What is a statutory demand?
A statutory demand is a mechanism created by legislation, the Companies Act 1993 (“the Act”). It enables creditors to enforce overdue payment from indebted companies. The debtor company’s failure to comply with the issued statutory demand could result in the liquidation of the debtor company.
The Court of Appeal in Pioneer Insurance Company Ltd v White Heron Motor Lodge Ltd [2009] NZCCLR 14 stated that there are two main purposes of a statutory demand:
- The main purpose is to obtain payment of the debt.
- The secondary purpose is to prove that the debtor company cannot pay their debts for the purposes of liquidation proceedings.
A statutory demand is a common way pursuant to which liquidation proceedings are started and brought to the High Court; a 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).
Due to severe consequences that it can cause, a statutory demand should not be used carelessly or vexatiously.
Requirements for issuance of statutory demand
For the creditor to be able to issue a statutory demand, the statutory demand must (s 289(2) of the Act):
- Be in respect of a debt that is due and is not less than $1,000.00; and
- Be in writing; and
- Be served on the debtor company; and
- Require the debtor company to pay the debt, or enter into a compromise under Part 14, or otherwise compound with the creditor, or give a charge over its property to secure payment of the debt, to the reasonable satisfaction of the creditor, within 15 working days of the date of service, or such longer period as the court may order.
The service of the statutory demand on the defendant company must also comply with the rules of service contained under the Act.
Abuse of Process
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, 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:
- There is a substantial dispute whether or not the debt is owing or is due; or
- The debtor company appears to have a counterclaim, set-off, or cross-demand, and the amount specified in the demand (less the amount of the counterclaim, set-off, or cross-demand) is less than $1,000.00; or
- The demand ought to be set aside on other grounds.
The grounds for seeking the setting aside of the statutory demand in High Court will be addressed in more details 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 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.
Disputed Debt
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.
Set off, counter claim, or cross demand
If the debtor company can show that there is a set-off or a counter claim 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 counter claim.
Other grounds
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.
Conclusion
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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Anna practices in the area of commercial litigation and has appeared as Counsel in the District Court, High Court and the Court of Appeal, having successes in all Courts. Anna has a special interest in corporate, insolvency and relationship property law.