I am often asked to advise both creditors and debtors on statutory demands, and so in this article, I briefly comment on some of the more fundamental issues for creditors and debtors to be aware of. A “statutory demand” is a written demand made by a creditor in respect of a debt owing by a company and, if used correctly, can be a very effective way of encouraging a company to pay a debt. The demand itself is made pursuant to section 289 of the Companies Act 1993, and is often effective because if a debtor company fails to comply with the demand within 15 working days of being served, the creditor is then entitled to make an application to put the debtor company into liquidation. There are however strict limitations on the way in which a creditor can use the statutory demand procedure, including: (a) the demand should not be used as a “debt collection” mechanism, rather it should be used to prove the insolvency of the debtor company; (b) the debt that the demand relates to must be $1,000 or more; (c) the debt must be due and owing at the time the statutory demand is issued; (d) the debt must not be substantially disputed; (e) the demand must be in writing and clearly identify the debt; and (f) the demand must be served on the debtor company correctly. For a company that has been served with a statutory demand, it can defend the demand by seeking that the Court set it aside on various grounds, for example, that there is a substantial dispute that the debt is owed. In order to do so however, timeframes are strict in that it must make an application to the Court within 10 working days of being served with the demand. When it comes to the statutory demand procedure, there are usually a number of legal issues to consider. Accordingly, if you are considering issuing a statutory demand, advice should generally be sought before doing so. In particular, one of the more important points for a creditor to remember is that improperly using the statutory demand procedure, such as where the creditor knows the debt is substantially disputed, can amount to an abuse of process, and ultimately result in the demand being set aside, with likely cost consequences for the creditor. Similarly, if your company has been served with a statutory demand, advice should be sought immediately. Failing to comply with the demand or defend it within time may entitle the creditor to make an application to put your company into liquidation.
