Statutory demand notices – a useful tool with benefits and risks

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Statutory demand notices are commonly used as a helpful tool to create leverage to collect undisputed debts.

They were introduced under the Companies Act 1993 and were originally designed to prove that a company which owes a debt is insolvent/unable to pay. There are a few strict requirements as to content but no set format for the demands so they can often just look like an informal overdue statement. Despite the unassuming look of these documents, statutory demands can have significant legal and financial implications for both the issuing party and the company on the receiving end.

Business people handshake

Basically, the demand requires payment of a debt over $1,000 which a creditor believes is undisputed. The notice must set out that the company has 15 working days to make payment or enter into an arrangement with the creditor. However if the company disputes the debt it only has 10 working days to apply to the High Court to set it aside. That time period is not included in the notice and is often missed by unsuspecting business owners.

If the company doesn’t apply to set the demand aside, pay the debt, or enter into an arrangement with the creditor it is deemed insolvent. The lack of compliance with the statutory demand can be used to support an application to liquidate the company in the High Court.

Using Statutory Demands

If you have a debt which is clear and undisputed (or undisputable) then statutory demands can be useful and cost-effective tool to recover the debt. They are far quicker, cheaper and easier to issue than formal court proceedings. If your invoice/debt is unpaid it is possible that you are not the only unpaid creditor and you may just be the least “squeaky wheel”. The statutory demand notice may jump your debt to the front of the queue for payment due to the serious consequences of non-compliance.

However, if there is even a sniff of a dispute there can be hefty consequences for misusing the statutory demand process. The Courts are unsympathetic to creditors who issue statutory demands when they are aware the debt is disputed. This can result in the demand being set aside and legal costs awards against the creditor. It is important to consider possible disputes/ other legal issues before deciding to use a statutory demand. Often it is best practice to make an informal demand in writing first – as any genuine dispute should be disclosed at that stage.

The Courts are unsympathetic to creditors who issue statutory demands when they are aware the debt is disputed. This can result in the demand being set aside and legal costs awards against the creditor.

We recommend that you talk to your lawyer and have them issue the statutory demand on your behalf. We regularly see statutory demands issued incorrectly by individuals and debt collectors which can put the company at serious risk of costs which can often eclipse the debt itself. Your lawyer will ensure that the minimum legal requirements are met and that you don’t open yourself up to the consequences of using a statutory demand in the wrong circumstances. If your terms and conditions are comprehensive and up to date, then the cost of issuing the demand can usually be included in the demand itself.

If there is a genuine dispute over the debt, or part of the debt, your lawyer will also be able to advise you about alternative options for collecting debts including through the Courts.

I’ve received a statutory demand – what should I do?

If you have received a statutory demand notice it will likely be served on the company’s registered office or a director. Though it might not look like a formal court document, it will refer to the Companies Act and require the company to pay a debt within 15 working days. Time is of the essence. You should immediately phone your lawyer and get a copy of the demand to them. If there is a genuine dispute (and you don’t want your company to be placed into liquidation) then you will need to act fast.

Often your lawyer will be able to get the demand withdrawn if there is a legitimate dispute. However, if the person who issued the demand refuses to withdraw it, you only have 10 working days from the date the demand was served to file an application in the High Court which attaches evidence of the dispute. Your lawyer will need some time to prepare those documents so the sooner you contact them the better. The 10 working day time limit is not a “soft deadline” – once it is past there are limited legal options for the company other than to pay the full amount of the debt claimed.

If you want to discuss how to use statutory demands to recover a debt, or if you have received a statutory demand notice, please contact our business law team or your usual trusted WRMK advisor.

Our thanks to Simon Davies-Colley for writing this article