A common occurrence for a business is a debtor company that fails to pay. An alternative to bringing a claim is to issue a letter of demand or a statutory demand. These can both be powerful tools in your credit control armoury. Our experience is that they often result in payment being swiftly made or at least opening a dialogue with the debtor in relation to agreeing a payment plan.

If, unfortunately, they do not result in payment then you can go on to issue a winding up petition. We will look at winding up petitions in more detail next month but you can read more about demand letters and statutory demands.

There are two options when considering demanding your debt. If the debtor company is a good client and a trading relationship is envisaged going forward the first step may be to issue a demand letter. If a tougher approach is preferred you can proceed straight to serving a statutory demand.

Issuing a demand letter

When preparing a letter of demand it should set out:

• When and how the debt was incurred;
• The value of the debt;
• When it should have been paid;
• Who to contact if there is an issue;
• When it needs to be paid by.

Most letters of demand give 7 days to make payment (and are referred to as 7 day letters). However, there is no rule that requires the time period be 7 days. 14 days is common if it is hoped that the trading relationship will continue. If you are confident that the debt is not disputed and you simply have a “bad payer”, or you are worried about the solvency of the debtor, then 3 days will normally be considered acceptable.

If your letter has no effect then seek prompt legal advice. The longer a debt is left the more likely it is that the company could be in financial trouble.

Statutory demands

If you have a debt that is;

• over £750;
• 'liquidated' i.e. payable immediately; and
• the debtor company is registered at Companies House in the UK

then a statutory demand might be a useful tool. A statutory demand is a written demand for payment of a debt in a prescribed format and is governed by the Insolvency Act 1986. A statutory demand is not a court document and is often the precursor to a winding up petition. However, just because you issue a statutory demand does not mean you have to go on to issue a winding up petition against the debtor if payment remains outstanding - It is your choice whether to take that next step. There are many advantages to issuing a statutory demand:

• It isn't expensive;
• It isn't issued in court and doesn't require a court timetable – the debtor simply has to pay up or apply to set aside the demand within 21 days from the date of service;
• It will often prompt payment because of the serious consequences that can follow (winding up);
• It can flush out potential cross claims that you may not have been aware of.

There are, however, some disadvantages:

• The debtor is given 21 days to pay or apply to set aside the demand – effectively you are extending their credit period;
• The debtor can make an application to set aside the demand which can initiate the court process;
• It  is often considered as an aggressive step and may damage a trading relationship going forward.

When preparing a statutory demand set out in detail the nature of the debt. Should a winding up petition later be pursued it is essential to ensure that the debt is particularised in sufficient detail. Remember to include any interest that has accrued up to the date of the demand together with any VAT payable.

Once prepared, arrange for the demand to be served at the Company's registered office. The Insolvency Rules 1986 state that the demand must be brought to the Company's attention. Service should be well documented as you must be able to prove that the statutory demand has been validly served. The most common method of service is to use a process server (an agent who hand delivers it to the company) although alternative methods e.g. recorded delivery are permissible.

If a company has not complied with a statutory demand within 21 days it is deemed to be insolvent and unable to pay its debts as they fall due. You have the option of taking the next step and issuing a winding up petition. We will look at winding up petitions next month.

Please feel free to contact us for help or guidance on credit control generally or dealing with difficult debtors.