What to Expect with Statutory Demands

The best chance of avoiding liquidation following the issue of a statutory demand is to understand your rights and the tight timeframes within which you must act.

We recently reported on the increase in IRD-issued Statutory Demands and the possibility of more on the way as the Government’s Covid hand-outs dry up. If you find yourself served with a statutory demand, it’s essential you know the options available and the short timeframes in which you must act. It is critical that you act swiftly and decisively if you are hoping to avoid liquidation after being served a statutory demand.

What is a statutory demand in New Zealand?

A statutory demand is a request from a creditor to a debtor demanding payment for an unpaid debt. In New Zealand, a statutory demand can only be served on a company, not an individual, and must be for an amount greater than $1,000. Once a statutory demand is issued the company must pay the amount within fifteen working days or liquidation becomes a very real possibility. However, both parties have the following rights:

• The debtor has a right to claim the amount disputed
• If the amount is not disputed, the creditor has a right to be paid
• If the amount is not paid within the prescribed time, the debtor is deemed to be insolvent

Service of statutory demand on a company

If your company has been served, then your company is the debtor – the other party is the claimant or creditor. The creditor has created the demand based on the rights of the law found in the Companies Act 1993. The demand records the creditor’s claim that the debtor owes them money, and the purpose of the demand is to bring the issue between the parties to a head conclusively.

The statutory demand process

It is important to understand there are strict time deadlines relating to a statutory demand. If you wish to dispute the demand, you have 10 working days to act. If you are able to settle the unpaid amount, you must do so within fifteen working days.

Statutory Demand: 10 days to dispute the demand

If the debtor wishes to dispute the claim, then an application to set the demand aside must be made in the High Court within ten working days of it being served. If you genuinely dispute the demand, it is advisable you contact your solicitor urgently.

Statutory Demand Maturity Date: 15 days to pay

A creditor serves a statutory demand for the purpose of getting paid. Failure to comply with the statutory demand within 15 working days becomes evidence that the company is insolvent, and liquidation is the next step. As we have mentioned, we are expecting to see an increase in this process—the issuing of Statutory Demands—from Inland Revenue over the coming months.

IRD statutory demands

Typically, IRD will work closely with a debtor to see if arrears can be met. They are usually accommodating with genuine situations and have been particularly lenient over the pandemic. Despite a cooperative approach, Inland Revenue will eventually become decisive and enforce a process of either getting paid or initiating liquidation proceedings. Once proceedings have commenced, payment must be made, or liquidation will be inevitable.

What happens when a statutory demand matures?

If the debtor is unable to settle, then the creditor can use this non-payment to support an application in the High Court to appoint a liquidator. The creditor must do this within 30 working days or the evidence becomes stale and cannot be used to support an application for a Liquidation Order.

After filing in the High Court, the creditor must serve a copy of the proceedings on the debtor company, which records the date and time the matter is to be heard in the High Court. The creditor must publicly notify other creditors entitled to join the proceedings at this point. This step cannot be taken before one week has expired after serving the debtor with the application.

An application for a Liquidation Order clearly signals that the creditor means to take the issue all the way to the commercially fatal consequences of liquidation. For a company that has been served a statutory demand, this is the time to become decisive and rapidly respond to the circumstances while options still exist. The debtor has the opportunity to alter the outcome in one of four ways.

• If there is a defence to the application, then quickly engage a solicitor
• If there is no defence, then achieve settlement before the final date of lodging the Public Notice (no less than one week before the date set in Notice of Proceedings)
• If there is no defence, but there is viability within the business, appoint an Administrator
• If there is no defence, and no potential for the business, appoint a Liquidator

Why acting fast matters when served a statutory demand

The right to appoint an administrator or a liquidator is lost if action is not taken within ten working days from the date the Notice of Proceedings was served on the company.

The serving of a statutory demand on a company has potentially dire consequences. If action is not taken, the creditor can commence a series of events that has the potential to result in a terminal event for the company.

What to do if you have been served a statutory demand

The best action to take is determined by the affairs of the company. Questions to consider are:

• Does the company have a future?
• How can this issue be overcome?
• What restructuring arrangements can be made to get the business back to viability?

There is no time to waste if preservation of the business is the goal. Getting help immediately after a statutory demand is served is the smartest move in this situation. Not only will expert advice provide you with guidance and reassurance it will also afford you the chance to make sound decisions at what may be a very stressful time.

I’ve received a statutory demand, what should I do? BWA Insolvency is a team of experts with 30 years of experience in liquidations and business rehabilitation. We look at solutions for insolvency where possible, including business rehabilitation, restructuring and voluntary administration. We are here to help when you are facing difficult times. Get in touch.