How Statutory Demands enforce debt payment

We speak to Philip Macey of our Taranaki office about the use of Statutory Demands to recover debt and their role in liquidations…

Time to read: 4 mins

The recent release of New Zealand’s annual liquidation statistics shows what most have been expecting – an increase in the number of struggling businesses. Until last year, liquidations had almost exclusively trended downwards since a high of 3,433 in 2009 during the Global Financial Crisis. In 2022 they edged up following the height of the Covid-19 pandemic, which saw:

  • 1,448 liquidations in 2020
  • 1,380 liquidations in 2021
  • Followed by 1,556 liquidations in 2022

With many businesses facing multiple and ongoing pressures, the rising trajectory may well continue and a key part of liquidation is the issuing of Statutory Demands by creditors. Let’s review the process around serving a Statutory Demand…

A legal requirement to pay debt

When a company owes a due debt of $1000 or more, creditors can issue it with a Statutory Demand (also known as a stat demand or Section 289 notice) under Companies Act 1993 legislation.

If your company receives a Statutory Demand, you should seek specialist insolvency advice from either your legal or accounting representatives. “As this is a legal process, a delayed response or incorrect information supplied can have a negative impact on the outcome,” says Baker Tilly Staples Rodway Taranaki director and licensed insolvency practitioner Philip Macey.

The Demand must be served in writing to the debtor, meaning a court-appointed person will deliver it to them – or their office – in person. The debtor must pay the amount owing within 15 working days unless the court orders a longer compliance timeframe. After that period, the company is presumed to be unable to pay its debts unless the contrary is proved, and the creditor can then apply to have the company put into liquidation. 

When the Demand has been served, the debtor must do the following to the “reasonable” satisfaction of the creditor:

  • Pay the debt or
  • Enter a creditor compromise as per Part 14 of the Act or
  • Reach a settlement with the creditor
  • Give a charge (security) over its property to secure payment of the debt

If debtors dispute the issuing of the Statutory Demand, they can apply to the high court to have it set aside if they can satisfy it that:

  • There is a substantial dispute about whether the debt is owing or due, or
  • The company appears to have a counterclaim, set-off, or cross-demand, or
  • The Demand ought to be set aside on other grounds

Care must be taken though as any request to set aside a Statutory Demand must be made within 10 days of receiving it, not the 15 days allowed for payment. This does not entitle the debtor to extra compliance time, but they may be granted an extension during the court hearing.

A Statutory Demand is generally only issued if all avenues for recovery of the debt have been exhausted and is seldom issued without notice.  

“Our recommendation would be that debtors engage insolvency specialists well before a Statutory Demand is likely to be initiated, says Philip. “Insolvency specialists will be able to give advice on the debtor’s ability to recover financially as well as provide assistance with negotiation with the creditor(s).”

For companies that cannot satisfy a Statutory Demand, the likely next step is a formal application to have the company put into liquidation. “Companies can recover from a Statutory Demand, and the avenues of creditor compromise and voluntary administration provide pathways for this recovery.”

A creditor compromise is a formal process whereby creditors of the company agree a repayment plan that allows the company to continue trading. The goal is to achieve a better outcome for creditors than would have been achieved had the company been liquidated.

A voluntary administration is where the company directors appoint an insolvency specialist to manage the company’s affairs and initiate its recovery if possible. If successful, it is then returned to control of the owners. In both cases there are detailed procedures to follow that require legal and accounting support from professionals. 

For more advice, contact our insolvency specialists (below) for in-person or remote assistance. 

DISCLAIMER No liability is assumed by Baker Tilly Staples Rodway for any losses suffered by any person relying directly or indirectly upon any article within this website. It is recommended that you consult your advisor before acting on this information.

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