When a company receives a statutory demand under section 459E of the Corporations Act 2001 (Cth), the clock starts ticking. This document, if left unanswered or unchallenged, can lead to the winding up of the company. However, Australian law provides strict mechanisms and deadlines for responding. This article explains how and when a company can set aside a statutory demand and what happens if it misses the deadline, including how the company may defend a winding-up application under section 459S.
What Is a Statutory Demand?
A statutory demand is a formal notice issued by a creditor to a company demanding payment of a debt of $4,000 or more. Under section 459E, the demand must be in writing and must specify the debt. It must also be accompanied by an affidavit verifying that the amount is due and payable. The purpose of the demand is to provide a fast, efficient means of enforcing debts without the need for litigation.
Once served, the company has 21 days to comply or apply to the Court to set the demand aside. If it does not do either, it is presumed to be insolvent. This presumption under section 459C allows the creditor to commence winding-up proceedings.
Setting Aside a Statutory Demand
Under section 459G, a company can apply to set aside a statutory demand. The company must make the application within 21 days from the date of service. It must support the application with an affidavit and file it in the appropriate court.
Grounds to set aside a demand include:
- There is a genuine dispute about the existence or amount of the debt (section 459H).
- The company has an offsetting claim that equals or exceeds the amount demanded.
- There is a defect in the demand that would cause substantial injustice (section 459J).
The statutory timeframe is strict. If the company fails to act within 21 days, it loses the right to challenge the demand unless the court grants leave under section 459S.
What If the Deadline Has Passed?
If the 21-day deadline to apply to set aside a statutory demand has passed, the company cannot simply ignore the consequences. The creditor can then apply under section 459P to wind up the company on the basis of presumed insolvency. This application relies on the presumption in section 459C.
At this stage, the company’s ability to oppose the winding-up application is severely limited. It cannot raise as a defence any matter that could have been the basis for setting aside the statutory demand—unless it obtains leave from the Court under section 459S.
Section 459S: Opposing a Winding-Up Application
Section 459S provides a narrow gateway for companies to resist a winding-up order even after the 21-day period has expired. To succeed, the company must:
- Seek the Court’s leave to rely on the ground of opposition;
- Demonstrate that the ground is material to proving the company is solvent;
- Provide a satisfactory explanation for not applying earlier to set aside the statutory demand.
Common grounds raised under section 459S include:
- A genuine offsetting claim;
- A serious procedural defect in the demand;
- Equitable or discretionary factors not captured under the narrow grounds in section 459H.
Importantly, courts are cautious in granting leave under section 459S. The Court does not exercise this discretion lightly. The applicant must show that the proposed ground of opposition would materially affect the solvency finding.
Defects in the Supporting Affidavit
One frequently overlooked ground for opposing a statutory demand is a defect in the accompanying affidavit. Section 459E(3) requires that the affidavit be sworn or affirmed at the same time or after the demand is dated, not before. This is because the affidavit must verify that the debt is due and payable as at the date of the demand.
If the affidavit predates the demand, it fails to meet this requirement and can render the demand invalid. The courts treat this as a serious defect. A demand supported by a non-compliant affidavit may be set aside, or it may support a grant of leave to oppose a winding-up application under section 459S if the deadline has passed.
The Court examined this issue in cases such as Vangory Holdings Pty Ltd [2015] NSWSC 1809, where the affidavit preceded the demand date. The court found the demand defective and unenforceable.
Offsetting Claim as a Defence
An offsetting claim is another way to resist a statutory demand. It refers to any genuine counterclaim, cross-demand or set-off that the company has against the creditor. For example, if a company owes $500,000 to a supplier, but the supplier caused the company to suffer $550,000 in losses due to a breach of contract, then the company may have an offsetting claim.
To rely on an offsetting claim, the company must demonstrate:
- That the claim is genuine and not a sham;
- That it exceeds or reduces the demand below the statutory threshold;
- That it is based on legally enforceable rights.
The company can raise this defence in an application to set aside a statutory demand under section 459H. It can also raise the defence, with leave, in opposition to a winding-up application under section 459S.
In either case, the claim must be substantiated with evidence. Courts will not entertain speculative or tactical claims. As stated in Creata (Aust) Pty Ltd v Faull [2017] NSWCA 300, the claim must be “good on its face” and capable of supporting a reasonable inference of solvency.
Conclusion
Setting aside a statutory demand is a highly time-sensitive and technical area of law. Companies must act swiftly to preserve their rights. Failure to do so may leave them with narrow defences to winding-up proceedings. The law allows for exceptions in appropriate circumstances. These include genuine disputes, offsetting claims, or procedural defects.
If your company has received a statutory demand or is facing a winding-up application, it is essential to seek legal advice immediately. With proper planning and evidence, it may still be possible to defend the proceedings and avoid liquidation.
Jake McKinley notes that this article is written for the purpose of providing generalised information and not to provide specialised legal advice. If you require qualified legal advice on anything mentioned in this article, our experienced team of solicitors at Jake McKinley are here to help. Please get in touch with us on 02 9232 8033 today to make an enquiry.
