So, you or your client have been served with a statutory demand.
What does it mean? What are the consequences? What must you do and by when? These are all questions that need to be answered within a short timeframe.
Issuance of a statutory demand is the first step in the process to commence liquidation proceedings against a company. This is not the only available path to commence liquidation proceedings against a company, however, this is the most used one.
As such, if a statutory demand has been served on a company, it should not be ignored as there could be serious consequences if it is not addressed.
Usually, a statutory demand can be set aside if there is a substantial dispute as to whether the debt is owing, or there appears to be a counterclaim or a setoff. The methods of setting aside a statutory demand are discussed in our previous article.
Unlike a usual statutory demand, the Supreme Court in Laywood v Holmes Construction Wellington Ltd [2009] NZSC 44 held that in certain circumstances, a statutory demand for a debt under the Construction Contracts Act 2022 (the CCA) might not be able to be set aside even if a company has a substantial dispute, counterclaim, or setoff. This is due to the “pay now, argue later” regime under the CCA.
This has recently been affirmed by the Court of Appeal in Demasol Ltd v South Pacific Industrial Ltd [2022] NZCA 480.
Background to Demasol Ltd v South Pacific Industrial Ltd
South Pacific Industrial Ltd (SPI) was the head contractor for demolition works. Demasol Ltd (Demasol) specialised in asbestos removal and was the subcontractor to demolish a large bin tank containing asbestos.
Demasol served two payment claims which contained charges for additional works due to variations to the contract. SPI did not dispute the payment claims by issuing payment schedules as required by the CCA, nor did it pay the amounts sought in the payment claims. Consequently, Demasol served a statutory demand on SPI.
SPI applied to set aside the statutory demand. The High Court set aside the statutory demand under s 290(4)(a) of the Companies Act 1993 because it was reasonably arguable that the second payment claim was not valid due to the charged variations being disputed. Demasol appealed to the Court of Appeal.
Payment claims under the CCA
The Court of Appeal noted that the objective of the CCA is to secure timely cashflow to contractors and subcontractors in the construction industry. The CCA does not shut the payer out from disputing the amount claimed but it requires the payer to pay first and argue later.
If a payer does not respond to a payment claim by serving a payment schedule under s 21 of the CCA, then the contractor is entitled to recover the amount as a debt due under s 23.
If a payer had issued a payment schedule and the dispute has not been resolved, then there may be a substantial dispute and s 290(4)(a) of the Companies Act 1993 may be invoked to set aside a statutory demand.
Whether the statutory demand should be set aside
Demasol made its payment claims under the CCA and complied with the statutory requirements under s 20.
SPI then became liable to pay the claimed amounts under s 22 as it failed to provide a payment schedule or pay the amounts claimed within 20 working days.
All the issues SPI belatedly disputed should have been covered in a payment schedule (which SPI failed to do). As a result, Demasol became entitled to recover the debt from SPI under s 23.
The Court of Appeal held that the payment claims served by Demasol on SPI were valid payment claims under the CCA. There was no substantial dispute as to whether SPI was liable to pay the amounts claimed. Accordingly, Demasol was entitled to enforce its statutory demand.
Therefore, the Court of Appeal held that the High Court erred in setting aside the statutory demand under s 290(4)(a) of the Companies Act 1993 as doing so would be contrary to the CCA and undermine its purposes. SPI was not shut out from the CCA’s adjudication processes or other proceedings. It simply had to pay now and argue later.
Outcome
SPI’s application to set aside the statutory demand was dismissed but the time for complying with the statutory demand was extended.
Our view
This recent Court of Appeal case reinforces the “pay now, argue later” regime under the CCA. It is a good reminder to all in the construction industry to respond promptly to payment claims pursuant to the process prescribed in the CCA.
The timeframes in the CCA are strict and failing to comply has irreversible consequences and can result in the payment claim being enforced in the Courts as a debt which will likely result in increased costs for the payer. It might be too late to dispute the debt once the contractor takes enforcement steps in reliance on s 23(2)(a) of the CCA.
Conclusion
If you have been served with a payment claim under the CCA or a statutory demand, or require legal assistance, we invite you to contact our specialists for a no obligation discussion. Our lawyers at Norling Law can assist you as part of our no obligation legal consultation.
To book a free 30-minute consultation, please click the button below:
Brent is the Director of Norling Law. He has a wealth of experience in the District Court, High Court, Court of Appeal and Supreme Court. Brent is passionate about negotiating favourable outcomes for his clients and able to implement this in his daily negotiations.
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.
Wendy has over 20 years’ experience in civil litigation in New Zealand with a main focus on construction, insolvency and debt recovery and security enforcement.