The statutory demand is the most-used tool in the Companies Act 1997. Section 337 defines it; sections 338 and 339 deal with the company’s response.
Section 337 — what a statutory demand must be
(1) A statutory demand is a demand by a creditor in respect of a debt owing by a company made in accordance with this section.
(2) A statutory demand shall —
(a) be in respect of a debt that is due and is not less than the prescribed amount; and
(b) be in the prescribed form; and
(c) be served on the company; and
(d) require the company, within one month of the date of service or such longer period as the Court may order, to pay the debt, or enter into a compromise under Part XV, or otherwise compound with the creditor, or give a charge over its property to secure payment — to the reasonable satisfaction of the creditor.
Due. Not a contingent, prospective or future debt. If the debt is not yet payable, the demand is bad.
Not less than the prescribed amount. The threshold is set by regulation, and a demand below it cannot ground the presumption.
Prescribed form. Use the form, not a solicitor’s letter. But see section 338(5) — a defect alone does not necessarily invalidate.
Served on the company. Service is governed by section 431 — at the registered office or address for service. Serving a director personally is not service on the company.
Note the four alternative responses in paragraph (d). A company may answer a demand by paying, by entering into a Part XV compromise, by compounding with the creditor, or by giving a charge to secure the debt — the last three to the creditor’s reasonable satisfaction, which is an objective standard.
Under section 335(a), failure to comply raises a rebuttable presumption that the company is unable to pay its debts as they become due in the ordinary course of business — the principal ground for a Court appointment of a liquidator.
But under section 336(1), evidence of that failure is not admissible unless the liquidation application is made within one month after the last date for compliance. The whole sequence runs about two months from service.
Section 338 — setting a demand aside
(1) The Court may, on the application of the company, set aside a statutory demand.
(2) The application shall be made, and served on the creditor, within one month of the date of service of the demand.
(3) No extension of time may be given for making or serving the application — but at the hearing the Court may extend the time for compliance with the demand.
Subsection (3) is emphatic. A company that misses the month cannot ask for more time to apply, however good its answer to the debt. Its only remaining course is to oppose the liquidation application itself and try to rebut the presumption under section 335.
The application must be both made and served within the month. Filing on the last day and serving later does not comply.
The Court may grant the application where satisfied that —
(a) there is a substantial dispute whether or not the debt is owing or is due; or
(b) the company appears to have a counterclaim, set-off, or cross-demand, and the amount demanded less that amount is less than the prescribed amount; or
(c) the demand ought to be set aside on other grounds.
The Court does not decide the dispute. It asks whether there is a genuine and substantial question about whether the debt is owing or due — a real defence, not a bare assertion. A liquidation application is not the forum for resolving a contested claim, and a creditor who uses a demand to pressure a company over a genuinely disputed debt risks the demand being set aside with costs.
Paragraph (b) is arithmetical. A counterclaim does not defeat the demand unless it brings the net amount below the prescribed threshold. A K200,000 demand met by a K5,000 counterclaim still stands for the balance.
Paragraph (c) is the residual ground — for example, where the demand was served for an improper purpose, or where the debt has since been paid or secured.
(5) A demand shall not be set aside by reason only of a defect or irregularity unless the Court considers that substantial injustice would be caused if it were not set aside.
(6) “Defect” includes a material misstatement of the amount due and a material misdescription of the debt.
(7) An order may be made subject to conditions.
So a mis-stated amount is not automatically fatal. The question is whether leaving the demand on foot would cause substantial injustice — which turns on whether the company could tell what debt was being demanded and what it had to do about it.
Section 339 — what else the Court may do
Where, on the hearing of a section 338 application, the Court is satisfied that there is a debt due by the company that is not the subject of a substantial dispute, and is not subject to a counterclaim, set-off, or cross-demand, the Court may —
(a) order the company to pay the debt within a specified period, and that in default the creditor may apply to put the company into liquidation; or
(b) dismiss the application and forthwith make an order under section 291(3) putting the company into liquidation,
on the ground that the company is unable to pay its debts as they become due in the ordinary course of business.
Paragraph (b) allows the Court to appoint a liquidator on the spot, at the hearing of the company’s own application. A company that applies to set aside a demand on weak grounds may leave the hearing in liquidation.
Under section 339(2), where the Court has made an order under paragraph (a) and the company fails to pay within the specified period, it is presumed to be unable to pay its debts on the hearing of the subsequent liquidation application. The second hearing is therefore short.
Checklist for each side
| Creditor | Company |
|---|---|
| Confirm the debt is due and at or above the prescribed amount | Check the debt is genuinely due and correctly stated |
| Use the prescribed form | Identify any substantial dispute, counterclaim, set-off or cross-demand |
| Serve under section 431 and record how and when | Apply to set aside and serve within one month — no extensions |
| Diarise one month to comply, then one month to apply (s 336(1)) | Consider paying, compounding, or offering a charge instead |
| Be ready to prove insolvency by other means if the demand goes stale | Be aware the Court may put the company into liquidation at the hearing — s 339(1)(b) |
Sources
- Companies Act 1997 — ss 291, 335–339, 431
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.