A statutory demand is more than a request for debt to be paid. As the Court of Appeal once described it, "if payment is not made, the demand fulfils a secondary purpose, namely to provide a basis upon which the debtor's inability to pay its debts as they fall due may be proved, if liquidation proceedings were brought".
In this way, a statutory demand is often the first step on the path for more serious proceedings - it is a notice that determines both whether a debtor can pay, and if further steps will be required. If debtors do not take action quickly, they can find themselves in court or having a liquidator appointed to realise the assets of their business.
However debtors may be able to dispute the notice if it was not served upon them properly. In this article, we will outline when this can occur.
What are the key components of a statutory demand?1. A statutory demand must be served in writing and by hand
Under section 289 of the Companies Act (2(b)), the law dictates that a statutory demand must be served upon a debtor in writing. It must also "be in respect of a debt that is due and is not less than the prescribed amount".
That prescribed amount must be more than $1,000, and it must be served by hand (as opposed to via fax, email or physical post). If you believe you were served with a demand that was not laid out in writing, there may be grounds to dispute the process in court.
2. A statutory demand must be served to the correct party
The Companies Act requires that creditors serve a statutory demand "on the company". However, there are several ways of doing this.
- Serving the demand upon the director of the debtor company directly (as named on the New Zealand Companies Register).
- Serving the demand to an employee at the company's principal place of business.
- Serving the demand to an employee at the company's registered office.
If none of these options are practically achievable, the creditor can deliver the demand to an employee or a shareholder through the court system. Any other method of delivery could be grounds for dispute, leading to a protracted legal battle.
3. A statutory demand needs the appropriate details
A statutory demand must contain all of the following information:
- The total amount of debt owing.
- When payment must be made (for example, within 15 working days).
- Contact details of the creditor or who to get in touch with to dispute the demand.
- The consequences if the debtor ignores the demand.
- A clear right of dispute with a 10 working day time frame.
Has a creditor served your business with a statutory demand correctly?4. A statutory demand must follow due process
The Auckland District Law Society (ADLS) has noted that in the past, courts looked down on the use of statutory demands strictly for debt collection. However, the ADLS believes debt collection is the realistic primary function of this document.
Where there can be confusion or dispute is when a creditor issues a statutory demand despite knowing the debtor is unable to meet its repayment obligations or negotiations on this are ongoing. Traditionally, a creditor issues the statutory demand after formally (or informally) addressing the debt and presenting a formal demand. If these are not met with a satisfactory outcome, a statutory demand is typically the next step.
The ADLS recommends ensuring due process is followed when issuing a statutory demand, as if set aside it can be a costly process.
If a statutory demand has not been properly served, there can be grounds for dispute.What do you do if a statutory demand is improperly served?
If a creditor fails to issue a statutory demand as per the Companies Act guidelines, there can be grounds for dispute. This can prolong the initial 15-day time frame for action from the debtor, while also potentially instigating further court proceedings, leading the court to set aside the statutory demand.
This will also be the case if the debtor has a counter-claim, defence or set-off that is equivalent to the debt outlined in the statutory demand. In this case, the creditor may also have to pay court costs incurred for both parties.
Dealing with a statutory demand is stressful for any business, but debtors must act swiftly - within 10 working days if they want to dispute, and within 15 working days if they do not. Either way, it is crucial to act in the right way and identify whether the demand has been properly served.
This can be complicated, and often requires professional aid. At McDonald Vague, our team has decades of experience helping New Zealand businesses deal with every step of the corporate debt and insolvency process. Contact our experts to find an easier way to deal with debt.