Mr Chao decides to start a new company. He launches Luscious Ice Cream Parlours Limited (LIP) a chain of ice cream parlours in Auckland. Mr Chao and his friend Ling, an accountant, are the shareholders and directors. Mr Chao has done a careful analysis drawing on his experience in the food business and believes there is a gap in the market. As the first step in the new venture LIP leased two shops in different parts of Auckland. Ling was concerned about the long term cost of these leases, but Mr Chao assured him that this step was necessary to make a profitable business. Ling accepts this as they have agreed that Ling should do the accounting and Mr Chao should handle the other aspects of the business.

However soon after LIP launched a competitor appears with rival ice cream parlours to LIP. Their ice cream is very competitive with LIP's in both quality and price.

LIP struggle for several months and then receive a statutory demand. This is from an equipment supplier and is for $70,000. Ling's records showed $69,232 was owed but Mr Chao did not want to pay all of that as half of the equipment was defective and had yet to be repaired or replaced by the supplier. At this time accounts drawn up by Ling showed that these demands could be paid by LIP if necessary.

Mr Chao wonders if the statutory demands can be challenged.

Question:

Explain the statutory demand procedure. Could Mr Chao have successfully challenged the statutory demands that were issued by the equipment supplier against LIP? On what grounds?