How to Defend a Statutory Demand – A Comprehensive Guide for Individuals and Companies

Introduction

Receiving a statutory demand can be an intimidating experience. It signals that a creditor is considering serious legal action and may proceed to bankrupt an individual or wind up a company. However, a statutory demand is not always the final word. There are a number of valid grounds on which such demands can be challenged or set aside.

Whether you’re a company director trying to protect your business, or an individual facing personal financial pressure, understanding your rights and options is crucial.

In this in-depth guide, we explain what statutory demands are, how they work, and what steps you can take to defend against them effectively.

What is a Statutory Demand?

A statutory demand is a formal written notice issued by a creditor demanding payment of a debt. It is a precursor to insolvency proceedings under the Insolvency Act 1986 and is used both in corporate and personal debt recovery scenarios.

To be valid, the statutory demand must:

• Be for a debt that is due and payable.
• Be for a liquidated amount, meaning it must be a fixed and certain sum.
• Exceed the relevant monetary thresholds:
• £750 or more for companies.
• £5,000 or more for individuals (following amendments made in 2015).

The demand must also comply with procedural requirements. This includes being in the prescribed form (SD1 for companies or SD2 for individuals), stating clearly the amount owed, and setting out the consequences of non-payment.

What are the Relevant Timeframes?

Once the statutory demand has been served, the recipient has 21 days to either:

• Pay the debt in full,
• Reach a satisfactory agreement with the creditor, or
• Apply to challenge the demand through the courts.

Failure to do so gives the creditor the right to petition for:

• Bankruptcy in the case of an individual.
• Winding-up (compulsory liquidation) for a company.

Common Grounds for Defending a Statutory Demand

Challenging a statutory demand involves persuading the court that the debt is either not due or that there is another compelling reason why the demand should not be enforced. Below are the most common and effective grounds of defence.

1. Genuine and Substantial Dispute

The most robust defence is that the debt is genuinely disputed on substantial grounds. Insolvency proceedings should not be used as a means of resolving complex debt disputes. If a legitimate argument exists, the proper forum is the civil courts, not the insolvency process.

Example: A client who claims that professional services were not delivered to an agreed standard may dispute the full amount invoiced. If correspondence or expert reports support this position, the court is likely to find the dispute substantial.

2. Counterclaim or Set-Off

If the debtor has a valid counterclaim or set-off that equal or exceeds the value of the demand, this may justify setting the demand aside.

Example: A subcontractor may owe a principal contractor £10,000, but also be owed £12,000 in unpaid retention fees. The net result may be no debt due.

The key is that the counterclaim must be based on evidence and not merely asserted as a tactic to delay or avoid insolvency.

3. Abuse of Process

A creditor who uses a statutory demand to put undue pressure on a debtor over a disputed or inappropriate claim may be found to be abusing the process. This is especially true where the demand is served despite ongoing correspondence, negotiations, or arbitration.

Example: A supplier who issues a demand knowing that a dispute is being resolved through alternative dispute resolution, i.e., mediation, may face judicial criticism and cost penalties.

Courts take a dim view of creditors who seek to circumvent normal litigation channels and use insolvency threats to strong-arm payment.

4. Technical or Procedural Defects

Statutory demands must meet strict formal requirements. Errors or omissions in the document can lead to it being set aside, particularly if they prejudice the recipient.

Examples include:

• Incorrect debt amount.
• Failure to describe how the debt arose.
• Service to the wrong address or by an unauthorised method.
• Omission of the debtor’s right to apply to set aside the demand.

While minor technical defects may be overlooked if they cause no injustice, significant flaws can render a demand invalid.

5. Debt Already Paid or Secured

If the debt has already been paid or is covered by enforceable security (e.g., a charge over property), there is no legal basis for a statutory demand.

Example: A creditor holding a charge over a debtor’s asset must account for this when issuing the demand. If they ignore the security and serve the full amount as a liquidated sum, this can be challenged.

How to Respond to and Challenge the Statutory Demand: Steps for Individuals and Companies

A. For Individuals – Apply to Set Aside

An individual who wants to challenge a statutory demand must act quickly. The application to set aside must be made within 18 days of service, using Form IAA, filed with the relevant county court.

The court will then list a hearing and consider whether the demand is valid. If successful, the demand is dismissed, and no bankruptcy petition can follow.

B. For Companies – Apply for Injunction

There is no set-aside procedure for companies. Instead, the company must apply to the High Court or Companies Court for an injunction to restrain the creditor from presenting or advertising a winding-up petition.

The injunction must be supported by evidence showing:

• The debt is disputed on substantial grounds.
• There is a counterclaim or other good reason for restraining the petition.

If an injunction is not sought in time and a winding-up petition is issued, it can cause serious commercial harm, such as freezing of bank accounts and reputational damage, even if the petition is later dismissed.

