How to Respond to a Statutory Demand You Can’t Pay

A statutory demand under the Corporations Act is one of the most aggressive debt recovery tools available. When a creditor serves the prescribed form on your company claiming a debt of $4,000 or more, you have exactly 21 days to respond. If you do nothing — or if you can’t pay in full — the creditor can presume your company is insolvent and apply to wind it up.

This article explains what happens when you receive a statutory demand you cannot afford to pay, the legal options available, and how to respond within the deadline.

What a Statutory Demand Is and Why It Matters

A statutory demand is a formal notice served on a registered company (not an individual) demanding payment of a debt of at least $4,000. It must be in the prescribed form and accompanied by an affidavit verifying the debt.

The demand gives your company 21 days from the date of service to either:

• Pay the debt in full
• Secure or compound for the debt to the creditor’s reasonable satisfaction
• Apply to the court to set aside the demand

If you do none of these, the creditor can file a wind-up application on the presumption of insolvency. That presumption is difficult to rebut once the 21 days expire.

Your Options When You Can’t Pay in Full

If your company genuinely cannot pay the full amount within 21 days, you have three realistic pathways:

1. Apply to set aside the demand on the basis of a genuine dispute

If there is a genuine dispute about whether the debt exists, or about the amount claimed, you can apply to the Supreme Court or Federal Court to set aside the demand. You must file the application within 21 days and serve it on the creditor.

A genuine dispute means there is a plausible contention requiring investigation — not a spurious objection raised to buy time. The court does not resolve the dispute at this stage; it only decides whether the dispute is real enough to justify setting aside the demand.

Common grounds for genuine dispute include:

• The debt has already been paid
• The invoice was never agreed to or authorised
• The goods or services were defective and you have a valid set-off or counterclaim
• The amount claimed is incorrect or inflated
• The contract was never validly formed

If the court is satisfied there is a genuine dispute, it will set aside the demand.

2. Prove the company is solvent despite non-payment

Even if the debt is not disputed, you can apply to set aside the demand on the basis that the company is solvent and can pay all its debts as and when they fall due.

This is a higher bar. You will need to file detailed evidence of the company’s financial position: bank statements, asset valuations, debtor lists, creditor schedules, cash flow forecasts. The court will scrutinise whether the company can genuinely meet its obligations.

This option is rarely used unless the debt is small relative to the company’s overall position, or there is a short-term cash flow issue that does not reflect true insolvency.

3. Negotiate a payment plan or settlement before the deadline

If you cannot dispute the debt and cannot prove solvency, your only practical option is to negotiate directly with the creditor before the 21 days expire.

The Corporations Act allows the company to “secure or compound for the amount to the reasonable satisfaction of the creditor.” This means you can propose a payment plan, offer security over assets, or negotiate a reduced settlement amount.

If the creditor agrees in writing and the agreement is documented properly, the demand is effectively neutralised. The creditor cannot proceed with wind-up proceedings based on a debt that has been settled or secured.

However, the creditor is under no obligation to accept your proposal. If they refuse, you are left with the choice of paying in full or facing wind-up proceedings.

The 21-Day Deadline Is Absolute

The deadline runs from the date of service, which is typically the date the demand was delivered to your registered office or handed to a director. If you are unsure when service occurred, check the affidavit of service that should accompany the demand.

Once the 21 days expire:

• You lose the right to apply to set aside the demand
• The creditor can file a wind-up application immediately
• The court presumes your company is insolvent
• You must prove solvency at the wind-up hearing, which is far harder than disputing the demand early

If you are going to act, you must act within the first week. Court applications take time to prepare, and negotiations require back-and-forth correspondence.

How to Draft a Response or Negotiate a Settlement

If you choose to negotiate rather than litigate, your response should be immediate, professional, and realistic.

Step 1: Acknowledge the demand in writing

Send a letter to the creditor within 48 hours acknowledging receipt of the statutory demand and confirming that you are reviewing your position. This does not stop the clock, but it signals that you are taking the matter seriously.

