Under section 459E of the Corporations Act 2001 (the Act), a creditor may issue a statutory demand to a debtor company.

Once served, a debtor company only has 21 days to either pay the debt in the statutory demand or make an application to the court to have the demand set aside.

If the debtor does neither, it is presumed to be insolvent and the creditor may make an application to wind the debtor company up.

Usual basis for setting aside a statutory demand

An application to set aside a statutory demand is normally made on the basis set out in section 459H of the Act that either:

  1. There is a genuine dispute about the existence or amount of the debt; or
  2. There is an offsetting claim.

The task of establishing a genuine dispute is considered not to be difficult or demanding.

Statutory demands based on judgment debts

Things are less straightforward if the statutory demand is based on a judgment debt and there is a dispute about the debt giving rise to the judgment.

This issue was recently addressed in Chapel of Angels Pty Ltd v Hennessy [2021] FCA 875 (02 August 2021).

In that case, judgment was obtained against a debtor company and a statutory demand was served based on that judgment.

The judgment debtor applied to set aside the statutory demand on the basis that there was a genuine dispute about the debt.

The court dismissed the application and awarded indemnity costs.

The court followed prior cases and found that it was not possible for an applicant to apply to set aside a statutory demand based on a claimed genuine dispute if the statutory demand is based on a judgment, even a default judgment.

There is still hope if a statutory demand is based on a judgment

However, if the judgment is the subject of an appeal or an application to set the judgment aside, an applicant may still apply to have the statutory demand for “some other reason” under section 459J(I)(b) of the Act.

Such an application was considered In the matter of AAP Investments (Aust) Pty Ltd [2015] NSWSC 1049 (04 May 2015). In that case, the underlying default judgment on which the statutory demand was based had been set aside. Accordingly, the court held that there was “some other reason” why the statutory demand should be set aside under section 459J(I)(b).