What is a Statutory Demand, and What can it Mean for your Business?

A statutory demand is a means of formal demand served by a creditor seeking payment of a debt that is an excess of $1,000 or more.

We hear mixed messages about whether the world will face a recession, whether dark clouds are hanging over the economy, and how some businesses are struggling to get back on top of things following lockdowns and a downturn in income. In this climate, we, unfortunately, do see an increase in more formal debt collection activity such as statutory demand. 

Whether more challenging financial times will descend on the economy may be location or business-type specific.  It is essential, though, that the director is aware of their potential liabilities if they face financial difficulties.  So often, we hear people telling us they thought it would go away or they could keep trading and deal with things themselves.  We know that tough financial times and the inability to pay bills and keep your head above water do not usually resolve without some help or significant changes to the business and company operation.

Statutory Demand

If a statutory demand is made on a company, the director/s of the company are being made to prove the solvency of the company or pay debts that are due. 

We are commonly contacted by businesses that have received a statutory demand from the Inland Revenue Department (IRD) due to owed funds.  However, the issuing of a statutory demand is not limited to IRD and may also be served by a private party owed money by a business or company. 

Before a company is put into liquidation, a statutory demand must be made for the debt to be repaid – to give a company an opportunity to avoid the potential rumination of a business. If we listen to the economists and business forecasters, they continue to predict that cash flow will be tight for Government and some businesses, and for some it already is.  Those companies that don’t deal with debt and look after all their creditors in the spirit of the Companies Act 1993, do so at their peril.

What Criteria Need to be Met to Issue a Statutory Demand?

• The NZ Companies Act 1993 (the Act) provides that a statutory demand must be in respect of a debt that is due, meaning the money must be owed to a party and have gone past the terms of trade without being repaid or a payment plan put in place.
• A judgment doesn’t need to be obtained before the service of a statutory demand.
• The debt must, however, be due and presently payable as of the date on which the statutory demand is served, in the sense that the creditor is entitled to immediate payment.
• The statutory demand procedure is available only to a creditor whose debt is equal to or more than the prescribed amount, which is currently $1,000.
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What Should Recipients of a Statutory Demand do When one is Served on Them?

• The first thing is to act and act quickly.  The clock is ticking when a statutory demand is issued, and time moves fast.
• First, speak to your accountant to determine any immediate options to pay the debt.
• Speak with a licensed insolvency practitioner who will give expert, practical advice, and options.
• The sooner a business owner faces the issues they may have, the more opportunity they have to resolve matters before a liquidator or receiver is appointed to take control of the company outright.

One of the most significant issues we have when contacted by a business in financial distress is they have left it too late to act and deal with the demand in a responsive matter; whatever financial difficulties you are facing, the sooner you address them, the sooner you can be free of the burden.