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What to do if your company has been served with a statutory demand

This article was written by Alexandra McGeady, a solicitor in the litigation and disputes resolution team.

Canterbury is currently in the midst of a period of frenzied economic activity, particularly in the construction and building sectors.  However, many companies are also facing problems getting paid for their services and/or are dealing with cash flow problems.  A common mechanism used by creditors to obtain payment of debts is the statutory demand.

This article will give a brief overview of what a statutory demand is and what a company should do if it is served with one of them.  This article is no substitute for legal advice, and if your company is served with a statutory demand we suggest that you contact the disputes resolution team here at Harmans urgently to assist.

What is a statutory demand?

A statutory demand is a formal demand served on a company by a creditor seeking payment of a debt owed of $1,000 or more.

What happens if my company gets served with a statutory demand? 

If your company has been served with a statutory demand then you should record the date that the company was served.  It is then essential you act quickly, because if the statutory demand is not complied with within 15 working days of it being served, then your company will be presumed to be unable to pay its debts.  A creditor can then rely on this presumption and apply to the High Court to have your company put into liquidation. There are several options open to a company served with a statutory demand, but all are time sensitive.  In particular:

  1. If you accept the company owes the amount demanded, then you should pay the debt within 15 working days of the date of the statutory demand being served on your company; or
  2. If you are unable to pay the debt in full immediately, then you should approach the creditor urgently to discuss the possibility of a payment arrangement; or
  3. If the creditor agrees, you can provide a charge over your company property securing the payment of the debt within 15 working days of the date of the statutory demand being served; or
  4. If you dispute the debt then you must, within 10 working days of the date of the statutory demand being served on the company, apply to the High Court to have the statutory demand set aside.  
     

If you pay the amount owing and/or otherwise come to a settlement arrangement with the creditor about the debt, then the creditor should withdraw the statutory demand and confirm this in writing.   

What do I do if I dispute that the company owes the creditor some/all of the amount demanded? 

As noted above, there are strict time frames to respond to a statutory demand.  If you accept that you owe the creditor some of the amount demanded, then you should pay that undisputed portion. It is common to negotiate with the creditor about disputed debts, with a view to getting the creditor to withdraw the statutory demand. However, should negotiations fail, then you will have to file an application in the High Court to have the statutory demand set aside within 10 working days of being it served.  

The High Court may set aside a statutory demand in the following circumstances:

  1. If there is a substantial dispute about whether or not the debt is owing or is due; 
  2. Where your company has a counterclaim/set-off/cross-demand against the creditor which, when deducted from the amount in the statutory demand, results in the alleged debt being less than $1,000.  We note that amounts owed to the company by the creditor under the Construction Contracts Act 2002 cannot be used as the basis for a counterclaim or set off;
  3. If there are “other grounds” that mean the demand should be set aside, which convince the Court that the creditor company’s right to liquidate the company is outweighed by some other factor making it plainly unjust for the company to be put into liquidation.  Examples of “other grounds” that might justify a Court setting aside a statutory demand include circumstances where the majority of the company’s other creditors want it set aside to enable the company to trade out of its problems or where the creditor that issued the statutory demand has already “sold” the debt to a third party.
     

Evidence that the company can pay its debts will not usually be sufficient of itself to convince the Court to set aside a statutory demand.  This is because if the company can pay its debts, and it accepts that it owes the creditor the sum sought, then it should pay the debt at issue.

It is also important to note that if you make an application to the High Court to have a statutory demand set aside, and the Court considers that none of the necessary grounds have been made out, then the Court can immediately put the company into liquidation or order that the company pay the debt within a specified period of time. 

The statutory demand has errors in it - is that enough to get it set aside? 

The creditor can still pursue a statutory demand even if the amount owing is incorrectly stated or if the nature of the debt is incorrectly described.  The Court will only set aside a statutory demand because of defects in the form of the document where it considers that there would be substantive injustice caused otherwise.   

Conclusion 

Statutory demands are a common method for creditors to use to obtain payment of a debt.  If a company is served with one it will need to act quickly to avoid the risk of being deemed to be insolvent and facing a liquidation application in the High Court.  We suggest that you book an appointment with the disputes resolution team here at Harmans as soon as possible after being served with a statutory demand so we can advise you about your options.  

 

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