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An Introduction to Statutory Demands:
A statutory demand is a legal document that is issued by a creditor (Creditor) to a debtor company (Debtor) demanding payment of a debt that is due and owing. The statutory demand can be a useful tool and is often a precursor to commencing liquidation proceedings. However, there are strict requirements that must be complied with to ensure that your statutory demand is valid.
In the current economic climate, it is unsurprising that liquidations and statutory demands have increased. It is important for parties issuing or receiving a statutory demand to have a clear understanding of their obligations.
As the name suggests, statutory demands are governed by statute. The Companies Act 1993 (the Act) dictates the contents, timeframes and consequences for non-compliance or failure to set aside a statutory demand.
What is required?
Section 289 of the Act establishes that a statutory demand must:
- Be for a current debt due which must be more than the prescribed amount (i.e. a minimum of $1000);
- Be in writing;
- Be served on the Debtor;
- Require the Debtor to pay the debt, or enter into a compromise, or compound with the Creditor or give a charge over the property to secure payment of the debt, to the satisfaction of the Creditor.
Professional Obligations
Although anyone can issue a statutory demand, it is best practice for solicitors as representatives of Creditors, to issue. Solicitors must adhere to professional obligations in issuing a statutory demand, including only using legal processes for proper purposes. If a solicitor issues a statutory demand knowing that, or failing to make inquiries as to whether, the debt is bona fide disputed, solicitors may be in breach of their professional obligations. It is important that the issuer of the statutory demand is satisfied that there is no substantial dispute to the debt and that the Debtor has no counterclaim, set-off or cross-demand which would make the amount demanded less than $1,000.
Time Frames: To Set Aside or to Comply?
The impact of a statutory demand kickstarts a relatively speedy process. From the service of the statutory demand, a Debtor will have 10 working days under section 290 of the Act, to apply to set aside the statutory demand (note: working day under the Act has its own formulation, distinct from the High Court Rules 2016 (HCR)). There is no extension of time granted for an application to set aside.
An application to set aside requires the Debtor to satisfy the court that one of three situations apply:
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- That there is a substantial dispute as to whether the debt is owing or due; or
- That the Debtor has a counterclaim, set-off or cross-demand which would make the amount demanded less than $1000; or
- The court should set it aside on other grounds.
There are instances however, where the ability to set aside a statutory demand is limited by existing legislation, for example under a construction contract. Section 23(2) of the Construction Contracts Act 2002 (CCA) permits recovery of debt in court if no payment schedule has been issued, therefore permitting the use of a statutory demand. Section 79 provides that the proceedings for the recovery of debt under qualifying provisions, are not affected by counterclaims, set-offs or deductions. The operation of section 79 of the CCA effectively limits the efficacy of the set aside provisions under section 290(4) of the Act.
Alternatively, if the Debtor does not apply to set aside the statutory demand, it has 15 working days from service to comply with the statutory demand. This may involve paying the debt, entering into a compromise with the Creditor under Part 14 of the Act (Compromises with Creditors), compound with the Creditor, or provide a charge over property to the Creditor’s satisfaction.
If the Debtor neither applies to set aside nor comply with the statutory demand, the presumption is created that the Debtor is unable to pay their debts as they fall due. This allows the Creditor to commence liquidation proceedings within 30 working days from the expiry of compliance (being 45 working days from the date of service).
The courts continue to grapple with the timeframes involved in the statutory demand process. A recent example is Ingenious Ltd v AP Chartered Accountants Ltd [2024] NZHC 1277, where service of an unendorsed copy of an application to set aside a statutory demand within 10 working days was considered invalid, despite an endorsed copy being served days later. However, this was only one of several factors considered; other factors included that the application was served by email when not previously agreed. The decision was later reversed in Ingenious Ltd v AP Chartered Accountants Ltd [2024] NZHC 2546, where the same court found that the mere fact that the application was unendorsed was not sufficient for service to be invalid under the HCR. Notwithstanding this reversal, when applying to set aside a statutory demand, it is preferable to err on the side of caution to mitigate the risk of invalid service.
Implications on Debtors and Creditors
Creditors: If you are considering issuing a statutory demand, you must be satisfied that it is an undisputed debt which is currently due and owing. It is not appropriate to issue a statutory demand for costs for the preparation and service of the demand as it not considered a debt due. The statutory demand process should not be invoked in a manner which amounts to an abuse of process.
Debtors: If you are served with a statutory demand, it is necessary to understand the strict timeframes for compliance. There are 10 working days to set aside the statutory demand which involves an application to set aside, demonstrating that one of the three grounds in section 290(4) of the Act apply. Alternatively, there are 15 working days to comply with the demand. It is also necessary to consider whether the costs of setting aside the statutory demand outweighs the debt due and owing.
Legal advice should be sought immediately upon receipt of a statutory demand.
If you have any questions about statutory demands, please get in touch with our Insolvency Team or your usual contact at Hesketh Henry.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.
