A statutory demand is a legal process by which a creditor, who is owed £750 or more, can send a written demand to a company[1] for payment of the outstanding debt within 21 days. A statutory demand can only be served in respect of a debt which is due at the time of service.

This can be done without the need to involve the court and is a useful, and largely inexpensive, tactic for an unsecured creditor to get the attention of a company which may have previously ignored any attempts at resolving an outstanding debt.

Do not ignore any statutory demands!

Statutory demands are a matter which should be taken seriously.  If a debtor fails to engage with a statutory demand, he can quickly find his company in a court process, which may include compulsory liquidation.

The reason statutory demands are such an effective tool in debt recovery is that any failure to pay the demanded debt can be used as a basis for satisfying the definition of insolvency in the Insolvency Act 1986, (section 122(1)(f) and section 123).

Once the company’s inability to pay its debts as they fall due has been established then a creditor can quickly move to serving a winding up petition, calling for the compulsory liquidation of the company.

This can be catastrophic for a company as bank accounts can then be frozen, lines of credit withdrawn and other creditors may begin to start demanding their debts are also paid. Any dispositions of property which the company makes from that point forward are then deemed to be void.  A company’s reputation can be tarnished by the presentation of a winding up petition, which can obviously be costly - even if the petition is ultimately avoided.  It can also raise concerns for the directors personally over wrongful or fraudulent trading.

What should you do if you receive one?

Take legal advice straight away – we can help you with the next steps. It is important to involve legal help as quickly as possible as the 21 day period within which to pay begins from the date of service.  This applies even if the statutory demand is outrageous, speculative or just plain annoying – you must take advice immediately.

The recipient company has several options:

The company can discharge the debt in full, if it feels that this is appropriate and the creditor is owed the amounts claimed.  Similarly, the company can discharge part of the debt owing, to bring the outstanding amount below £750; this may prevent the winding up petition being advanced.

It is vital in either of these cases to begin a dialogue with the creditor – some companies will simply pay the debt just to make the whole thing go away.  It is prudent to require the statutory demand be withdrawn or to ask for an undertaking that the creditor will not seek to present a winding up petition going forward.

If however the company genuinely disputes the debt, then these objections must be communicated to the creditor as quickly as possible.  The debtor company can also make a counterclaim or demonstrate any rights of set off which may be applicable.

The creditor should not present any winding up petition on the basis of a disputed debt and the company should ask for an undertaking that the winding up petition will not be presented.  The company can also seek an injunction against the creditor to prevent any such petition being presented or advertised in the London Gazette – this advertisement can cause bank accounts to be frozen and for company creditors to be notified of the difficulties, perceived or otherwise, in which the company now finds itself.

It may be that the company can begin a dialogue with the creditor to come to some sort of compromise or mediation to discuss the outstanding debt and a way forward, away from a court process. 

Conclusion

Whatever course of action your company may wish to take if you ever receive a statutory demand, it is imperative that you involve your legal counsel as quickly as possible. Twenty one days is the difference between a company surviving and being liquidated, even if the company is in good financial health.  It simply takes one disgruntled creditor to begin a process which can be difficult to stop, without specific legal advice.

[1] A statutory demand may be served on an individual if the debt is more than £5000; however this article focuses on corporate insolvency.