Statutory demand: a residential builders practical guide

What it is

A statutory demand is a formal written demand for payment served on a company under section 459E of the Corporations Act 2001 (Cth). It is the fastest single tool a creditor has against a corporate debtor in Australia. The demand creates a 21 day deadline. If the company does nothing within that window, a presumption of insolvency arises and the creditor can apply to wind the company up.

For residential builders the typical use case is a debt owed by a Pty Ltd developer, a Pty Ltd head contractor on a townhouse job or a Pty Ltd supplier that has taken money for materials that never arrived. It is not a tool for chasing a homeowner. A statutory demand can only be served on a company.

When it can be used

Four conditions must all be met before a statutory demand is appropriate.

1. The debtor must be a company

A statutory demand only works against a company registered under the Corporations Act. ASIC search the debtor first. If the entity is a sole trader, a partnership, a trust without a corporate trustee or a homeowner you cannot use this tool. Look at debt recovery in the local or magistrates court instead.

2. The debt must be at least $4,000

The statutory minimum was raised from $2,000 to $4,000 on 1 July 2021 and that threshold still applies. Multiple smaller debts owed by the same company can be added together to reach the threshold provided each is due and payable.

3. The debt must be due and payable

The debt must be a present money debt. A future liability does not qualify. A claim for unliquidated damages does not qualify either. If the amount is genuinely in dispute the company will set the demand aside and you pay their costs.

4. The debt must not be genuinely disputed

This is the trap. A genuine dispute does not need to be a strong dispute. It only needs to be a real one. If the company can point to defective work, a variation argument or a set-off claim the court will set aside the demand. Statutory demands are not designed to resolve contested claims. They are designed to enforce admitted debts.

How it works

Step 1: Draft the demand on Form 509H

The demand must be in the prescribed Form 509H. It states the creditor, the debtor, the amount, the basis of the debt and an address for payment. The demand must be accompanied either by an affidavit verifying the debt or, if the debt is based on a judgment, a reference to that judgment.

Step 2: Serve at the registered office

Service is on the registered office of the company as recorded on ASIC. Personal service is not required. Posting to the registered office by ordinary post is enough, but a process server is safer because service date matters.

Step 3: Wait 21 days

The company has 21 days from service to do one of three things:

• Pay the debt
• Reach a written agreement with the creditor
• File an application in the Federal Court or relevant Supreme Court to set the demand aside

The 21 day period is strict. There is no extension. The High Court has confirmed it is a hard deadline. If the company misses it the set aside option is gone.

Step 4: Apply to wind up

If the company does none of these by day 22 the creditor can apply to wind the company up. The presumption of insolvency is the trigger. The court does not need to find actual insolvency at the winding up hearing. The presumption stands unless the company rebuts it with positive evidence.

Set aside grounds under s 459G

A company can apply to set aside the demand on four grounds. The application must be filed and served within 21 days of receiving the demand.

• Genuine dispute about the existence or amount of the debt
• Offsetting claim that reduces the amount to under the statutory minimum
• Defect in the demand that has caused substantial injustice
• Some other reason the demand should be set aside

The genuine dispute ground is the most common. It is also the easiest to make out. The threshold is low and the costs consequences of losing a contested set aside application are high. A builder who serves a statutory demand on a disputed debt is usually worse off than if they had sued in the local court.

Risks for builders

Three risks recur in residential building disputes.

Defective work counter-claims are easy for a debtor to manufacture. Even a thin allegation of defective work is enough to ground a genuine dispute defence. If the job is finished and there is any snagging dispute on file, a statutory demand is risky.

Variation disputes are also a problem. Where the debt includes variation amounts that the head contractor or developer has not accepted in writing, the company will argue the variations were not authorised and the demand will fall.

Costs orders against an unsuccessful creditor are routinely awarded on the indemnity basis. That doubles the downside if the demand is set aside.

When it works

A statutory demand works best where the debt is on a judgment, on a clear admitted invoice or on a Security of Payment determination. In each of those situations the debt is locked in and a genuine dispute is hard for the company to manufacture. Used in those circumstances the statutory demand is the cheapest fastest pressure point in the toolkit.