A statutory demand is a legal demand for debt repayment. If ignored, it can lead to liquidation proceedings. It’s crucial to address a statutory demand promptly to avoid severe legal consequences. Seek professional advice for guidance.
A statutory demand is a mechanism created by legislation, specifically the Companies Act 1993 (“the Act”). It enables creditors to enforce overdue payments from indebted companies. If the debtor company fails to comply with the issued statutory demand, it could result in the company’s liquidation. However, the company can seek to set aside the statutory demand if it believes the demand is invalid or disputes the debt.
The Court of Appeal in Pioneer Insurance Company Ltd v White Heron Motor Lodge Ltd [2009] NZCCLR 14 outlined two main purposes of a statutory demand: the primary purpose is to obtain payment of the debt, while the secondary purpose is to demonstrate that the debtor company cannot pay its debts, which is crucial for initiating liquidation proceedings.
A statutory demand is commonly used to start liquidation proceedings in the High Court. Failure to pay or set aside a validly issued statutory demand creates a presumption of the company’s insolvency (s 287(a) of the Act). Given the severe consequences it can cause, a statutory demand should not be used carelessly or vexatiously.
For the creditor to be able to issue a statutory demand, the statutory demand must (s 289(2) of the Act):
The service of the statutory demand on the defendant company must also comply with the rules of service contained under the Act.
The Courts have made it clear that creditors should not be criticised for utilising a statutory demand as a method of debt collection, however, the process should not be abused. The Court of Appeal in Link Electrosystems v GPC Electronics (New Zealand) Ltd (2007) has explicitly stated that a statutory demand should not be used “oppressively as a debt collection device”. A statutory demand should not be used to threaten a company with liquidation if the requirements have not been met for issuing the statutory demand in the first place.
A statutory demand should not be used where there is a genuine and substantial dispute as to the debt. Doing so will likely be seen as an abuse process.
It is a good practice that a statutory demand is issued by the creditor’s lawyer, rather than the creditor personally or their debt collection agency. This is because it is generally expected of lawyers to ensure that the required pre-requisitions for the issuance of the statutory demand are satisfied.
Subsequently, it is recommended to consult a lawyer before considering your options and whether or not to issue a statutory demand is the right process for your company, as there can be risks associated with improperly using the process. For example, a Court may penalise a creditor by awarding increased costs in relation to setting aside the statutory demand if it deems that the statutory demand was improperly issued.
Setting Aside a Statutory Demand
If your company has been served with a statutory demand, then you should consult a specialist lawyer immediately; time is of the essence in determining your options. The Act has strict timelines for companies that have been issued with a statutory demand.
If the debt is not disputed by the debtor company, the most commonly recommended option is to either pay the debt or enter into a payment arrangement with the creditor.
If obligation to pay the debt is disputed by the debtor company, there is an option to make an application to Court to seek that the statutory demand is set aside. There are three primary grounds under s 290(4) of the Act that allow the court to set a statutory demand aside:
The grounds for seeking the setting aside of the statutory demand in the High Court will be addressed in more detail below.
It should be noted that any application to set aside a statutory demand must be made within 10 working days of the date of service of the statutory demand, and also served on the creditor within 10 working days of the date of service of the statutory demand. This is a strict requirement, and no extension of time may be given. However, at the hearing of the application, a court may extend the time for compliance with the statutory demand (e.g. payment of amount owing).
Otherwise, if the statutory demand has procedural defects (these procedural requirements are located in s 289(2) of the Act and above), it could be considered invalid and/or can be set aside.
If the statutory demand is neither satisfied, nor an application to the Court is made for the setting aside of the statutory demand within the prescribed timeframe, by operation of the Act, the debtor company would be presumed to be insolvent, and the creditor would be entitled to make an application to Court to seek liquidation of the debtor company.
In the event that the debt is genuinely disputed, a statutory demand should not be issued in the first place.
If a statutory demand has been issued on a disputed debt, the Court will have to decide whether there is a credible or fairly arguable basis that the debt is not owing. The assessment is conducted on the basis of the material presented to Court. Where there is a genuine dispute, the dispute should be addressed in an ordinary proceeding, and not in the liquidation Court.
It is worth noting that if the debt had been genuinely disputed prior to the issue of the statutory demand, and the statutory demand was made despite the dispute, there may be an increased award of costs in favour of the party setting aside the statutory demand.
If the debtor company can show that there is a set-off or a counterclaim that appears to exist against the creditor that would reduce the amount owing to be under $1,000.00, then a Court may set aside the demand. If the claim against the creditor is a liquidated or undisputed amount, then it is likely the demand will be set aside with minimal issues. If the claim against the issuer is for an unliquidated amount or disputed, the debtor company must demonstrate sufficient evidence showing that it has a real basis for the claimed set-off or counterclaim.
If the Court is satisfied that the creditor’s prima facie entitlement to liquidate the company is outweighed by some factor making it plainly unjust for the liquidation to occur, then the Court has the discretion to set aside the statutory demand (Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 (CA)). Generally, this would include grounds such as preventing the abuse of the statutory demand process and/or preventing substantial injustice. It is less common to see this section invoked.
If you have received a statutory demand, the time to act is now. Due to the strict timelines of the Act, it is imperative to consult a lawyer as soon as possible. Failure to serve an application to set aside the statutory demand when faced with a validly issued statutory demand can lead to a company’s liquidation extremely quickly.
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