Setting Aside a Creditor’s Statutory Demand on the Basis of a Dispute

A creditor’s Statutory Demand is an effective tool used by creditors to compel a debtor company to pay its outstanding debts.

The purpose of a Statutory Demand is to prevent debtors from delaying matters by filing nonsense defences to liquidated claims. A Statutory Demand can be served on a company who owes a debt which exceeds $2,000.

Once a Statutory Demand has been served by post on a company, the company has a period of 21 days to make full payment of the outstanding debt or file an application (in a Supreme Court or Federal Court registry) to set aside the Statutory Demand. If a debtor company fails to take either of these steps, a presumption of insolvency will arise and a creditor may apply to the Court to wind up the debtor company.

It is important to ensure that a Statutory Demand is clear, correct and unambiguous. Where a demand is confusing or does not correctly identify the particulars of the claim, the Court may set aside the Statutory Demand.

Further a Court may set a Statutory Demand if a debtor company can show a genuine dispute in respect of the existence of the debt or if there is an offsetting claim.

In order for a Statutory Demand to be set aside on the grounds of a genuine dispute, a debtor need not satisfy the Court that it has a successful defence to the alleged debt. It must merely satisfy the Court that a genuine dispute exists in respect to the debt. The threshold for establishing the existence of a genuine dispute is relatively low.

There is no statutory test for what constitutes a genuine dispute however, some factors which the Court will may consider are whether:

  1. there is a serious question to be tried about the size or existence of the debt; or
  2. the dispute is bona-fide and real and not spurious, hypothetical, illusory or misconceived.

A Statutory Demand can be a timely and cost-effective way for creditors to recover payment of outstanding debts rather than instituting Court proceedings by way of a Claim. However, like all litigation, the process can be subject to inherent risks.

DSS Law insight articles are intended to provide commentary and general information. They should not be relied upon as formal legal advice. If you would like specific advice relating to this topic, please contact DSS Law on epost@dsslaw.com.au.