Step 2: Assess whether you have a genuine dispute

Review the debt carefully. Is it actually owed? Is the amount correct? Do you have a counterclaim or set-off? If there is a genuine dispute, you should be preparing a court application, not a payment plan.

Step 3: Propose a realistic payment plan or settlement

Draft a formal proposal offering one of the following:

• A payment plan over 3-6 months with specific instalments and dates
• A lump sum settlement for less than the full amount (if you can raise funds quickly)
• Security over company assets or a director’s guarantee to secure the debt

The proposal must be realistic. Offering $100 per month on a $50,000 debt will not satisfy the creditor’s reasonable expectations.

Step 4: Document the agreement properly

If the creditor accepts your proposal, document it in a binding deed of settlement or payment plan agreement. The agreement should:

• Acknowledge the debt
• Set out the payment terms or settlement amount
• Confirm that compliance with the agreement satisfies the statutory demand
• Include a clause stating what happens if you default

The creditor should sign the agreement and provide written confirmation that they will not proceed with wind-up proceedings while you comply with the terms.

Step 5: Comply strictly with the agreement

If you miss a payment or breach the agreement, the creditor can revive the statutory demand or file a fresh one.

When to Get Legal Advice

If any of the following apply, you should speak to a solicitor immediately:

• The debt is disputed and you need to apply to set aside the demand
• The creditor refuses to negotiate and you need to prove solvency
• The company is genuinely insolvent and you need advice on voluntary administration or liquidation
• You are unsure whether the demand was validly served or complies with the Corporations Act

A statutory demand is not a DIY matter if you are facing wind-up. The consequences of getting it wrong can include personal liability for insolvent trading if you continue to operate while insolvent.

How ClaimDone Helps

If you need to respond to a statutory demand in writing — whether to propose a payment plan, acknowledge the debt, or request time to seek advice — ClaimDone’s Legal Response service prepares a professionally drafted response based on your situation.

You upload the statutory demand and explain your position. Our Proprietary AI Engine generates a response letter citing the Corporations Act and setting out your proposal clearly. The document is prepared within 60 minutes for a flat fee of $97.

ClaimDone does not give legal advice and cannot file court applications, but we can help you draft a formal response to a statutory demand to start negotiations or buy time to get proper legal representation.

Final Steps: Act Fast or Face Wind-Up

If you have received a statutory demand and cannot pay in full, you have three choices: dispute it, prove solvency, or settle it. All three require immediate action.

Do not ignore the demand. Do not assume the creditor will negotiate after the deadline. The 21-day clock is ticking.

If you need help drafting a response, ClaimDone can prepare a binding payment plan agreement or document a settlement to neutralise the demand today. For more background on how statutory demands work under the Corporations Act, see our statutory demand service page.

Frequently Asked Questions

Can I negotiate a payment plan after the 21-day deadline expires?

No. Once the 21 days expire, the creditor can file a wind-up application and the court presumes your company is insolvent. Any negotiation must happen before the deadline.

What happens if I ignore a statutory demand?

If you do nothing within 21 days, the creditor can apply to wind up your company on the presumption of insolvency. You will then need to prove solvency at the wind-up hearing, which is far harder than disputing the demand early.

Can I dispute a statutory demand if I just can't afford to pay right now?

No. Cash flow problems are not a genuine dispute. You can only dispute the demand if there is a real question about whether the debt exists or the amount claimed. Inability to pay is evidence of insolvency, not a dispute.

Do I need a lawyer to respond to a statutory demand?

If you are applying to set aside the demand or proving solvency, yes — you need a solicitor. If you are negotiating a payment plan or settlement, you can draft the response yourself or use ClaimDone to prepare the letter.

What is a genuine dispute for the purposes of setting aside a statutory demand?

A genuine dispute is a plausible contention that the debt does not exist, the amount is wrong, or you have a valid set-off or counterclaim. It must be more than a spurious objection raised to delay payment.