What is a Statutory Demand and When is it Used for Debt Collection?
A Statutory Demand serves as a formal court notice compelling a debtor company to settle an outstanding debt owed to a creditor, marking the initial step in the legal process of initiating the "winding up" of an insolvent company in accordance with Section 289 of the Companies Act 1993.
Essentially, a Statutory Demand functions as a litmus test for a Debtor Company, evaluating its financial viability by determining its ability to meet its obligations and settle debts promptly. It should however only be used as a debt collection tool if there is no dispute.
A disputed debt has a different process to follow. A statutory demand should not be issued on a known disputed debt. Pursuing legal proceedings in the District Court (claims less than $350,000) or the Disputes Tribunal (claims up to $30,000) is recommended as a more suitable course of action to resolve the dispute through standard legal channels. The High Court deals with higher debts and complex cases.
The issuing of a Statutory Demand often proves to be a successful strategy, compelling the Debtor Company to address the outstanding issue promptly and often leading to successful debt settlement.
Owed Money? What to Consider before issuing a Statutory Demand
Certain restrictions should be carefully considered before issuing a Statutory Demand. It is imperative to evaluate whether the Debtor Company has previously contested the debt or disputed the owed amount. Also if the debt is $1000 or less it is deemed inappropriate to issue a statutory demand since it constitutes an abuse of the court process for winding up a company.
It is advisable to have a professional such as a lawyer, licensed Insolvency Practitioner or Debt Collector issue the Statutory Demand and for a process server to serve it.
Ultimately, the issuance of a Statutory Demand is a strategic move, often prompting swift action from the Debtor Company to fulfill the demand and avoid the potential consequence of being wound up.
Owe Money? How should a Company that receives a Statutory Demand Respond?
Upon receipt of a Statutory Demand, the Debtor Company is granted a 15-working-day window to either settle the debt, fulfill the demand through alternative means, or formally dispute the matter in the High Court. Failure to pay the debt or initiate a dispute by way of a notice to set aside within this timeframe establishes an act of insolvency, empowering the creditor to file an application in the High Court for the winding up of the Debtor Company. This can lead to liquidation.
Where there is a valid dispute for reasons such as the debt is not owing or where there is a counter claim, setoff or cross demand, the window to act is small with the application to set aside required to be filed in the High Court and served within 10 working days of the service of the statutory demand. Prompt action to appoint a lawyer to act is important.
If there is no dispute but the debtor company has no ability to pay or offer a compromise (such as agreed security and/or instalment plan) then it is recommended to seek advice of a licensed insolvency practitioner to discuss the options of voluntary liquidation or company compromise or possibly a voluntary administration.
Options For Companies Who Have Been Served With A Statutory Demand - Undisputed Debt
• Do nothing and ultimately face liquidation proceedings (being served with a notice for putting a company into liquidation);
• Pay the amount owing;
• Enter into an informal compromise reaching a full and final settlement for an agreed sum - over a term or upfront - and possibly from sources not available should the company face liquidation;
• Offer a formal company compromise under Part 14 of the Companies Act 1993 - offering all creditors a payment arrangement on "compromise debt" and trade terms for ongoing trading;
• Offer assets as a form of security;
• Enter into a shareholder resolution placing the company into a voluntary liquidation before the winding up proceeding is filed with the consent of the applicant creditor. The voluntary liquidation process is generally less stressful as the entire procedure is well planned and the directors can assist and guide the liquidator.
For advice on when to issue a statutory demand and the next steps leading to a winding up proceeding OR for advice as the recipient of a statutory demand and the options and risks contact our team at MVP. We are here to help.