How To Use Statutory Demands
What is a statutory demand?
A statutory demand is a legally enforceable way of making a formal demand for repayment of a debt that is owed to you (the creditor) by a company or an individual (the debtor).
It can only be served if the below applies to the debt. It is:
- less than 6 years old;
- for a specific and known amount; or
- over £5,000 where the debtor is an individual, or over £750 for a company debtor.
There must also be no dispute between the creditor and debtor on the existence or amount of the debt.
Why use a statutory demand?
A statutory demand starts a time period of 21 days (from the date it is served) after which the consequences for the debtor may lead to individual bankruptcy or to the winding-up of the company. So a statutory demand is often the first step a creditor will take to present a bankruptcy or winding-up petition against the debtor.
In practice, a statutory demand incentivises a debtor to pay its debts as commercially it is not in the interests of the individual or company to have bankruptcy or winding-up petitions against him / it. This is especially so when the individual or company has the means to pay the debt.
Advantages on the use of statutory demands
- The use of statutory demand is low cost and easy because the creditor is able to complete the statutory form himself;
- It can be a swift and effective way to get a creditor to settle the debt or negotiate a payment plan as failure to comply with the statutory demand has undesirable implications for the debtor; or
- The creditor has the option of either pursuing the debt or leaving the statutory demand to expire.
Disadvantages on the use of statutory demands
- As the consequences of failure to comply with the statutory demand are severe, the debtor might
perceive the creditor negatively especially if there is a long-standing relationship between the
parties thereby impacting the future relations; or
- The debtor in response to the statutory demand might either apply to court to set aside the
statutory demand or for an injunction to restrain the winding-up petition. Should the court
application succeed, the creditor might end up having to pay the debtor’s legal costs.
How to serve a statutory demand?
Serving on an individual
The statutory demand form must be given to the debtor. The creditor must attempt to serve the statutory demand at all the known debtor’s addresses. This can be through personal service of the statutory demand or the engagement of a professional process server to deliver the statutory demand.
It is only if the delivery cannot be carried out in person, then the statutory demand can be sent by registered post or put through a letterbox.
Serving on a company
To serve the statutory demand on companies, it must be left at the company debtor’s registered office or provided to the company’s director, company secretary, manager or principal officer.
Like the serving of the statutory demand form on individuals, it is only if the statutory demand cannot be carried delivered in person, then can the statutory demand form be sent by registered post or put it through a letterbox.
However because of the effect of s436B of the Insolvency Act, a statutory demand must be served as a hardcopy.
What happens after statutory demand is served?
Ideally the debtor will:
- pay the outstanding debt in full;
- partially discharge the debt so that the outstanding debt amount is below the statutory demand
- initiate settlement negotiations;
- challenge and set aside the statutory demand; or
- ignore the statutory demand.
Paying the outstanding debt in full or partial repayment
If the debtor pays the outstanding debt in full or makes partial repayment so that the outstanding debt amount is below the statutory demand thresholds as mentioned above, the debtor may request you to withdraw the statutory demand.
This can be achieved with your written confirmation. Should you consent, the statutory demand is withdrawn and you will not be able to present a bankruptcy or winding-up petition against the debtor.
The debtor and you get to the negotiating table and agree on a payment plan / terms going forward so as to avoid either bankruptcy or winding-up proceedings being issued.
For instance, where the debtor has property, he could offer you security on the property against the debt. Another option is to put in place an individual voluntary agreement which is a legally binding agreement to pay you over an agreed period of time. This affords the debtor breathing space to make the repayments and might be a pragmatic way forward.
Where the debtor has no income, assets or any means of making the debt repayment, nothing may be gained by taking further action against the debtor.
What can I do as an individual if a statutory demand has been served on me?
You can make an application to the court to set aside the statutory demand within 18 days from the date the demand was served. The court might also consider an application outside this time limit if the creditor has not already asked for a bankruptcy petition to be issued.
The court may grant an application to set aside the statutory demand if:
- the statutory demand debt is genuinely disputed;
- you have a cross claim which equals or exceeds the statutory demand debt;
- the creditor holds securities in relation to the statutory demand debt which equals or exceeds the statutory demand debt; or
- the court is satisfied that the demand ought to be set aside.
If the application is successful, the statutory demand will be set aside. The creditor might choose to continue negotiations with you about the debt.
If dismissed then unless the outstanding debt is repaid immediately, the creditor can proceed with a bankruptcy petition and your property and goods may be taken away.
What can I do if a statutory demand is served on my company?
To avoid the creditor issuing winding-up proceedings at the back of the statutory demand, you will need to apply within 21 days from date of statutory demand service to the court to restrain the presentation of a winding-up petition.
The impact of a winding-up petition is very serious and can have an immediate and significant adverse effect on your company with the company ultimately being wound up. Hence the creditor will attempt to carry out a winding-up petition quickly.
The court is likely to grant an injunction to prevent winding-up proceedings if it appears that your company is solvent and one of the below apply:
- the statutory demand debt is genuinely disputed on substantial grounds;
- your company has a cross claim which exceeds the statutory demand debt; or
- your company has a reasonable excuse for not paying the debt.
Ignoring the statutory demand
If the debtor ignores the statutory demand this strengthens your position as a creditor and allows you to proceed with the bankruptcy or winding-up proceedings after the 21 days’ timelines discussed as above.
As a debtor, ignoring the demand runs the grave risk that bankruptcy or winding up will follow. The time limits are strict.
The proper use of a statutory demand can be a very powerful and effective tool to recover outstanding debts from individuals or companies because of the serious consequences associated with its use. The statutory demand is treated as valid unless and until it is set aside by the court.
Poor preparation or failure to attend carefully to the process can leave either party in a poor position and facing failure and even the possibility of having to pay their opponents cost.