Practical Tips & Strategy

i. Act Immediately – Time is of the essence. The statutory deadlines are short, and failure to act promptly may lead to irreversible consequences.

 ii. Gather Documentation – Compile all relevant evidence (i.e., contracts, invoices, payment records, emails, expert opinions) to support your defence. Your solicitor will need these to prepare a persuasive argument.

 iii. Obtain Legal Representation – Navigating the insolvency rules and procedures can be complex. An experienced solicitor can assess your case, draft necessary court applications, represent you at hearings, and negotiate with creditors.

iv. Consider Negotiation or Settlement – In some cases, even if a defence exists, it may be commercially wiser to resolve the issue through negotiation. A payment plan, reduced settlement, or agreed withdrawal of the demand may avoid costly litigation.

What should I do if I agree I (or my company) owes the money

If you accept that you owe the money, it’s important to act quickly. One of the first steps you should take is to contact the creditor, or the solicitor who issued the statutory demand, and try to negotiate a solution. It’s best to do this within the 21-day deadline outlined in the demand. This shows that you’re taking the matter seriously and are willing to work toward a resolution.

Bear in mind that bankruptcy is a serious legal process and can have lasting consequences on your life. It may affect your employment and could even put your home at risk. Some creditors use statutory demands not because they truly intend to start bankruptcy proceedings, but as a low-cost way to pressure you into paying. Nevertheless, once a statutory demand is served, it should never be ignored.

You could consider offering to pay the debt in instalments. This can be an effective way to demonstrate your willingness to repay the money, but your offer should reflect what you can realistically afford based on your income and essential expenses. Remember, however, that the creditor doesn’t have to accept your repayment plan.

Another option is to look at refinancing. This means taking out a new loan, ideally one with affordable repayments, to clear this debt and possibly consolidate other debts too. If you’re considering this, it’s essential to seek independent financial advice to avoid making your situation worse. Taking on new credit should always be done cautiously, and only if the repayments are manageable.

If you own property, you might think about offering a voluntary charge against it. This would secure the debt in a similar way to a mortgage. You could propose certain conditions, such as agreeing that the creditor won’t force a sale of your home, and that interest on the debt will be frozen. This approach can give the creditor some reassurance, while also protecting your interests. Professional advice is strongly recommended before going down this route.

Some people also consider asking a trusted friend or relative to act as a guarantor for the debt. This means that if you’re unable to pay, the guarantor would become responsible for the debt. This is a serious commitment for the other person, so it should only be used when both parties fully understand the risks involved.

If you’re an individual and close to the bankruptcy threshold of £5,000, reducing the debt below this amount could prevent the creditor from applying to make you bankrupt on their own. They would only be able to proceed with bankruptcy if they made a joint application with another creditor.

In certain cases, particularly where the debt falls under an agreement regulated by the Consumer Credit Act 1974 (like a credit card or loan), you might be able to apply to the court for a time order. This is a legal tool that allows the court to give you more time to repay what you owe. It can help you avoid further action while catching up with payments.

Finally, you may want to explore a formal repayment solution such as an Individual Voluntary Arrangement (IVA). An IVA is a legally binding agreement between you and your creditors to repay some or all of your debts over a set period, typically five years. It must be arranged through a licensed insolvency practitioner, and not everyone will qualify, but it can be a useful alternative to bankruptcy for some people.

Whichever route you’re considering, don’t delay in seeking advice. The sooner you act, the more options you’re likely to have.

Consequences of Ignoring a Statutory Demand

Ignoring a statutory demand is highly risky.

• For individuals, it can lead to a bankruptcy petition, affecting your personal credit, home ownership, and employment (especially in regulated professions).
• For companies, it can lead to a winding-up petition, which may be advertised in the London Gazette. This alone can prompt banks to freeze accounts and suppliers to withdraw credit facilities.

Even if you have a valid defence, failing to respond in time may prevent you from presenting it.

Conclusion & How We Can Help

Statutory demands are a powerful but often misunderstood legal tool. While they can lead to insolvency proceedings, they are not immune to challenge. If you believe a demand served against you is unjustified, there are multiple avenues available to defend your position.

From genuine disputes and procedural errors to counterclaims and abuse of process, there are various avenues open to both individuals and companies to challenge a statutory demand. However, timing is critical. The window for responding is narrow, and the consequences of inaction can be incredibly severe and draconian.

If you’ve received a statutory demand, we strongly recommend seeking legal advice immediately and we’re here to help.

If you require help, we offer a no-cost, no-obligation 20-minute introductory call as a starting point or, in some cases, if you would just like some initial advice and guidance, we will instead offer a one-hour fixed fee appointment (charged from £250 plus VAT to £350 plus VAT* depending on the complexity of the issues and seniority of the fee earner).

Please email wewillhelp@jonathanlea.net providing us with any relevant information ensuring that any call we have is as productive as possible or call us on 01444 708640. After this call, we can then email you a scope of work, fee estimate (or fixed fee quote if possible), and confirmation of any other points or information mentioned on the call.

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