The usefulness of Statutory Demands - when to use them and avoid them

A statutory demand is a document issued by a creditor to a debtor company. It sets out a sum of money owed by the debtor to the creditor. It looks like this.

A statutory demand is unlike any other demand for payment of money, like a letter of demand issued by a creditor or its lawyer, for example.

A statutory demand requires the debtor to pay the amount specified in the demand within 21 days or secure or compound the amount claimed to the creditor's reasonable satisfaction during that time. If this timeframe is not complied with and an application to set the demand aside is not made, the debtor company is presumed insolvent. This enables the creditor to apply to a Court to have the company wound up.

When should a statutory demand be used?

A statutory demand should be used when:

(a) there is no dispute as to the amount of the debt owed; and

(b) the debtor does not have an off-setting claim against the creditor.

It is recommended to issue a regular letter of demand before issuing a statutory demand. This practical step can elicit the debtor's position in relation to the amount owed (for example, whether or not the debtor acknowledges its indebtedness).

A statutory demand should not be used where the debtor has an offsetting claim.

Good times to use statutory demands, in our view, are when:

(a) debtor companies have confirmed in writing, in an email for example, that they do owe the money but are prevented from paying it due to limits on cashflow; or

(b) the debtor offers a payment plan to the creditor in respect of the debt which is unsatisfactory to the creditor.

In these circumstances, these written acknowledgements of the debtor's indebtedness bolster the creditor's position in defending any application to set aside the demand (discussed further below).

What should you do if you are in control of a company that receives a statutory demand?

If you receive a statutory demand, you must make a forensic decision to either:

(a) pay the amount claimed / enter into an agreement with the creditor whereby the creditor agrees in writing to withdraw the statutory demand;

(b) secure or compound the amount claimed to the creditor's reasonable satisfaction; or

(c) apply to set aside the statutory demand;

within 21 days.

You should seek legal advice if you receive a statutory demand. Time is of the essence. The 21 day timeframe cannot be extended. If you are responsible for managing the affairs of a debtor company and it does not respond, the debtor company will be presumed insolvent.

You will only be able to apply to set aside a demand if:

(a) there is a dispute as to the amount of money outstanding;

(b) there is an "offsetting claim";

(c) the statutory demand is defective; or

(d) there is "some other reason" why the demand should be set aside.

Statutory demands are a legislative instrument that have a very technical nature. If you wish to issue one or, if you are in control of a company that receives one, you should seek legal advice.