On 23 November 2022, the Reserve Bank made its largest ever hike to the OCR to battle high inflation. With the cost of living increasing, inflation at an all time high and interest rates increasing more than expected, businesses will undoubtedly suffer. Debt becomes a real concern for small businesses that need to be paid or are struggling to pay invoices.

An effective means of eliciting payments from debtor companies or testing a company’s solvency is a statutory demand. A statutory demand is a formal demand made on a company for payment of a debt. Under the Companies Act 1993 (the Act), a failure to comply with a statutory demand gives rise to a rebuttable presumption that the company is unable to pay its debts. This is the first step in a legal proceeding to place the debtor company into liquidation.

However, creditors need to take great care before issuing a statutory demand to ensure that there is no dispute over the debt in question. Under section 290 of the Companies Act 1993, the debtor can apply to the High Court to set aside the statutory demand within 10 working days of being served. The debtor only needs to show the High Court that there is a substantial dispute as to whether the debt is owing. If the debtor can show a substantial dispute, not only will the statutory demand be set aside but the creditor is likely to also have an unwelcome Court order to pay the debtor’s legal costs. The debtor can also raise a counterclaim, set off or cross demand and if it can satisfy the Court that there appears to be a counterclaim, set off or cross demand, the Court will also have grounds to set aside the statutory demand.

An example of a successful application to set aside a statutory demand is Coffee Culture Franchises Ltd v Home Straight Park Trustees Ltd [2021] NZHC 577. In this case the landlord had served the tenant with a statutory demand for unpaid rent. The tenant applied to set aside the statutory demand on the basis that there was substantial dispute as to whether all the rent was due. The tenant’s argument was that the lease had a clause which entitled the tenant to a rent reduction for periods of no access due to an emergency (being Covid-19 lockdowns). Associate Judge Bell found that there was a substantial dispute and he ordered that the statutory demand be set aside and that the landlord pay the tenant’s legal costs for the proceeding.

There are also strict timeframes for a debtor to make payment or apply to set aside a statutory demand under the Act. If the debtor takes no action, after 15 working days there is a presumption of insolvency. The creditor is then in a position to rely on that presumption in support of an application to wind up the company and have a liquidator appointed. The creditor needs to file its application within a further 30 working days otherwise the statutory demand will go “stale”.

If you have companies that owe you or your business money, get in touch with us about whether a statutory demand might be an appropriate tool to help you get paid. If you have been served with a statutory demand, we can advise on your options.