When a statutory demand has been served on a debtor, there are six main ways to respond. Which is going to work for your business?
Statutory demands (or Section 289 notices) pose a big threat to New Zealand businesses. These are written requests from a creditor for a debtor to pay overdue debt, with a payment term of 15 working days.
A creditor can serve a statutory demand if formal demands for payment or debt collection services have not proven effective and the debt is not disputed. It will contain details such as:
- How much is owed.
- The repayment time frame.
- Contact details for the creditor.
- Potential consequences.
- Details for a right of dispute within 10 working days.
When a debtor is properly served with a statutory demand, the risk of winding up proceedings or even legal action becomes very real. There are six main courses of action when this occurs - read on to find your best course of action.
1) Pay the debt in full
If the debtor is able, paying the owed funds within the designated time frame is the fastest and simplest way to resolve a statutory demand. Debtors can also offer assets as security in order to improve their situation - a combination of security and a payment plan may be enough to satisfy the creditors.
Debtors should ensure this is done within the period outlined in the statutory demand, 15 working days.
2) Reach a compromise, offer security or compound the debt
Under Part 14 of the Companies Act 1993, debtors can enter a creditors compromise through a formal process. Outside of this, they may try and engage creditors in an informal compromise, offer security as above or compound the debt.
- A formal compromise is a binding agreement and considers all creditors by class. A successful compromise will allow the company in debt to continue operating. It must be approved by a majority in number representing 75 per cent in value of the creditors (who vote on the matter).
- An informal compromise often utilises funding sources not available through the liquidation process. If the company eventually does face liquidation, there can be some risk of clawback if certain creditors have been preferred.
- A compounding of debt is a mutual arrangement between the creditor and debtor to discharge the initial debt obligation, and establish a new one in its place, often involving assets used as security.
If any of these options are pursued, the creditor must approve of the method and the potential outcome. Debtors should try and facilitate this within the 15 working day period.
3) Dispute the debt
By the time a creditor serves a statutory demand, there should be no dispute over what the debtor owes. However, if there are further issues, debtors can make an application to set aside the statutory demand within 10 working days of receiving it.
From here, courts may choose to set aside the demand or accept a counter-claim or cross-demand. If there is a defect in the demand that causes injustice to the debtor (for example, a gross misstatement of the amount owing), the courts may take this into account.
4) Debate whether the statutory demand was properly served
Creditors must follow a specific process when serving a statutory demand.
- It must be served upon the debtor in writing.
- It must be delivered to either the company's registered office, principal place of residence or immediately to the director.
If the debtor feels a creditor served the demand incorrectly, there may be further grounds for dispute.
5) Initiate a shareholder-appointed liquidation
Debtors can take this proactive measure to avoid costs to the creditor by entering voluntary liquidation within 10 working days of receiving a winding up proceeding. This time period is currently under review and may be removed. An independent, shareholder-appointed liquidator will realise the company's assets and pay down debt.
This can result in one of three processes:
- The business closes and assets are sold.
- The business is sold to a third party as a going concern.
- The business is restructured.
6) Do nothing
If debtors do nothing to address or dispute a statutory demand and do not pay the debt, the next step is typically legal action. Within 30 working days of a failure to comply, the creditor can formally apply to the High Court to put the debtor company into liquidation.
An affidavit of service of the statutory demand will be filed, alongside an application for the appointment of a liquidator - typically referred to as a winding up application. However, even at this late stage, debtors can repay the debt or advance a compromise (with an adjournment granted by the court for creditors to consider it) and avoid further action.
A creditor- or court-appointed liquidation can be set aside or disputed, provided there is enough evidence. This can help the debtor avoid court proceedings, but it still has to pay the debt. If debtors cannot set aside the applications, the court will appoint a liquidator that will take control in the same way it would during a shareholder-appointed process.
Get ahead of your debts
When served properly with a statutory demand, the consequences of inaction can be severe and long-lasting. To find the best course of action for your business, speak to the insolvency experts at McDonald Vague.