What is a statutory demand?
A statutory demand is a special type of demand that creditors can make against companies under section 289 of the Companies Act 1993 (Act).
Who can make a statutory demand?
A creditor of a company can make a statutory demand.
A creditor is defined as a person who would be entitled to claim in a liquidation of the company and, for the purposes of statutory demands, includes a secured creditor (section 240(1)).
A creditor can make a statutory demand directly or through an authorised agent. It is best practice to have a statutory demand issued and signed by the creditor’s solicitor.
What companies can receive a statutory demand?
The following companies can receive a statutory demand:
- A New Zealand company registered or re-registered under the Act.
- An overseas company that can be put into liquidation under the Act.
- An association. This is defined to include a body corporate, a partnership, and an unincorporated body of persons.
- Any other body corporate to which Part 16 of the Act applies under any other enactment.
To what debts can a statutory demand relate?
The debt must be due and owing by the company. This is an important requirement. If a debt is not due or owing, the company may apply to the High Court to set aside the statutory demand.
The debt cannot be less than the prescribed amount. This is currently set at $1,000.
What form must a statutory demand take?
There is no set form for a statutory demand. However, it must
- be in writing. This does not mean a physical printed document is required, although that will suffice. The Interpretation Act 1999 defines writing to mean, “representing or reproducing words, figures, or symbols in a visible and tangible form and medium (for example, in print).” This definition includes writing in electronic (non-physical) form;
- be served on the company. Service is discussed further below; and
- require the company to do one of the following within 15 working days of the date of service, or such longer period as the Court may order:
- Pay the debt.
- Enter into a compromise under Part 14 of the Act or otherwise compound with the creditor.
- Give a charge over its property to secure payment of the debt, to the reasonable satisfaction of the creditor.
How is a statutory demand served on the company?
A statutory demand is not generally considered to be a legal proceeding for the purposes of the Act. This means it can be served on a New Zealand company in accordance with section 388 of the Act, which allows service on a company by:
- by delivery to a director, or to an employee of the company at the company’s head office or principal place of business. Delivery includes handing the document to the person, or, if the person refuses to accept the document, bringing it to the attention of, and leaving it in a place accessible to, the person;
- by leaving it at, or posting it to, the company’s registered office or address for service;
- in accordance with an agreement made with the company;
- by delivering it to a box at a document exchange that the company is using at the time. Receipt is deemed to occur 5 working days, or any shorter period as the court may determine in a particular case, after it is posted or delivered;
- by sending it by facsimile machine to a telephone number used for the transmission of documents by facsimile at the company’s registered office, address for service, head office, or principal place of business. Receipt in this case is deemed to occur the next working day; or
- by emailing it to the company at an email address that is used by the company. Like fax, receipt is deemed to occur on the following working day.
Note that while service by fax and email is technically allowable, the statutory demand must be addressed and sent properly. This has been interpreted to mean appropriately, rather than just correctly.
To avoid any uncertainty as to whether email service is sufficient, best practice would suggest effecting service by delivery of the statutory demand at the company’s registered office or address for service, especially considering the modest cost and relative ease of doing so.
What happens after service?
Once the debtor company is served with a statutory demand, the 15-working day time period within which the demand must be remedied commences. That period can be extended by order of the High Court on an application to set-aside the statutory demand.
There is another statutory time period that commences from service: the period within which the debtor company can apply to the High Court to set aside the statutory demand. That period is 10 working days. This timeframe cannot be extended.
When can a set aside order be granted?
The High Court may grant an order setting aside a statutory demand if it satisfied that (per section 290(4)):
- there is a substantial dispute whether or not the debt is owing or is due. If a statutory demand is issued for a debt about which there is a substantial dispute, the High Court can order the demand to be set aside and costs will likely follow. This is why statutory demands should only be used for undisputed debts, as determined by a solicitor;
- the company appears to have a counterclaim, set-off, or cross-demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross-demand is less than the prescribed amount; or
- the demand ought to be set aside on other grounds.
A defect in a statutory demand, including a material misstatement of the amount due or misdescription of the debt, will not justify a set aside order unless substantial injustice would be caused if the demand were not set aside.
When will the debtor be presumed unable to pay its debts?
If there is no set aside application and the demand expires unremedied, the company will be automatically presumed to be unable to pay its debts.
This presumption will continue until the date 30 working days after the last day for compliance with the demand. After that 30-working day period, the statutory demand will be inadmissible as evidence that a company is unable to pay its debts (per section 288(1)).
What is the relevance of a company being unable to pay its debts?
The presumption that a company is unable to pay its debts is significant because, under section 241 of the Act, a creditor can apply to the High Court for an order appointing a liquidator to a company when it is unable to pay its debts.
An expired statutory demand creates a rebuttable presumption that a statutory ground exists for the appointment of a liquidator to the company. The presumption is rebuttable because it will remain open to the debtor company to prove, on the balance of probabilities, that it can, in fact, pay its due debts.
If you have a question about statutory demands or the liquidation process generally, or require other insolvency or debt recovery related legal services, get in touch with our expert team.