One of the most critical aspects of running a successful business is maintaining cash flow, and debt management plays an important role in business management.
If you are owed money by a company that has not responded to your invoices or requests for payment, you may wish to consider taking formal action to recover the debt. One of the simplest and most effective ways of doing this is to issue a statutory demand under the Companies Act 1993.
The process is commenced by serving a demand in the appropriate form on the company. If the company does not comply with the statutory demand, the creditor can apply to place the company into liquidation.
A statutory demand itself is a court document which provides 15 working days for the debtor to:
- Settle the debt owed to the creditor; or
- If it disputes the debt, apply to the Court to have the statutory demand set aside.
It is essential the debt on which a statutory demand is based is a liquidated debt, meaning the other party does not dispute the debt. The consequence of inappropriately issuing a statutory demand is it may be set aside by the Court and costs awarded against you.
If the debtor company does not settle the debt or apply to the Court to have it set aside, the creditor may rely on the statutory demand as evidence that the company is insolvent and apply to have the company put into liquidation. The Court of Appeal in Magsons Hardware Ltd v Concepts recorded that the use of a liquidation proceeding as an enforcement mechanism may be justified in cases where, for example, there is an unreasonable refusal to pay a significant sum which is indisputably owed. Therefore, it is typically open to creditors to use the statutory demand process as a means of debt recovery.
The statutory demand and liquidation process place significant pressure on a company debtor to pay its debts. This response is not surprising as the consequences of liquidation proceedings can include negative publicity, payment of legal costs incurred by the creditor in pursuing the debt and potentially the winding up of the company.
If you are having difficulty pursuing a debt from a company and wish to learn more about debt recovery options, we suggest that you seek early advice. Initial input can ensure the process is run correctly and does not fall short for procedural reasons. Equally, if you have been served with a statutory demand you need to seek legal advice immediately as the timeframe for responding is very short.
For more information:
Our litigation department is experienced with these types of applications and is available to assist with any questions you may have. Feel free to get in touch with Michael Wolff on 04 495 8919 or Shehan Gunatunga on 04 495 8923.