Statutory demand from the ATO: the 21 days before your company is presumed insolvent

What a statutory demand is

A creditor's statutory demand (Form 509H under the Corporations Act) is a formal written demand a creditor can serve on a company for a debt of at least $4,000 that is due and payable. It gives the company 21 days to do one of three things:

• Pay the debt (or reduce it below $4,000),
• Secure or compound for it to the creditor's reasonable satisfaction — i.e. reach a binding arrangement the creditor accepts, or
• Apply to court to set the demand aside.

Do none of those within 21 days and the company is presumed insolvent. The ATO doesn't need to prove your company can't pay its debts — the failure to comply proves it for them, and the presumption holds for 3 months, during which the ATO can file a winding-up application relying on it. The ATO is one of the heaviest users of statutory demands in the country, and by the time one arrives you're usually past reminders, warning letters and often a defaulted payment plan on the escalation ladder.

"Presumed insolvent" — why those words matter

Normally a creditor asking a court to liquidate a company must prove insolvency — a genuinely hard thing to prove. The unanswered statutory demand flips the burden: the court starts from the position that your company is insolvent, and it's on the company to prove solvency if it wants to resist the winding-up — with full financial evidence, at your cost, on the court's timetable. Practically, letting a demand lapse converts "the ATO says we owe money" into "the court presumes we're finished" in three weeks of inaction. That's why insolvency practitioners treat these letters as the last cheap exit on the road.

Service, the registered office, and why some companies "never saw it"

A statutory demand is validly served by leaving it at, or posting it to, the company's registered office as recorded with ASIC. That address is often an accountant's office, a former accountant's office, or premises the business left two years ago. The law doesn't care: service at the registered office starts the 21 days whether or not any human forwarded the envelope, and companies are regularly presumed insolvent — and later wound up — over demands nobody in the business ever read.

Three practical consequences:

• Check the demand's service date, not just its letter date — the clock runs from service, and the accompanying affidavit and postal rules determine when that was. An adviser can pin the true expiry date down quickly.
• If the demand surfaced late, count honestly. Finding the letter on day 15 doesn't reset anything; it means you have 6 days, and triage has to reflect that.
• Fix your ASIC details today if the registered office is stale — the next document served there could be a winding-up application with a hearing date on it.

Your options inside the 21 days

1. Pay in full. Payment (or reduction below $4,000) kills the demand. If the money exists but not the liquidity, short-term finance against the deadline is sometimes rational — price it against what a winding-up would cost.
2. Negotiate — properly, and in writing. The ATO can withdraw a demand or agree not to act on it, and frequently does when lodgments are brought current and a credible payment plan (often with a meaningful upfront payment) is agreed. Critical detail: a phone promise doesn't stop the clock. Until you have written confirmation that the demand is withdrawn or won't be relied on, assume the 21 days still run. A plan entered and then defaulted also revives everything quickly.
3. Apply to set the demand aside. A court can set aside a demand where there's a genuine dispute about the debt, an offsetting claim, a defect in the demand causing substantial injustice, or another good reason. The application must be filed and served within the 21 days — no exceptions. Honest warning for tax debts: a notice of assessment is treated as conclusive evidence of the debt in recovery proceedings, so "we dispute the tax" almost never sets aside an ATO demand — tax disputes belong in objection and appeal processes, which don't pause recovery. Set-aside is the right tool against defective demands or genuinely wrong accounts, not a delay tactic; a failed application usually adds the ATO's costs to your bill.
4. Use the deadline to restructure. If the company can't pay and can't credibly negotiate, the demand is telling you it's decision time. Appointing a small business restructuring practitioner (viable business, under $1m liabilities, lodgments current, super paid) or a voluntary administrator deals with the insolvency question on your initiative rather than the ATO's — keeping the business trading while a proposal goes to creditors. If the business isn't viable, a director-initiated liquidation is nearly always cleaner and cheaper than a court winding-up, and for directors it matters that these decisions also interact with DPN timing.

Why ignoring it is the worst option

Every path — even liquidation — is better entered deliberately than by default. Ignore the demand and:

• Day 22: the company is presumed insolvent, and your right to set the demand aside is gone forever.
• The ATO can file a winding-up application, and the court process (publication on ASIC's insolvency notices, banks and suppliers finding out, frozen credit) starts moving on the ATO's timetable, not yours.
• Options shrink and get dearer: SBR and administration are still technically possible after a winding-up application is filed, but courts scrutinise late appointments, and negotiation leverage is far weaker with a hearing date set. See winding-up applications.
• Interest compounds throughout at 11.43% a year, non-deductible.

Compare what ignoring ATO debt costs generally — a statutory demand is that whole article on fast-forward.

One more cost of drifting past day 21: the presumption follows the company into the courtroom. Directors who eventually oppose the winding-up must prove solvency with proper financial evidence — audited-quality figures, valuations, cash-flow proof — assembled in weeks, at legal and accounting rates, from a standing start. Almost every company that wins that argument could have avoided having it, cheaper, inside the original 21 days.

A sensible first 72 hours

1. Diarise day 21 from the service date. Everything works backwards from it.
2. Verify the debt against your ATO account, and have the demand checked for defects — amounts, form, service — by someone who knows what a defective demand looks like.
3. Answer the viability question honestly — can this business pay its way if the tax debt is restructured?
4. Get specialist advice this week, not day 19. Set-aside applications, SBR appointments and negotiated withdrawals all need runway; none of them can be conjured on day 21.