This article reviews the law relating to “Statutory Demands” pursuant to the Companies Act 1993.
Statutory Demands may be served on a company to require a debt to be paid or disputed very quickly. The company served must act quickly to resolve the issues behind the Statutory Demand or it will risk being placed into liquidation.
The purpose of a Statutory Demand
Companies are generally incorporated for the purpose of protecting the shareholders from the liabilities of upcoming trade debts or risk. A company is a different legal entity to its shareholders and it can enter into contracts as it runs its own business. Many companies are small businesses controlled by the sole owner (being both a director and a shareholder). One of the Companies Act mechanisms of importance is the Statutory Demand. A Statutory Demand under section 289 of the Companies Act can be served on a company by a creditor’s solicitor to require it to pay the debt within 15 working days. Non-payment of a Statutory Demand is most often used as evidence in the High Court to support an application to place the company into liquidation.
Use of Statutory Demands
Previously, a Statutory Demand was not supposed to be used for the purpose of debt collection on the basis that to do so was an abuse of the Court. This was because a Statutory Demand is such a major threat to the very existence of a company it seemed to be an overly heavy handed approach towards debt collection. The Court of Appeal in 2008 in the case of Pioneer Insurance Company Limited v White Heron Motor Lodge Limited reversed that school of thought and accepted that it was legitimate to use a Statutory Demand for the purpose of debt collection.
Statutory Demands cannot be used for all debt collection. They must only be used where the debt is “due and owing.” If the other side has raised an issue with the debt or the invoice then you may not be able to serve a Statutory Demand. Legal advice is an absolute must in those circumstances. It is for this reason that the High Court has expressed concern at the situation where solicitors have not been involved in the serving of a Statutory Demand. Solicitors are under further obligations to ensure that there are solid grounds to serve the Statutory Demand or they may face discipline before the Law Society for a breach of the rules of conduct and client care.
Responding to a Statutory Demand
As soon as the company is served with a Statutory Demand it needs to make an immediate decision as to whether it will pay the amount outstanding. Time is never the company’s friend in this circumstance. If the company has a genuine dispute then it should apply to the High Court to have the Statutory Demand set aside. Such an application will ultimately be costly to whichever party is incorrect and legal advice would need to be sought as soon as the Statutory Demand is served. The company only has 10 working days to file and serve an application to have the demand set aside. That time limit is almost never included in the Statutory Demand and it will almost always lull the company into believing it has more time to sort out the issues.
If your company is served with a Statutory Demand then your best course of action is to seek immediate advice as soon as possible as to what course of action you should take. The entire procedure involved with Statutory Demands is complex and involves dealing with the requirement of the High Court Rules and the Companies Act 1993. Unlike the helpful comments contained within a notice of proceeding that is served with ordinary proceedings, it will not be apparent from the face of the Statutory Demand what you will need to do. Getting good advice early may eventually save both sides a significant amount of time, stress and money.
This article is current as at the date of publication and is only intended to provide general comments about the law. Harkness Henry accepts no responsibility for reliance by any person or organisation on the content of the article. Please contact the author of the article if you require specific advice about how the law applies to you.