Statutory demands - minimising bad debts is critical for any business
Debt collection is difficult for business owners. Pursuing bad debts early on improves any chance of receiving payment. A creditor that puts the most pressure on a debtor will most likely receive their money before others; however, they need to be conscious of the voidable transaction regime when they are dealing with an insolvent company.
If you are owed a debt and that debt is not in dispute and you suspect the company you have been trading with may be insolvent, you can issue a statutory demand against the company. Depending on your terms of trade, a statutory demand will require the debtor to pay you the outstanding debt, interest on the debt, and the legal costs for issuing the statutory demand. The purpose of a statutory demand is to determine whether the creditor can pay and not that they are liable to pay.
The statutory demand process provides a quick procedure for ensuring payment, or for at least achieving some knowledge on whether payment is possible. This process is intended to be a first step in making an application to put a company into liquidation when a company genuinely cannot pay.
It is important to get the process right and it is advisable to instruct a lawyer who has ethical obligations to ensure the correct steps are taken rather than issuing the demand yourself or a debt collection agency taking responsibility. It is however an abuse of process if the statutory demand option is taken when there is no prospect of the company being placed into liquidation.
The cost of issuing a statutory demand should not be taken lightly. If there is a substantial dispute and the creditor is successful in its challenge, Court costs will be awarded against the creditor. If a creditor gets this process wrong, not only are they out of pocket for additional costs but months may have passed and they are no closer to collecting the debt.
Sections 289 to 291 of the Companies Act 1993 deal with statutory demands.
The process
Before serving a statutory demand it is sensible to ensure that the debt is not in dispute. Sending a formal demand so any dispute can be raised will give you an opportunity to settle the debt without any further action being taken. If, however, the debt is disputed you can file proceedings at the District or High Court and seek judgement on the claim.
Step 1 - Serve a statutory demand for the debt
The demand must be in writing and should be served on the debtor company's registered office. The demand must require the company to pay the debt or to secure the debt or to settle it in some way. If the debtor does not pay the amount claimed within 15 working days, you can apply to put the company into liquidation. This is a powerful tool as it is quite likely the debtor will go to lengths to ensure that other creditors are not aware of liquidation proceedings pending or in progress. The company has 15 working days after being served to comply with the notice.
The statutory demand must specify exactly what amount is owed (and it must be over $1,000). The document specifies when the sum must be paid and provides the alternatives to full payment such as to enter into a compromise (Part XIV of the Companies Act 1993), or otherwise compound, or give a charge over property to secure payment of the debt to the reasonable satisfaction of the debtor, all within 15 working days of the date of service of the demand, or such longer period if the High Court order.
Once a statutory demand is served on the debtor company, the debtor has 10 working days to dispute the debt by filing an application to set aside the demand or pay the debt within 15 working days.
Step 2 - Applying to the Court to place the debtor into liquidation
In the event the debt is neither disputed nor paid, then, on the expiry of 15 working days the debtor is deemed to be insolvent and the creditor can apply to the Court to place the debtor into liquidation. The onus is then on the debtor to satisfy the Court that it is solvent. If the company is unable to pay then a liquidation with a Court appointed liquidator will follow, or, the shareholders within 10 working days of being served have an ability to appoint a liquidator by a shareholder resolution.
A liquidation application can only be issued by certain persons and the order for the appointment can only be made on grounds specified in section 241(4) of the Companies Act 1993. The decision on whether the company is placed into liquidation is at the Court's discretion. The Court may only put a company into liquidation by the appointment of a liquidator if the Court is satisfied that the company is unable to pay its debts, or the company, or the board of the company, has persistently or seriously failed to comply with the Companies Act 1993, or the company does not comply with section 10 (essential requirements), or it is just and equitable that the company be put into liquidation.
The alternatives to paying a statutory demand in full
Compounding means "coming to an agreement with a creditor". The most usual form of compounding is an acceptable offer of payment by instalments. It can also be an offer of a deferred payment or a request to defer filing of a winding up proceedings.
Company Compromise (Part XIV Companies Act 1993) is an agreement between the company and various classes of creditors that give the company an opportunity to survive by avoiding liquidation and trading out of financial difficulty. In order to reach a compromise a majority in number representing 75% in value of each class of creditor voting in favour of such a resolution is required (at a meeting of creditors). Once agreement is reached, all debts are frozen and no creditor can take action against the company during the term of the compromise. The outcome could be creditors are repaid either in full or in part and over time. It is specifically a good option if the business is solid and is in financial difficulty but customers and suppliers are prepared to provide support. Find out more about Company Compromises.
Another remedy upon receiving a statutory demand is to reach a full and final settlement. However, it is always important to bear in mind voidable transactions when dealing with an insolvent company. A payment from a third party or the director or a personal guarantee are wise.
How to serve a statutory demand
A statutory demand to qualify as being served on the company either must be delivered to a person named as a director on the New Zealand Companies register, to an employee of the company at the company's head office or principal place of business, be left at the company's registered office or address of service, and in accordance with directions as to service by the Court, or in accordance with any agreement made with the company. It is recommended that the document is served by a document server. The service of a statutory demand by facsimile cannot be relied upon.
Disputing a statutory demand
If a debtor can show that a defence or a counter claim or a set-off equal to the amount claimed in the demand exists, not only will a demand be set aside but the aggrieved creditor will be ordered to pay the debtor's costs and will be no closer to collecting the debt.
A Court may set aside a statutory demand if the application is made within 10 working days of the date of service of the demand and the application was served on the creditor within 10 working days of the date of service of the demand. The Court may grant an application to set aside the statutory demand if it is satisfied that there is a substantial dispute, whether or not the debt is owing or is due, or the company appears to have a counter claim, set-off, or cross demand and the amount specified in the demand, less the amount of the counter claim, set-off or cross demand is less than the prescribed amount or the demand not to be set aside on other grounds.
A demand will not be set aside by reason only of a defect or irregulatory unless the Court considers that substantial and injustice would be caused if it were not set aside. Under section 291 of the Companies Act 1993, if a Court is satisfied that there is a debt due by the company to the creditor that is not subject to a substantial dispute, or is not subject to a counter claim, or set off, or cross demand, the Court may order the company to pay the debt within a specified period and that in default of payment, the creditor may make an application to put the company into liquidation, or dismiss the application and make an order putting the company into liquidation on the grounds that the company is unable to pay its debts.
The service of a statutory demand process can give great leverage to get paid quickly, however if a debt is disputed or the company that owes the money is not in financial difficulty the process is used at your own peril.