Cost-effective way to get undisputed debts paid

By NATALIE FLETCHER*

Outstanding debts have the potential to cripple a business in today's competitive market, but a relatively simple procedure can help recover money owing.

The statutory demand process can be used against firms who owe debts of $1000 or more as long as there is no substantial dispute surrounding the debt.

In the right situation it can be a cost-effective tool to recover your money and improve your cash flow.

The statutory demand is provided for by the Companies Act 1993. There is no need to obtain a judgment against the debtor firm but the situation must meet three key criteria:

* The debt must be for $1000 or more.

* There must be no substantial dispute about whether the money is owing or due.

* The debt must fall due on or before the date of the statutory demand.

The process is relatively simple and is available to secured and unsecured creditors.

A statutory demand must be in writing and served on the debtor company in accordance with the Act.

It must give details of what the debt is for and specify the amount owing. It should also say where payment can be made and give an address where the debtor company can serve any proceedings on the creditor.

The demand gives the debtor company 15 working days (or longer if the court orders) to either pay the debt, secure or compound it, or enter into a compromise to the reasonable satisfaction of the creditor.

The debtor company has 15 working days to comply. If it fails to do so the creditor has a further 30 working days to apply to the High Court to have the debtor company placed into liquidation. If the creditor fails to make the application within that time, the statutory demand is deemed stale and cannot be relied upon to show that the debtor company is unable to pay its debts.

But the creditor is entitled to issue a fresh statutory demand if the debt remains outstanding.

If the debtor company does not agree with the contents of the statutory demand it has 10 working days to apply to the High Court to have it set aside.

The statutory demand process should be used only when there is no substantial dispute between the parties about whether the debt is owing or due.

It is designed as a short cut mechanism to allow sincere creditors a cost-effective method to recover money owed. The courts take a dim view of creditors who issue a statutory demand when the debt is substantially disputed. It is considered an abuse of process and the creditor risks a substantial costs award.

* Natalie Fletcher is a lawyer with Simpson Grierson.