When a company is served with a statutory demand for payment (a formal notice from a creditor requiring payment of a debt) it has only 21 days to respond. The response must involve either paying the debt or applying to set the demand aside in court. If the company fails to take action within that timeframe, the consequences can be serious. Under the Corporations Act 2001 (Cth), failure to respond gives rise to a legal presumption that the company is insolvent, allowing the creditor who served the statutory demand to apply to have the company wound up. Once the 21-day period has expired, the company’s ability to challenge the winding-up is extremely limited.

In a recent case in the Supreme Court of New South Wales In the matter of Kong & Kong Property Investment Pty Limited [2025] NSWSC 290, the Court reaffirmed the strict and cautious approach courts adopt when considering applications to oppose a winding-up order after the expiry of the 21-day response period.

Background

The Plaintiffs, trustees of the S & S Superannuation Fund, served a statutory demand on Kong & Kong Property Investment Pty Ltd in July 2024 for $188,481.18 – the amount of a default judgment obtained in the District Court based on a loan agreement which was allegedly signed in 2019. The Defendant took no steps to set aside the demand within the 21-day period under section 459G.

A winding-up application was subsequently filed. However, the default judgment was later set aside by consent, and the District Court proceedings were reopened. Kong & Kong sought leave under s 459S to raise a genuine dispute about the debt as a ground for opposing the winding-up application.

The Legal Issue

Under s 459S(1), a company may not oppose a winding-up application on grounds it could have relied on to set aside a statutory demand, unless the court grants leave. Importantly, under s 459S(2), the court must not grant leave unless satisfied that the ground is material to proving the company’s solvency.

The Decision

Justice Nixon dismissed the Defendant’s application for leave to raise a genuine dispute about the debt under s 459S(1), concluding that:

1. The company provided no adequate reason for failing to apply to set aside the statutory demand within time. Despite claims of misunderstanding, the director had received multiple communications outlining the basis of the debt and had legal representation in other matters at the relevant time.
2. Even accepting there was a genuine dispute about the debt, the company failed to show that this dispute was material to proving solvency. The company claimed to be solvent regardless of whether the debt was owed, relying on property assets, rental income, and financial support from its director. Thus, the Court found the existence or non-existence of the debt was not determinative of the company’s financial position.

Justice Nixon emphasised that leave under s 459S is granted sparingly and that permitting companies to raise solvency-based defences at the winding-up stage (after ignoring a statutory demand) would undermine the purpose of Part 5.4 of the Corporations Act.

Key Takeaways for Commercial Clients

• Companies must move within the 21-day timeframe to apply under s 459G if they dispute the debt. The courts have no discretion to extend this period.
• The threshold for obtaining leave under s 459S is high. The disputed debt must be material to proving solvency, and a credible explanation must be given for the earlier inaction.
• If the statutory period lapses, the presumption of insolvency arises. Later action, such as setting aside a judgment or disputing the debt in separate proceedings, won’t erase that presumption.
• If a company asserts it is solvent due to asset backing or director support, those assertions must be properly documented and credible, especially if relied upon at the winding-up hearing.

Conclusion

The Kong & Kong decision reinforces the strict operation of section 459S and the importance of responding to statutory demands within the 21-day timeframe. Courts remain firmly of the view that the statutory demand regime is not to be undermined by late attempts to challenge a debt at the winding-up stage, especially where a company has had ample opportunity to respond earlier.

Disclaimer

This information is general in nature. It is intended to express the state of affairs as of the date of publication. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.