“Legal tender” means that the currency is a valid way to pay off an existing debt.
Prior to the parties entering into a contract, they can agree on how a debt will be paid. If you and I enter into a contract and you stipulate that I have to pay you in gold Kruger Rands, then that’s how I’m required to pay you. I can’t try to substitute paper money.
But if we enter into a contract and it’s silent on payment, and I owe you money under the contract, I can offer you paper money. That’s a legal tender to satisfy a debt. If you refuse to take it, you can’t later sue me alleging I’ve not paid you under the contract.
As to the distinction between legal tender and demonetising, a country can state that past coins and currencies have ceased to be legal tender, but are still currency at the banks. That is, no-one but a bank is required to accept the old coins and currencies. Merchants can refuse to accept the old money and insist that you pay in legal tender, the new money. But to maintain confidence in the currency, the government provides that the banks have to exchange the old money for new money. The banks then turn the old money into the central bank for a credit.
Maintaining a limited monetisation like this is important for confidence in the currency. Some countries completely de-monetise old notes and coins. If you don’t exchange the money you have before the due date, it just becomes little pieces of paper.
Some countries have completely demonetised some of their currency, and it causes a lot of economic uncertainty. Russia did it to the rouble under Yeltsin, with the net effect that Russians trusted their government even less. India did something similar in the past couple of years, as an anti-counterfeit measure.
Complete demonetisation, especially in economies that still rely heavily on cash rather than electronic payments, can have very negative effects both internally to the country, and to the country’s reputation for fiscal stability.
That’s one of the reasons the US, the UK and Canada have such good fiscal reputations. Those three countries have never demonetised their old coins and currencies. Some old notes may need to be taken to a bank to be exchanged for modern currency, but you can always redeem them at face value.
In fact in Canada, coins and notes issued by the colonial governments, before Confederation in 1867, are still valid currency. Merchants may not have to accept them as legal tender, but the banks will take them at face value.
Of course, pre-Confederation currency will be worth more than face value now on the collector’s market, but still carry face value at the bank.