the steps involved in issuing one.
What is a statutory demand?
A statutory demand is a formal notice under s 459E of the Corporations Act 2001 (Cth) requiring a company to pay a debt within 21 days.
If the company does not pay, reach an agreement with you, or apply to court to set the demand aside within that time, it is presumed to be insolvent. You can then apply to the Court to have the company wound up.
A statutory demand is not intended primarily a ‘debt collection tool’. That said, the prospect of a demand not being complied with or a winding up application is often a strong incentive for a company to pay.
When is a statutory demand appropriate?
Before issuing a demand, make sure:
The debtor is a company. Statutory demands cannot be served on individuals or partnerships. Do an ASIC search and check.
The debt is due and payable now. It cannot be a future or contingent debt.
The debt is at least the statutory minimum. This is currently $4,000.
The debt is not ‘genuinely disputed’. If the company has raised a real dispute about whether the money is owed, or how much, a demand is likely to be set aside.
There are no obvious ‘offsetting claims’. If the company has a genuine counterclaim against you, such as for defects, delay or back charges, the demand may be set aside or reduced.
In the construction industry, statutory demands may be based on adjudication determinations or court judgments, or more commonly on unpaid invoices that the debtor has never disputed.
The process
1. Check the company’s details
Search the ASIC register to confirm the company’s exact name, ACN and registered office. Errors in these details are a common source of problems.
2. Prepare the demand
The demand must be in writing, in the prescribed form (Form 509H of the Corporations Regulations 2001 (Cth), identify the debt and state the amount owing, require payment within 21 days after service and be signed by or on behalf of the creditor.
3. Prepare a supporting affidavit
Unless the debt is a judgment debt, the demand must be accompanied by an affidavit verifying that the debt is due and payable. The affidavit should be sworn by someone with knowledge of the debt. It should state that, in their belief, there is no genuine dispute about the existence or amount of the debt.
4. Serve the demand
The demand and affidavit are usually served by leaving them at, or posting them to, the company’s registered office. Keep a record of how and when the documents were served, because the 21 days run from service.
5. Wait 21 days
Within 21 days after service, the company must either pay the debt, reach a settlement with you, or apply to the Supreme Court to set the demand aside, under s 459G of the Corporations Act.
6. If the company doesn’t comply
If the company does nothing within 21 days, it is presumed to be insolvent and a winding up application can be made.
How can a demand be set aside?
A company can apply to set aside a demand on the basis that:
there is a ‘genuine dispute’ about the existence or amount of the debt
it has a ‘genuine offsetting claim’ against the creditor
there is a defect in the demand that would cause substantial injustice if it were not set aside, or
there is some other reason to set it aside, such as an abuse of process.
The threshold for showing a genuine dispute or offsetting claim is low. The Court will not decide who is right, only whether there is a real issue.
Common pitfalls
Using a demand for a disputed debt. This is the most common reason demands are set aside, and the creditor may be ordered to pay costs.
Running parallel proceedings. Serving a demand while you are already suing for the same amounts may be an abuse of process.
Ignoring offsetting claims. A head contractor’s claims for liquidated damages or back charges can potentially reduce or defeat a demand.
Errors in the paperwork. Getting the company name, debt amount or service details wrong can undermine an otherwise valid demand.
How we can help
Lang Litigation and Construction Law advises creditors on issuing statutory demands and pursuing winding up applications, and acts for companies seeking to set demands aside. If you are considering issuing a statutory demand, or have received one, contact us promptly. Strict time limits apply.
This article is general information only and is not legal advice. You should seek specific advice about your circumstances.