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.

Economic recap

With the third quarter of 2022 inflation results coming in at 7.2 well above a number of economists and banks predictions of 6.5 we will likely be seeing jumps in the OCR at a steeper rate than expected with the next rate rise projected to be 75 – 100 basis points up from the prior estimation of 50 points. This will keep the pressure on homeowners with mortgages and businesses with lending as consumers role off fixed rates. With inflation well above the target levels of 1%-3% business continue to struggle on with constrained capacity and labour issues.

Leading into the Christmas period we will no doubt see the seasonal jump in retail sales followed by regional growth as holiday makers vacate the city centres for the traditional January break away. How this will affect insolvency figures will no doubt follow the usual course as businesses wind down as they head into Christmas and courts close for the break we will see the usual lower Dec and Jan figures. The question will be in the lead up months of Oct and Nov will the heightened levels seen in the last 3 months carry on, time will tell.

Company Insolvencies – Liquidations, Receiverships, and Voluntary Administrations

Corporate insolvency appointments in September saw the usual drop for this time of year but appointments for the month remain above the past two years, likely a result of elevated winding up applications from the past two months beginning to flow through with a chance to remain elevated to the end of the year.

What we did see during the month was the continued elevation in Receivership appointments at 9 however total appointments remain below the 2021 levels at this stage.

Winding Up Applications

September saw a continuation in the gradual drop-in total appointments, but the levels remain in the higher end of appointment in the 2022 year when compared with earlier months. From the above graph you can see the drop was directly attributable to the IRD drop in winding up applications. This is likely in part due to the end of year wind down as IRD collection slow in the lead up to Christmas and won’t kick off again till February.

The above figures are however difficult to compare to August/September 2021 due to the lock down that took place at that time.

Personal Insolvencies – Bankruptcy, No Asset Procedure and Debt Repayment Orders.

Personal insolvencies have seen a lift on past months numbers largely related to Debt Repayment Orders and No Asset Procedures. While September 2022 is above the 2021 figures these are not an accurate comparison as we were in lockdown at this time last year.

If you want to have a chat about any points raised or an issue you may have you can call on 0800 30 30 34 or email This email address is being protected from spambots. You need JavaScript enabled to view it..

Debt collection actions are gaining momentum. Winding up proceedings are on the rise. There is a climb in IRD initiated winding up proceedings.

Many NZ companies have been impacted by Covid-19 and are facing insolvency. To be insolvent means one of two things:

• Debts can’t be paid when they’re due.
• Total debt is more than the value of all assets.

The Commissioner of Inland Revenue has increased debt recovery actions. The CIR is able to issue a statutory demand as a step necessary to advance a proceeding against a company.

Ignorance Isn't Bliss

It is recommended for any business struggling to meet tax arrears that negotiations are entered into promptly to avoid a potential winding up proceeding.

Taxpayers are required to pay their tax in full and on time. Failure to do so leads to late payment penalties and interest. These charges compensate the Commissioner for the loss of use of the money and act as a deterrent to encourage taxpayers to pay the correct amount of tax on time.

If your company receives an IRD formal demand, doing nothing really isn’t an option. Inaction will limit your options and virtually guarantees insolvency. You can also be held personally liable for failing to pay PAYE.

In certain situations the Commissioner may be able to provide assistance to taxpayers if they are not able to pay on time, or if the imposition of penalties and/or interest is not appropriate. Depending on the circumstances the Commissioner may also agree to write off or remit amounts owing (so they do not need to be paid), or agree that the taxpayer enters into an instalment arrangement (so the amount is paid over time rather than immediately).

The IRD seek open communication and are more willing to consider instalment arrangements when directors have been upfront from the start. Company directors that bury their heads in the sand and have no plans in place may face less leniency and liquidation proceedings.

The IRD can find directors liable for their company’s tax under general insolvency law. The law also says if a company agreement purposefully leaves it unable to pay a foreseeable tax liability, a director can be personally liable.

