New Zealand: A digital future for statutory demands in New Zealand?

October 29, 2019 - By Josh Taylor and Miles McConway

<p>The 21<sup>st</sup>&nbsp;century has brought with it some fascinating developments, smartphones, social media, and service of statutory demands by email?</p> <p>The judgment of Lester AJ in the High Court decision of&nbsp;<em>Upright Scaffolding Ltd v Pinnies Painters &amp; Plasterers Ltd</em>&nbsp;(<strong><em>Upright Scaffolding</em></strong>)<em><sup>1</sup></em>&nbsp;seems to have settled the decades old question of whether service of a statutory demand by email is possible under the Companies Act 1993 (<strong>Act</strong>).</p> <p><strong>Historic cases</strong></p> <p>Whether statutory demands can be served by email has been a point of contention conflicting authorities in the High Court. The question hinges on whether a statutory demand is a "document in any legal proceeding".</p> <p>The distinction is important because if a document is considered to be a part of any legal proceeding, that document would fall under the service rules of section 387 of the Act, requiring service at a company's registered office. If the document is not considered part of a legal proceeding, that document may be served on a company under section 388(1)(d) by email.</p> <p>On the plain words it seems clear that a statutory demand is not a document in a legal proceeding. It is not filed with the Court, does not commence a proceeding and there is no proceeding on foot when it is issued. Perhaps the biggest tell is that, if paid, the matter would never see the Courtroom door. However, it seems the courts have been willing to reach a conclusion not supported by the plain words because of the serious nature of statutory demands.</p> <p><em>To be a legal proceeding</em></p> <p>In&nbsp;<em>Delta Installations Ltd v Hamilton Joinery Ltd</em>&nbsp;(<strong><em>Delta</em></strong>) was the authority cited by Lester AJ that a statutory demand forms part of a legal proceeding so cannot be served by email.</p> <p>In&nbsp;<em>Delta</em>, Master Faire held that a statutory demand is a significant document, being an instrument used to prove the inability of a company to pay its debts. It is an integral document to the appointment of liquidators. Therefore, statutory demands, having no other purpose, should rightly be considered a document intended for use in legal proceedings.</p> <p>On this reasoning, a statutory demand should be served according to section 387 of the Act, by a process server to the company's registered address, and not by email.</p> <p><em>Not to be a legal proceeding</em></p> <p>Master Lang did not think as highly of statutory demands in&nbsp;<em>Arzan Investments Ltd v Beresford Apartments Ltd</em>&nbsp;(<strong><em>Arzan</em></strong>).</p> <p>In&nbsp;<em>Arzan</em>, Master Lang said "[a] statutory demand is not a demand which is part of legal proceedings".<sup>2</sup>&nbsp;This reasoning of Master Lang naturally drew the conclusion that a statutory demand may be served by email under section 388 of the Act.</p> <p>The decision of Master Lang was cited as good law in other cases dealing with the classification of statutory demands.<sup>3</sup></p> <p><strong>The decision of Lester AJ</strong></p> <p>In&nbsp;<em>Upright Scaffolding</em>, Lester AJ had little trouble concluding that a statutory demand was not a document in a legal proceeding.<sup>4</sup>&nbsp;We agree that this is clearly the right conclusion.</p> <p>For fear of taking too liberal an approach to service of statutory demands, Lester AJ clarified that there may be some exceptions to consider when pressing send on an email attaching a statutory demand.</p> <p>Lester AJ said that the real concern with email service of statutory demands, or of any service for that matter, is proving service.<sup>5</sup>&nbsp;This is because a statutory demand can only be effective if it has come to the attention of the company, such is the aim of service.<sup>6</sup></p> <p>He said that anyone wishing to serve a statutory demand by email must, in their affidavit of service, address the requirements of section 392(1)(f). This provides that an email must be properly addressed and properly sent to the email address. "Properly" in the context of section 329(1)(f) meaning "appropriately".</p> <p>This means not emailing the (peripheral) email address on the company's website for requesting a quote.<sup>7</sup>&nbsp;Service must be appropriate to meet the objectives of service of the demand. This also means not emailing junior staff members.</p> <p>The emailed statutory demand must be sent to a designated and active email address of a director or senior staff member and be sent in a way that makes it clear that what is being served is a statutory demand. Extreme examples of adequate and inadequate service were given by Lester AJ as follows:</p> <ol type="a"> <li>Service of a statutory demand will likely be adequate if the email address has been used by a director for correspondence regarding the debt subject to the statutory demand;</li> <li>Service of a statutory demand may not be adequate where the demand was sent to the email address of an employee and the sender knew the employee would be away from the office for an extended period.</li> </ol> <p>The overarching concern that Lester AJ said needed to be considered is that service by email opens a creditor up to risk that the creditor may commence liquidation proceedings only to be met with a defence of inadequate service. A balance must be struck between the cost saving of email service and the litigation risk.</p> <p><strong>What to do now?</strong></p> <p>When serving a statutory demand, we always recommend that you deliver it to the registered office of the company by hand using an employee of your company or a process server. Though convenient and less costly on its face, service of statutory demands by email exposes frugal creditors to substantial costs risk if service is later disputed. This is particularly the case given the comments of Lester AJ about when a statutory demand is 'properly' served.</p> <p>If you are served with a statutory demand by email, however, you should always consider that service has been achieved because it may well have been. You should always seek legal advice as soon as possible given the strict time frames for responding and the consequences of failing to do so.</p> <p><strong><small>Footnotes</small></strong></p> <p><small><sup>1</sup>&nbsp;<em>Upright Scaffolding Ltd v Pinnies Painters &amp; Plasterers Ltd</em>&nbsp;[2019] NZHC 1495 [<strong><em>Upright Scaffolding</em></strong>].</small></p> <p><small><sup>2</sup>&nbsp;<em>Arzan Investments Ltd v Beresford Apartments Ltd</em>&nbsp;(2003) 16 PRNZ 825 at [21].</small></p> <p><small><sup>3</sup>&nbsp;Lester AJ in&nbsp;<em>Upright Scaffolding</em>&nbsp;citing at [10]&nbsp;<em>Phonographic Performances NZ Ltd v Music Systems (Music) Ltd</em>.HC Wellington CIV-2006-485-1270, 2 August 2006;&nbsp;<em>North Harbour Equine Hospital Ltd v D K Little Corporate Trustee Ltd</em>&nbsp;HC Auckland CIV-2006-404-7585, 19 February 2007; and&nbsp;<em>Energy Efficient Health Homes Limited v Greenwood Natural Wood</em>&nbsp;[2013] NZHC 1179.</small></p> <p><small><sup>4</sup>&nbsp;<em>Upright Scaffolding</em>, above n 1, at [31].</small></p> <p><small><sup>5</sup>&nbsp;At [10].</small></p> <p><small><sup>6</sup>&nbsp;At [16].</small></p> <p><small><sup>7</sup>&nbsp;At [24].</small></p>