A statutory demand is a legal demand issued against a company, demanding that the company pay a debt due within fifteen working days
Section 289 of the Companies Act 1993 covers the issuing of the demand. Section 290 covers the challenging of the demand.
Once a demand is issued, the debtor has ten working days to go to Court to challenge the demand or fifteen working days to pay. If they do not do so, on day sixteen the creditor can go to Court to seek an order to place the company in liquidation.
Place of Issue:
The demand can be served at the company’s registered office, the regular place of business, or to a director. The demand cannot be served by fax, email or such. It must be physically served.
The debt must be greater than $1000 and cannot be the subject of a dispute. There are three common issues that arise from the issuing from a statutory demand:
- The Challenge:
Once issued, a statutory demand, left unchallenged for ten working days, becomes proof of the company’s insolvency and this evidence, presented before a judge, can be used to liquidate the company. It is important then, for companies who receive a statutory demand to either settle with the creditor or to challenge the demand in Court. To challenge in Court they must lodge a statement of defense with the High Court, covered under Section 290 of the Act. To succeed they must show that either the debt is disputed, or that the company has some counterclaim against the creditor. If they are successful the petitioning creditor will usually incur substantial costs awarded against them.
- The Dispute:
There is a lot of case law on what constitutes a dispute. However, the debtor simply asserting a dispute will not suffice. The debtor must bring evidence to Court that the dispute is genuine and substantial. Further, if the dispute is over only part of the demand, then the debtor must pay the undisputed portion, or they face getting caught by the hooks in Section 290.
- The Trap:
An unsatisfied statutory demand may lead to the liquidation of the company. It depends on the determination of the creditor pursuing the claim. However, depending on Court backlogs, the liquidation call may take many months to get before a judge and the company ends up in the hands of a liquidator. Challenging a statutory demand is very risky, for both parties. If the challenge is successful the creditor will get costs awarded against them. If they lose, the judge has the discretion to declare that the company is insolvent, and order the immediate liquidation of the company
An Example of the 290 Trap:
Superfurn (New Zealand) Limited, a furniture retailer, was issued with a statutory demand by one of its wholesalers, for US$42,000. Superfurn challenged this demand in Court, relying on Section 290. Unfortunately the judge found that the debt was not, in fact, disputed, and ordered Superfurn to pay the debt. When, one week later they had not done so, the company was promptly placed in liquidation. Typically, a business with an expired statutory demand will be placed into liquidation by the Courts once the petitioning creditor brings an action. The unsatisfied statutory demand is proof that the company is insolvent.