Unpaid debts can have a significant impact on the balance sheet of any business. One option where the debtor is a company is to issue a statutory demand. Statutory demands are a particularly useful tool where the debtor is a company and the debt is undisputed. But how do statutory demands work?
The statutory demand process is set out under the Companies Act 1993. A statutory demand must:
- Be in respect of a debt that is due and not less than the prescribed amount (currently $1,000.00);
- Be in writing;
- Be served on the debtor company;
- Require the company to pay a debt, enter into a compromise or otherwise reach a settlement with the creditor within 15 working days of service or such longer period as the Court may order.
Once you serve a statutory demand on the debtor, the debtor has 15 working days to resolve the debt as set out above. If the debtor wishes to dispute the statutory demand, they have 10 working days from service of statutory demand to apply to the court to set it aside. The application to set aside the statutory demand usually commits the debtor company to legal advice and costs and so particularly where the debtor’s legal costs are likely to exceed the undisputed debt the debtor company may simply opt to pay their debts. However, equally there is a risk that this could commit the creditor to the legal costs of the set aside application. Therefore, a statutory demand is usually only an effective recovery tool where there is no dispute as to the amount owed.
Generally, if the debtor does not apply to set the statutory demand aside and does not comply with the 15 working day period then the debtor company is deemed insolvent. The creditor can then apply to the Court to have the debtor company placed into liquidation within 30 working days of the last date for compliance with the statutory demand. If the debtor company is genuinely insolvent then this may bring the matter to a head. However, if the debtor company is simply being unresponsive or belligerent it may lead to some movement on their part for fear of their solvent company being put into liquidation.
A statutory demand can be a powerful tool for recovering undisputed debts against a debtor company. Because the onus and costs of the statutory demand process initially fall on the debtor company it can often be a more cost-effective and efficient tool than other recovery options such as proceedings. However, while it can be simpler than other methods and reduce the need for lawyers and their costs it will not always be the most appropriate option and laypersons will need help in avoiding mistakes in complying with this process. For this reason professional advice should still be sought and quickly, particularly where you are the recipient of a statutory demand.