Creditor's Statutory Demand
Not all is lost – use Creditor’s Statutory Demand to make a debtor pay you what they owe

Our detailed guide tells you what you need to know about a Creditor’s Statutory Demand.

Table of Contents

In an ideal world, every business transaction goes to plan and no one loses money. In a real world we live in, things do go wrong for good and bad reasons. You end up facing a challenge to recover money owed to you by another business.

You try every tool in the game, load up with patience and good will but nothing helps. What do you do?

One way to recover debt another company owes you is to issue a Creditor’s Statutory Demand to the debtor.

What Is a Creditor’s Statutory Demand?

A Creditor’s Statutory Demand is a letter of demand served by a creditor to a debtor company in an attempt to recover debt owed to a creditor.

What are the Requirements to Serve a Creditor’s Statutory Demand?

  1. The debt must be larger than $2000.
  2. The debt must be due and payable.
  3. The creditor is required to use Form 509H prescribed by the Corporations Act 2001.
  4. The creditor must provide an affidavit to verify the debt is owed and due.

Why Issue a Creditor’s Statutory Demand?

If you believe a debtor who owes you money has no grounds to set a demand aside by Court’s order, issuing a statutory demand is an efficient and straightforward way to force the debtor pay what they owe you.

Advantages to consider:

  • you don’t need a Court order;
  • you can add invoices and other relevant documents to your demand;
  • time-saving, tight 21-day window for a debtor to respond;
  • a demand places a debtor under pressure to fix the problem

Before You Act, Consider:

  • For a Court not to set your statutory demand aside, the debt must be due.
  • You should be reasonably certain the debtor has no genuine grounds to dispute the debt.
  • There is always a risk for Court’s decision to go against you. If this happens, you may have to pay the debtor’s legal fees.

What Happens When Debtor Fails to Pay?

Under Section 459E of the Corporations Act 2001, a debtor company has 21 days to pay a creditor.

A debtor has two options to respond within 21 days:

  1. pay the amount demanded by the creditor, or
  2. ask the Supreme Court to set it aside.

A debtor must strictly comply with the 21-day period regardless of the actions they wish to pursue. The strict 21-day period cannot be extended even by a Court.

The grounds a debtor may seek Court’s order to set a Creditor’s Statutory Demand aside include:

If debtor either does not pay the debt or fails to set a demand aside by Court’s order, under Section 459C(2)(a) of the Corporations Act 2001, the debtor company is deemed insolvent.

The Court then may order to appoint a liquidator to wind up the company.

If a debtor company has any loan agreements in place, the agreements will usually have provisions for what’s known as an act of default to deal with a failure to comply with a Creditor’s Statutory Demand or if the company faces liquidation.

This situation may trigger the financiers to call up outstanding loans or appoint their own receivers to manage the debtor company liquidation.

Obviously, for any company director who receives a Creditor’s Statutory Demand, it’s prudent to contact a Commercial Lawyer immediately to work out a strategy on how to respond to it in a proper manner.

Let’s look at the grounds a Court may take into account to set aside a Creditor’s Statutory Demand.

Genuine Dispute Exists

To set aside a demand, a debtor must show the Court a genuine dispute exists in relation the the demand between the creditor and the debtor.

A debtor does not have to bring a successful defence to the alleged debt claim. It is enough for a debtor company to demonstrate to the Court a plausible dispute to the alleged claims in the affidavit may arise to warrant further investigation.

At this stage, the Court is not interested in who is wrong and who is right. The Court’s task is to determine if a genuine disputed exists.

For example, in Spencer Construction Pty Ltd v GAM Aldridge Pty Ltd, the Full Federal Court said that the dispute is genuine when the grounds for it are “real and not spurious, hypothetical, illusory or misconceived.”

Similarly, in a more recent case of TR Administration Pty Ltd Frank Marchetti & Son Pty Ltd, the Court held that in order to determine if a dispute is genuine, “no in-depth examination or determination of the merits of the alleged dispute is necessary, or indeed appropriate…”

What it means in practice is a debtor company’s threshold to show the Court a genuine dispute exists is low. All it takes to set a Creditor’s Statutory Demand aside is to demonstrate a potential for a real, not hypothetical or spurious dispute.

If you are the creditor and a Court sets a statutory demand against your claim aside, you may face the possibility of paying the debtor company’s legal costs.

For this reason, you should never send a Creditor’s Statutory Demand without legal advice from a Commercial Litigation Lawyer unless you have no doubts the debtor has no grounds to challenge the demand.

An Offsetting Claim

The Corporations Act 2001 defines offsetting claim as a genuine claim a debtor has against a creditor.

An offsetting claim can be:

  • a counterclaim;
  • a set-off (an offsetting claim doesn’t have to relate to the same transaction or circumstances as a debt to which the demand relates); or
  • a cross-demand (a demand a debtor claims against a creditor).

The same principle applies to an offsetting claim as does to a genuine dispute – the debtor doesn’t have to prove an offsetting claim is successful. A Court will only seek to establish if an offsetting claim is genuine.

Defect and Substantial Injustice

Another avenue a debtor may use is a defect in the demand and substantial injustice the demand may cause unless set aside by a Court.

Important to note at this point: a Court might set a statutory demand aside on the basis of defect and substantial injustice only if the demand is both defective and causes substantial injustice to a debtor.

The Corporations Act 2001 defines defect as:

  • an irregularity;
  • a wrong statement of an amount or total;
  • a wrong description of a debt or other matter;
  • a wrong description of a person or company.

For example, the debt amounts lack consistency or description of the debt lacks clarity and may lead to misinterpretation of the debt.

Other examples from case law:

  • a Creditor’s Statutory Demand failed to describe individual debts where the demand related to more than one debt; or
  • a Creditor’s Statutory Demand issued by more than one creditor but only one creditor signed the affidavit (Gone Farming v Long).

A Court will consider a potential defect only if it is found in the demand itself. Any supporting documents submitted with the demand will be ignored for this purpose.

A Court may find a Creditor’s Statutory Demand will likely cause substantial injustice to a debtor unless it is set aside if the demand:

  • fails to inform a debtor about the Corporations Act‘s requirements relevant to the demand;
  • misleads a debtor;
  • confuses a debtor.

Other Reasons

The Courts have been reluctant to define what “other reasons” means. From case law, it appears other reasons to set aside a Creditor’s Statutory Demand may be:

  • a creditor fails to provide a debtor with an affidavit (a statement used as evidence and affirmed by oath);
  • an affidavit have been signed at different times;
  • an affidavit does not identify the debt amount and due date.

Point by Point Summary

To round up, here is a quick summary of the main takeaway points discussed in this article:

  1. To issue a Creditor’s Statutory Demand, the debt owed must be larger than $2000.
  2. A debtor has 21 days, without exception, to either pay the debt or apply to a Court to set a demand aside.
  3. The debt must be due and payable.
  4. There must be no genuine dispute about the debt.
  5. The threshold to establish a genuine dispute is low.
  6. A Creditor’s Statutory Demand must be without defects.
  7. Failure to pay the debt or set a demand aside will result in the debtor company being presumed insolvent. The creditor (or any 3rd party for that matter) may apply to wind the debtor company up and declare it insolvent.
  8. To set a demand aside, the debtor must satisfy the Court that either a genuine dispute exists, the debtor has an offsetting claim or there is a defect in the demand or some other good reason to set it aside.
  9. And finally – never ignore a Creditor’s Statutory Demand. 21 days may be too short of a time frame to settle a debt or prepare a Court application to set the demand aside.

Any Questions? Ask a Lawyer

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