Statutory Demands - What are they and why use them?

Statutory demands are often used to try and recover outstanding sums as they can be an efficient debt recovery tool.

If you are a creditor and are owed money, they provide a way of seeking repayment for undisputed sums without having to issue court proceedings. The receipt of a statutory demand is a serious issue for you, and you should not ignore it. If you do then, if you are an individual it can lead to a bankruptcy petition and bankruptcy and, if you are a company, then it can lead to a winding up petition and insolvency.

The critical issue for you and your business is that you understand what the document means, what the process is and what your options are to deal with the demand.

A Statutory Demand – what is it?

The demand is a notice which, as a creditor, you send to the debtor. The notice confirms that you want payment of the debt, that you consider is due and owing, without further delay. There are financial limits for the issue of the demand and these are as follows:

• £750 for a company
• £5,000 for an individual

The purpose of the demand is that it creates a fixed position on the debt that is owing to you as the creditor. This allows you, as the creditor, to take the next step – assuming the debt is not paid – to issue a winding-up petition (if the debt is owed by a company) or a bankruptcy petition (if the debt is owed by an individual).

Issuing a Statutory Demand: Steps for Creditors

A statutory demand is an effective and relatively low-cost method for creditors to get payment without the involvement of the courts. To issue one:

• The debt must be payable immediately, should not be in dispute and must exceed the financial amounts - as set out above;

• You must use the correct form – clearly setting out the debtor, the amount owed, the circumstances of the debt together with the appropriate supporting evidence; and

• You must make sure that the demand is properly served – we would recommend using a process server to serve the demand on the debtor

If you do not follow the proper procedures – in preparing and serving the demand, then it makes it easier for the debtor to challenge the demand in court. This can lead to costs being awarded against you.

Once the statutory demand has been served then the debtor has a short time frame to make a payment or negotiate a settlement with the creditor. The debtor has 21 days to pay the debt or agree a settlement sum before the creditor can go to the next step – a winding up petition for a company debt or a bankruptcy petition for an individual debt.

If, however, the debtor on receipt of the statutory demand decides that it wishes to challenge the debt then the steps that must be followed are different depending on whether the debtor is an individual or a company.

I have received a Statutory Demand – what should I do now?

If you receive or are served with a statutory demand then it can feel overwhelming, if you act quickly then it can make a big difference. This is what we would recommend you do as soon as possible:

• Check the details on the document – are they accurate and do you owe the debt?
• Get legal advice immediately on the statutory demand and what your options are.
• If you owe the debt - can you pay it or will you need to negotiate with the creditor?

If you don’t owe it – then as an individual you can apply to “set aside” the demand; if your company has received it then you can apply for an injunction to stop a winding-up petition.

The timing of your actions are critical – you only have 18 days to apply to challenge it or 21 days to settle the outstanding sum.

I want to challenge a Statutory Demand – what are my options?

The approach that you take will depend on whether you're an individual or a company.

If you are an individual, then you can make an application to ask the court to set aside the demand (within 18 days) if:

• You believe, and can demonstrate, that there is a genuine dispute over the debt
• You are owed more by the creditor than you owe them
• The statutory demand wasn’t properly served
• The debt is below £5,000

If you are successful, with your application, then the court may choose to cancel the demand and order the creditor to pay your legal costs of making the application.

If you are a company, then you can make an application to the court to ask the judge for an injunction to stop the creditor issuing a winding-up petition. This application can be made if:

• You can demonstrate that the debt is genuinely disputed
• You have a counterclaim or setoff equal to or more than the debt within the demand
• The statutory demand was incorrectly served
• The debt that the statutory demand is chasing is below the statutory minimum of £750

Again, acting early on the receipt of the statutory demand and obtaining legal advice is essential to giving you as many options as possible.

The key message is don’t ignore a statutory demand—it will not simply go away, and a delay can limit your options and increase the risk of insolvency.

What if I ignore a Statutory Demand?

If you, or the Company, should choose to ignore a statutory demand that has been received then there are serious consequences which can follow

For Companies – who ignore a statutory demand:

• A winding-up petition may lead to liquidation of the company
• If appointed, then a liquidator may sell assets to repay creditors
• If the company is put into liquidated, then directors may be investigated and potentially could face claims bought by the liquidator or, following an investigation by the Insolvency Service, director disqualification proceedings

For Individuals:

• A bankruptcy petition may be issued at the court
• If the petition is granted, then a trustee will be appointed to manage and sell the individual’s assets in order to raise funds to pay to creditors
• You could lose your home or other possessions
• Credit will be harder to obtain, and you can't act as a director during bankruptcy

If you have any questions about statutory demands or any insolvency matter please contact Richard Ludlow on 01732 496496.