In the first instance the IRD will try for a settlement. This is your chance to negotiate terms and arrive at a compromise that allows you to stay in business while the IRD claims their tax. If you can reach a repayment agreement, the IRD won’t take the matter further.

If you’re unable to reach a compromise, the IRD will issue a formal demand, followed by a statutory demand and then issue an application for putting the company into liquidation (winding up proceeding) if you don’t settle the demand. If you do nothing the company will be placed into liquidation by the High Court.

Relief Options

The IRD offer relief options for companies with viable businesses and have been supportive of businesses that have shown clear impacts of Covid-19 on their business.

Financial relief can be granted when a taxpayer cannot meet their payment obligations. The process to apply for financial relief or an instalment option is here.

The Commissioner is open to instalment arrangements towards tax arrears. Splitting up what you owe over weekly or fortnightly payments can make it easier to repay your tax debt.

The CIR may agree to collect the amounts owing over a period of time through an instalment arrangement, or to not collect the amount owing (that is, write off the amount), or a combination of the two options (that is, write off some of the debt and enter into an instalment arrangement for the remainder). An amount may be written off if collecting it would place the taxpayer in “serious hardship”.

Where an amount is considered irrecoverable, the Commissioner has the discretion to write it off. The Commissioner may write off amounts if collecting the amounts owing is considered to be an inefficient use of Inland Revenue’s resources.

Certain penalties may be remitted when an event or circumstance has occurred which is beyond the taxpayer’s control.

Interest or certain penalties may be remitted if to do so is consistent with the Commissioner’s duty to collect the highest net revenue over time.

Voluntary Liquidation

One possibility for meeting the IRD formal demand is voluntary liquidation. This gives the director and shareholders a small element of control over liquidation proceedings. If liquidation is inevitable then the opportunity to voluntarily appoint a liquidator is usually required within 10 working days of the winding up proceeding being served so acting promptly following the statutory demand (or earlier) is advised.

If you do nothing or you can’t reach a settlement, the IRD can apply for their preferred liquidator or Official Assignee and manage your affairs and liquidate your company. In this instance the Court will appoint the IRD’s liquidator. As company director you have less control over the process and must cooperate with the Court appointed liquidator or Official Assignee at all times.

Deciding between involuntary and voluntary liquidation may not seem like much of a choice. Appointing a licensed insolvency practitioner that you believe understands you, your business and your industry, and who can consider your interests while satisfying the IRD’s demands provides more certainty of the likely outcomes. Your liquidator can apply specialist skills to remove some of the sting from this traumatic process.

Statutory and formal IRD demands are outside threats to your business. There are just as many risks that can come from within, so how do you protect your business from those?

If your company is experiencing financial difficulty, download our free guide for NZ Companies to discover your different options.

WHAT SHOULD YOU BE CONSIDERING NOW?

1. Consider the risks of trading insolvently and how directors can be held personally liable.
2. Negotiate an instalment plan with IRD for historic arrears and have a plan in place. The Inland Revenue have pressure to maximise the recovery for the Commissioner under the Tax Administration Act. They are willing to work with companies that communicate early on and this can save further interest/penalties.
3. Assess the viability of the business and its future. Prepare a cashflow forecast.
4. Where cashflow is an issue, consider compromises with creditors leading to some debt forgiveness and time payment arrangements or voluntary administration.

If the company has lost too much from the impact of Covid19 and the prospects are that the company has minimal ability to repay creditors nor has a financial source to fall back on to offer a better position than what liquidation holds, then liquidation sooner may be the better option. Continuing to trade with knowledge of insolvency is a risk for the directors.

WE ARE HERE TO HELP
Our team are happy to discuss the options available for struggling companies and how to manage personal guarantees and personal exposure. Contact This email address is being protected from spambots. You need JavaScript enabled to view it.

If your company needs some advice on the restructuring options or is likely facing the prospect of liquidation, we are happy to advise on the process and consequences.