A statutory demand is a formal legal notice used by creditors to force a company to address an unpaid debt. Once served, directors have 21 days to act. Ignoring it can lead to a presumption of insolvency and court action, but early, informed decisions can preserve options and protect the business.
On This Page
- Introduction
- What is a Statutory Demand?
- When Can a Creditor Issue a Statutory Demand?
- Statutory Demands Based on Judgment Debt
- What Happens Once a Company Is Served with a Statutory Demand?
- What Happens If You Ignore a Statutory Demand?
- Next Steps
- FAQs
- About Greg Bartels
- Related Articles
Introduction
When a company cannot pay its debts as they fall due, creditors have the right to take formal action to recover what they are owed. One of the most common steps they use is issuing a statutory demand. Understanding where you stand and acting early is critical, as time is short.
This guide breaks down what a statutory demand is, why creditors use them, the timelines you cannot ignore, and the risks if no action is taken. More importantly, it outlines the practical steps directors can take next to protect themselves and their business.
What is a Statutory Demand?
A statutory demand is a formal legal notice sent by a creditor to a company demanding payment of a debt, or security for that debt. It is issued when the creditor believes the debt is overdue and unpaid, and they want to enforce their rights.
Unlike invoices or reminders, a statutory demand carries legal consequences. If the company does not respond properly within the required timeframe, the law assumes the business is insolvent. This allows the creditor to apply to the court to wind up the company.
When Can a Creditor Issue a Statutory Demand?
According to the Corporations Act 2001 (Cth), a creditor can issue a statutory demand when:
- The debtor is a company
- The debt is due and payable
- The creditor is owed at least $4,000
- The debt is not subject to a genuine dispute
Once a statutory demand is served, the company has 21 days to respond. This timeframe is strict and cannot be extended without court involvement.
If the company does not properly deal with the demand within those 21 days, it is legally presumed to be insolvent.
A statutory demand often signals deeper pressure. Use the Director Distress Triage Checklist to assess insolvency risk before deadlines tighten.
Statutory Demands Based on Judgment Debt
A creditor may also serve a statutory demand relying on a judgment debt (a debt confirmed by a court order). This often happens after:
- Court proceedings
- Default judgment
- An unpaid judgment amount that remains outstanding
Judgment debt can make the creditor’s position stronger. It also narrows the room to argue about whether the debt exists. That said, directors still need to assess:
- Whether the demand was served properly
- Whether the amount claimed is correct
- Whether there are grounds to challenge it (where available)
If the demand is based on a judgment, waiting is rarely a safe option. The timeline still applies.
What Happens Once a Company Is Served with a Statutory Demand?
Once a statutory demand is served, the company has 21 days to take action. There are no reminders and no grace period.
Within that timeframe, the company must either:
1. Pay the Debt
If the debt is paid in full within the 21-day period, the statutory demand is satisfied, and no further action can be taken based on that demand.
This option only works when:
- the business has the cash available, and
- paying the debt does not create further financial risk
2. Resolve or Dispute the Debt
If there is a genuine dispute about the debt, or the amount is incorrect, the company may apply to the court to have the statutory demand set aside.
This must be done within the 21-day period. Late applications are not accepted, even if the dispute is valid.
How to apply? Get in touch with our team. Our insolvency experts can advise you on the best way forward.
3. Take Formal Action to Protect the Business
Where the debt cannot be paid and is not genuinely disputed, directors may need to consider broader options to protect the company and themselves. This can include restructuring or formal insolvency processes, depending on the circumstances.
What matters most is that the company acts within the 21-day timeframe.
More on this: Business Restructuring Guide: Timelines, Risks, Eligibility & Options
What Happens If You Ignore a Statutory Demand?
If the company does not take one of the required actions within the 21-day period, the law automatically treats the business as insolvent because the statutory demand was not properly dealt with in time. This is known as a presumption of insolvency.
At that point:
- The company loses control of the process
- The creditor can apply to the court to wind up the company
- Options become limited and more expensive
- Directors have far less ability to influence the outcome
In many cases, businesses that could have been stabilised or restructured earlier lose that opportunity simply because no action was taken within the required timeframe.
The key takeaway is this: doing nothing is treated as a decision, and it is the decision that carries the highest risk.
Regain clarity before control is lost. Use our Director Distress Triage Checklist to quickly assess insolvency risk and urgency.
Next Steps
It is important to act early before the 21-day deadline expires. The next step should be to:
Confirm the Facts
Check whether the debt is correct, due, and payable. Small errors, disputed amounts, or incorrect service can change how the demand should be handled. Do not assume the creditor is right without checking.
Assess the Company’s Position
Be honest about whether the business can pay the debt without creating further risk. Paying one creditor under pressure can expose the company and directors to additional problems if the business is already under strain.
Get Expert Advice Before Time Runs Out
Statutory demands operate on strict rules and deadlines. Early advice helps directors understand whether the demand can be challenged, resolved, or whether broader action is required to protect the business and their personal position.
