What is a statutory demand? A guide for creditors

12 April, 2018 | Duncan Lang

Article update 29 August 2024

A statutory demand is a legal document used in the debt collection process, which gives a company written notice that it must pay the debt or face a risk that it may be wound up.

A statutory demand can only be issued against companies and is ultimately used to test the solvency of the debtor company through its ability to pay its debts when they fall due.

What are the benefits of a statutory demand?

A statutory demand is a powerful tool. The benefits of a statutory demand include:

1. Forces prompt payment with a strict deadline and serious consequences for failing to meet these: Once the debtor has been served with a statutory demand, it has a strict 15 working day period to pay the debt or otherwise satisfy the demand. If the debt is not formally disputed and is left unpaid, it creates a legal presumption that the debtor is unable to pay its debts and allows you to file a High Court application to liquidate (wind up) that company.
2. Evidence to justify filing liquidation proceedings: There are prerequisites to filing liquidation proceedings against a company, and the failure to satisfy a statutory demand is a simple way to meet those requirements.
3. Prioritises payment of the debt: There are situations where a debtor will have multiple creditors chasing them for payment of various debts. As a statutory demand is a powerful legal document which has strict statutory deadlines along with the threat of liquidation, issuing this kind of demand may bump your debt to the top of the list for payment.
4. Clarity, formality and seriousness: A statutory demand signals to the debtor that you are serious about recovering the debt. It clearly sets out the amount owed, the basis for the debt, any interest or penalties (where applicable), and the consequences for the debtor should they fail to make payment (liquidation proceedings). This often motivates the debtor to pay.
5. Opportunity for resolution: A statutory demand provides the debtor with the opportunity to settle the debt before you escalate it to Court. This can open dialogue between yourself and the debtor directly, or through your respective lawyers, encouraging full payment or a mutually beneficial settlement agreement outside of Court. Settlement outside of Court can be the cheapest option for everyone involved.

When should you issue a statutory demand?

Before issuing a statutory demand on a company, you must consider the following:

• Is the debt substantially disputed (or disputable) by the debtor?
• Is the debtor likely to have a counterclaim that is reasonably arguable?
• Is the amount of the debt greater than $1,000?

You should have clear evidence that the debt is owed. This may include invoices, contracts, or agreements (including any terms and conditions).

It is also in your best interest to have already made preliminary attempts at recovering the debt prior to considering a statutory demand. This could include sending reminder letters, phone calls or emails, issuing a letter of demand (What Is A Letter of Demand?) or having informal negotiations with the debtor. If these efforts are unsuccessful or the debtor consistently ignores or delays payment, a statutory demand can help escalate the matter.

If there is a substantial dispute over the debt owed to you, then serving a statutory demand is not the appropriate course of action and is considered to be an abuse of the Court process for winding up the debtor company. In that case, it would be a more appropriate to determine the dispute by issuing legal proceedings, which we can also assist you with.

How can engaging a lawyer increase the likelihood of recovering the debt?

Engaging a lawyer to assist you to prepare and serve a statutory demand is helpful for several reasons:

1. Understanding the legal requirements: We can assess if the debt meets the criteria outlined above to determine whether a statutory demand is appropriate. If a statutory demand is warranted, we can then prepare the demand correctly so it complies with all legal requirements to increase the chances of its effectiveness, and ensure that it is properly served on the debtor. The High Court recommends that a statutory demand be issued by a lawyer to ensure that this procedure is not used inappropriately. (An improper statutory demand, if challenged successfully, will usually result in an award of costs against you, the issuer of the demand).
2. Understanding the full statutory demand process: A statutory demand is a powerful document with serious consequences for the debtor. It is important you understand what you are getting into, and the risks involved. (In particular the risk of the debtor making an application to the High Court to set the statutory demand aside.) We can advise you about the timeframes, the process, costs, and your legal rights and options.
3. Protecting and defending your rights and interests: If the debtor makes an application to set the statutory demand aside, we can assist you with preparing your strongest legal arguments to defend the application. Alternatively, if the debtor wishes to enter into negotiations outside of Court to satisfy the debt, we can help devise a strategy, and correspond with the debtor (or their solicitor) on your behalf.

Are you owed money by a company, and require assistance with recovering the debt? (Or have you been served with a statutory demand? If so, consider our article for companies receiving a statutory demand, here: How do you respond to a statutory demand?