Statutory Demands and Insolvency Proceedings
A statutory demand is a formal means of demanding a debt. If the debt is not paid (or sufficiently reduced) or the demand not set aside by a court, then a creditor will normally be able to present a bankruptcy or winding up petition and rely on the demand as evidence that the debt is unpaid and undisputed.
Statutory Demand – what is it?
A Statutory Demand can be made by anyone who is owed money [‘the Creditor’] where there is no reasonable dispute about the debt. It can be made to demand payment from an individual or a company. The debt must usually be less than six years old and the creditor must not hold any security against it.
After an individual or a company is served with a statutory demand [‘the Debtor’] they have 21 days to either pay the debt or reach an agreement to pay. If the Debtor does not respond to a statutory demand, the Creditor can petition to bankrupt the Debtor or to wind up the company, provided the debt is for more than £5,000 for an individual or £750 for a company.
Statutory Demand – the form
The Creditor’s solicitors will need to fill in the form and serve it on the individual or the company that owes them money. This sets out the particulars of the debt and explains what the Debtor must do. There are several ways of service:
- a statutory demand can be handed to the individual owing the money (normally by a process server/agent)
- a statutory demand can be left at the registered office of the company that owes money (or the main place of business if they do not have a registered office)
- a statutory demand can be given to the company’s director, company secretary, manager or principal officer)
- substituted service may be possible where the Demand cannot be personally served
What happens next?
After a statutory demand is served a Creditor needs to wait for 21 days. If the Debtor does not pay the debt or the demand is not set aside or withdrawn, the Creditor can commence insolvency proceedings (i.e. present a bankruptcy/winding up petition to the court).
Because insolvency is a form of class action, careful consideration will need to be given as to the Debtor’s likely response, asset position and the existence of any other Creditors. If a Debtor becomes insolvent then their/its assets are managed by a trustee-in-bankruptcy. Depending on the value of the bankruptcy estate, assets will be distributed between Creditors after the trustee’s costs. Assets are not always distributed evenly. For example, if property is charged then the interest of the party with the charge will normally take priority.
If a Debtor has something to lose the threat of insolvency proceedings is often an effective way of forcing payment.
Can a Debtor challenge a statutory demand?
A Debtor can apply to challenge a statutory demand and apply to set aside. This requires an application to the court named on the demand. If a statutory demand is served on a company it can apply for an injunction to stop a Creditor from winding up the company.
A Debtor would need to apply to challenge the statutory demand within either 18 days of being served (if they were in the UK when they got the statutory demand) or 21 to 34 days (if they were in another country, depending on the country). They would usually hear from the court within 10 working days of making the application. If the court dismisses the application then the Creditor can petition for the Debtor’s bankruptcy.
If a Creditor unreasonably refuses to withdraw a statutory demand in respect of a debt that is reasonably disputed the court may award the Debtor their costs of having the demand set aside.
Finally, in some circumstances the service of a statutory demand before issuing a petition is not compulsory (for instance where the outstanding debt is confirmed in a court order). Nevertheless, it will often still be preferable to give the Debtor a final opportunity to pay.