If you have received a statutory demand and are unsure what to do next, speaking with someone experienced can provide clarity and direction.
At Halo Advisory, we work for you — the director. Financial expert Greg Bartels offers a no-obligation, 10-minute conversation to help you understand where you stand, what risks exist, and what options are realistically available before deadlines reduce control. Get in touch today.
FAQs
What is insolvency?
Insolvency occurs when a company cannot pay its debts as they fall due. It is not based on profit or asset value alone, but on whether the business can meet its obligations on time. A company can appear profitable and still be insolvent if cash flow is insufficient.
What is a winding up order?
A winding up order is a court order that forces an insolvent company into liquidation. Once made, a liquidator is appointed to take control of the company, realise assets, and distribute funds to creditors. Directors lose control of the business at this point.
What is the timeline for responding to a statutory demand?
A company has 21 days from the date a statutory demand is served to respond. This timeframe is strict. If the demand is not properly dealt with within 21 days, the company is legally presumed to be insolvent.
What is the minimum amount for a statutory demand?
The minimum amount for a statutory demand in Australia is $4,000. If the debt is below this threshold, the creditor cannot issue a statutory demand. For more, check section 459E of the Corporations Act.
How do you respond to a statutory demand?
A company must respond to a statutory demand within 21 days by either:
- Paying the debt
- Resolving the debt through agreement or dispute
- Taking formal steps to protect the business
If none of these actions are taken in time, then it is treated as insolvency under the law.
What is small business restructuring?
Small business restructuring is a formal process that allows eligible companies to restructure their debts while continuing to trade. It is designed to help viable businesses recover without entering liquidation or voluntary administration.
Is small business restructuring an option after a statutory demand?
In some cases, yes. Small business restructuring may be available after a statutory demand, depending on the company’s financial position, eligibility, and timing. Early advice is critical, as options can narrow quickly once deadlines pass.
Can a statutory demand be challenged or set aside?
Yes, but only in limited circumstances and strictly within 21 days of the statutory demand being served. The court will not extend this deadline, even if both parties agree.
A statutory demand may be set aside if:
- There is a genuine dispute about the debt or how it arose
- The company has a valid offsetting claim against the creditor
- The demand contains a defect, such as an incorrect amount or misdescription
- There is another valid reason, including a defective supporting affidavit or the demand being issued for an improper purpose
If you are unsure whether a statutory demand can be challenged, seek expert advice early to understand your options before time runs out.
What is the difference between a statutory demand and a Director Penalty Notice (DPN)?
- A statutory demand is issued to a company by a creditor to recover an unpaid debt. It is used to test whether the business can pay what it owes and can lead to liquidation if it is ignored.
- A Director Penalty Notice (DPN) is issued by the ATO to a director personally, usually for unpaid PAYG withholding or superannuation. A DPN can make a director personally liable for company tax debts.
In simple terms, a statutory demand puts the company at risk, while a Director Penalty Notice puts the director personally at risk. Both are serious, but they require different responses and timelines.
Are Directors Personally Liable for Company Debts?
In most cases, company debts stay with the company. Directors are not automatically personally liable for ordinary trade debts just because the business is struggling.
Personal exposure can arise in specific situations, including:
- Personal guarantees (for leases, loans, supplier credit)
- Insolvent trading risk where debts keep being incurred while the company can’t pay them
- ATO director liability in certain circumstances, especially around PAYG withholding and superannuation
If you are facing a statutory demand, it’s a signal to check whether any of these risk areas exist, not to assume personal liability is automatic.
More on this: Are Directors Personally Liable for Company Debt?
Can a statutory demand be issued for a disputed debt?
No. A statutory demand is generally not appropriate where there is a genuine dispute about the debt. If there is a real dispute, the company may have grounds to apply to set the demand aside, but strict deadlines apply.
What if there are multiple creditors chasing the business?
A statutory demand from one creditor often signals wider risk. Directors should assess whether the business can meet all debts as they fall due and consider broader restructuring if pressure is building.
Further reading: Debt Restructuring vs Debt Consolidation: Which one to choose
What can a debt collector do in case of company debts?
For company debts, the most serious escalation usually involves formal legal action – including statutory demands and, if deadlines are missed, steps toward winding up proceedings.
Can a statutory demand be withdrawn?
In some cases, yes. A creditor may withdraw a demand if the debt is paid, settled, or resolved. Directors should not rely on withdrawal without confirmation in writing and should still act within time.
What is the difference between debt consolidation and debt restructuring?
Debt consolidation usually means rolling debts into one new facility. It can increase risk if it:
- Adds personal guarantees
- Extends the problem without fixing cash flow
- Shifts unsecured debt into secured debt
Debt restructuring focuses on making the debt load workable based on real cash flow. It may include:
- New repayment terms
- Settlements
- Changes to how the business operates
- Formal processes when informal deals won’t hold
If directors are thinking whether restructuring is a good idea, the answer depends on whether the underlying business can be viable after the debt and cash flow are stabilised.
Read more: Debt Consolidation vs Debt Restructuring: Which One To Choose
