The information below is a summary introduction and general guide only. This information is not to be relied upon and is not a substitute for obtaining legal advice. Detailed advice should be obtained to cover your specific factual situation.
There are huge risks with Creditors Statutory Demands. Legal Street Limited can help you get it right.
Sections 287 to 291 of the Companies Act 1993 (“the Act”) provide a quick and proven procedure for ensuring payment of an undisputed debt of $1,000.00 or more, or at least finding out if payment is possible. To recover a debt from a company utilizing these provisions you can serve a Creditors Statutory Demand (also known as a Section 289 Notice) on the company. However there are tangible risks involved and you should obtain legal advice before embarking on this process.
The Statutory Demand must be in writing and strictly comply with the provisions of Section 289 of the Act. The demand must require the company to pay the debt, enter into a compromise or to secure the debt in some way to the reasonable satisfaction of the creditor. Once the demand is served on the company then the company has:
(a) 10 working days to apply to the High Court to set aside the demand; or
(b) 15 working days to comply with the notice.
If the company fails to apply to have the demand set aside within the strict time frame then the company has limited options. If the company also fails to comply with the demand before the 16th working day then the company is presumed to be unable to pay its debts. In this situation you may apply to the High Court for the company to be placed into liquidation. However you should be aware that evidence of failure to comply with a statutory demand is not admissible as evidence that a company is unable to pay its debts unless the liquidation application filed is with the High Court and served upon the company within 30 working days after the last date for compliance with the demand.
If you do not collect the relevant debt during the liquidation then in certain circumstances, such as where there has been a proven breach of directors duties, you may be able to collect the debt from the directors themselves. Nevertheless you should be aware that High Court remedies are costly to pursue.
Serious Risks with Creditors Statutory Demands
Although an effective procedure, the statutory demand process is fraught with risks that include but are not limited to the following:
- The Statutory Demand must be drafted correctly and in compliance with the Act;
- Time limits are fatal. You should consult with your solicitor before you issue a statutory demand. Similarly, if your company is served with a statutory demand then it is imperative that you see your solicitor immediately.
- If the company disputes the debt and can show the court that a defense exists or if the company has a counterclaim or set-off equal to the amount claimed in the demand then the company can apply to the High Court to have the demand set aside (only within the 10 working days). If the company’s application is successful then you will be ordered to pay all of the company’s legal costs and disbursements on a full indemnification solicitor client basis which can exceed $4,500.00 (ex GST)
- If you recover the debt but then the creditor is subsequently placed into liquidation by another party then you risk having the payment set aside by the liquidators as a voidable transaction.