For many businesses, receiving a statutory demand from the Inland Revenue Department (IRD) can be an alarming and stressful experience. It signals that the company has unpaid tax obligations and that the IRD is taking formal steps to recover the debt. If left unaddressed, this can quickly escalate into a winding-up application, resulting in the company’s liquidation. This article outlines what businesses should do when served with a statutory demand by the IRD and how to respond when an instalment proposal is rejected.
Understanding a Statutory Demand
A statutory demand is a formal notice issued under section 289 of the Companies Act 1993, requiring a company to pay a debt within 15 working days. Failure to comply creates a presumption of insolvency, allowing a creditor, including the IRD, to apply to the High Court to wind up the company.
When an Instalment Proposal is Rejected
If the IRD declines a company’s proposal for an instalment arrangement and advises that a statutory demand and subsequent winding-up proceedings will follow, the company must take decisive action. The rejection often indicates that IRD has lost confidence in the company’s ability to meet its obligations or that past compliance history has influenced its decision.
At this stage, directors should:
• Seek Professional Advice Immediately – Insolvency practitioners can explore restructuring options, negotiate further with IRD, or assess alternative financing solutions.
• Consider a Voluntary Administration or Creditor Compromise – Under Part 15A of the Companies Act 1993, a voluntary administration or compromise with creditors may provide breathing room to restructure debts.
• Avoid Personal Liability Risks – Directors have duties under the Companies Act 1993, including avoiding reckless trading. Continuing to trade while insolvent could expose directors to personal liability.
Immediate Steps Upon Receiving a Statutory Demand
Time is of the essence when dealing with a statutory demand. Here’s what businesses should do immediately:
1. Review the Demand Carefully – Ensure the details, including the debt amount, are accurate. If there are discrepancies, seek legal or insolvency advice promptly.
2. Assess the Company’s Financial Position – Can the company pay the debt in full? If not, are there alternative arrangements available?
3. Respond Within 10-15 Working Days – The company must either pay the debt (within 15 working days), negotiate a settlement (within 15 working days), or apply to the High Court to set aside the demand on valid grounds (within 10 working days) (e.g., a genuine dispute over the debt or a counterclaim exceeding the debt amount).
Failing to act within this period allows the IRD to commence liquidation proceedings, which can be extremely difficult to halt once initiated.
Act Now—Time is Limited
The moment a statutory demand arrives, or an instalment proposal is rejected, directors must act swiftly. The sooner expert insolvency advice is sought, the more options remain available to preserve the business or mitigate potential risks.
If a statutory demand is ignored judgment will be gained and then under the Companies Act 1993, the creditor, in this case the Inland Revenue Department (IRD), can serve the company with a winding-up proceeding to put the company into liquidation.
A company in receipt of a statutory demand from IRD has a limited window to appoint a voluntary liquidator of its choice if paying the debt is not an option and the company is not viable to continue (without the support and a structured instalment plan with IRD). Specifically, the shareholders can pass a resolution to voluntarily appoint a liquidator within 10 working days from the date of service of the winding-up application. If the company fails to appoint a liquidator within this timeframe, any subsequent appointment of a voluntary liquidator would be deemed to be an invalid appointment unless the consent of the applicant creditor (in this case, IRD) is gained first and the proceedings are withdrawn. The usual process is the company needs to await the Court's decision to appoint a liquidator.
If your business is facing tax debt pressure from IRD, don’t wait until it’s too late. Contact us today for expert assistance and a confidential discussion on your options. Our team of experienced insolvency specialists can assess your situation and help develop a tailored strategy. Whether it’s negotiating with IRD, restructuring, or managing voluntary administration, we provide clear, practical guidance to safeguard your business and your interests.