Statutory demands are not be used as a debt recovery procedure, but often people try to use them as such.
Properly used, a statutory demand is a way to prove that an individual or a company cannot pay their liabilities as they fall due and this means they are cash-flow insolvent. Proving insolvency is necessary if the creditor wishes to petition for the individual’s bankruptcy or the company’s winding up.
Failing to appreciate that a statutory demand is not supposed to be used as a debt recovery procedure can cause significant loss to a creditor if the demand is disputed. If the creditor serves a statutory demand for a disputed debt, or refuses to withdraw it if a dispute is raised after it is served, then the creditor may have to pay the debtor’s legal costs for setting aside the statutory demand against an individual or for an injunction preventing the presentation of a winding up petition by the creditor. The costs which may then be payable by the creditor on setting aside or the granting of an injunction can range from £2,000 upwards even if, ultimately, the the court agree that the debt is owed. It is important for a creditor to realise that withdrawing the demand is not an admission that the debtor does not have to pay but is merely a recognition that there is a genuine dispute or triable issue for a court to decide.
There is no point wasting time and money defending an application to set aside if there is a genuine dispute. The creditor is better off applying its time and money to pursuing the relevant pre-action protocol and, if necessary, issuing proceedings.
There is a second problem – what happens if the demand is not challenged and no dispute is raised? The creditor’s next step would be to initiate formal insolvency proceedings by presenting a bankruptcy petition or winding up petition. That will cost at least £2,000 and then the creditor will have to share any net assets left after the costs of insolvency with the other creditors.
WHAT SHOULD I DO IF I HAVE BEEN SERVED WITH A STATUTORY DEMAND?
Statutory demands are often served by personal service on the debtor as the creditor needs to prove that the demand has come to the debtor’s attention.
If you are served with a demand: YOU MUST ACT QUICKLY AND CONSULT A LAWYER IMMEDIATELY.
If a valid statutory demand is served on you as an individual and it is not satisfied within 21 days, or if you dispute it and it is not set aside by the court following an application made by you within 18 days, then it could result in your bankruptcy. If you are a limited company and you have not applied for an injunction restraining the creditor from presenting a winding up petition then an unsatisfied demand could result in the winding up of the company. In both cases the creditor needs to demonstrate that an undisputed and unsecured debt of at least £750 for a company and £5,000 for an individual is outstanding 21 days after service of the demand.
DON’T IGNORE IT This is true particularly if you dispute the debt or you have a counterclaim or setoff to the amount demanded. Contact the creditor and set out why you dispute the demand in writing and ask them to withdraw it. However, if over £750 for companies and £5,000 for individuals of the demand remains undisputed and unpaid then that is still an act of insolvency/evidence of an inability to pay debts as they fall due and the demand could be relied on by the creditor in insolvency proceedings against you. Often creditors use a statutory demand as a debt recovery tool and will not want to incur the cost of actually petitioning for bankruptcy or winding up if the debtor doesn’t pay. Those costs to the creditor can be in the thousands and will not be recovered by the creditor if the debtor really is cash-flow insolvent.
If the debtor will not agree to withdraw the demand in writing then YOU MUST APPLY TO THE COURT TO SET ASIDE THE DEMAND WITHIN 18 DAYS If you are a company and the demand and/or threat of the presentation of a petition will not be withdrawn, then you must apply for an injunction restraining the creditor from presenting a winding up petition. Note, a statutory demand is not always required before the creditor can present a winding up petition.
For individuals the court has the power to set aside the demand on the following grounds: i) the debtor appears to have a counterclaim, set-off or cross-demand which equals or exceeds the amount of the debt or debts specified in the statutory demand; or ii) the debt is disputed on grounds which appear to the court to be substantial; or iii) it appears that the creditor holds some security in respect of the debt claimed by the demand and either the statutory provisions relating to the disclosure of the nature and amount of the debt are not complied with in respect of it, or the court is satisfied that the value of the security equals or exceeds the full amount of the debt; or iv) the court is satisfied on other grounds that the demand ought to be set aside.
In respect of a company, if the company has a valid reason for not paying the debt, then a winding up petition should not be presented. A valid reason may arise where either:
i) The debt is genuinely disputed on substantial grounds, or
ii) The company has a genuine cross claim against the debtor. In terms of what constitutes substantial grounds this effectively means the dispute must be real as opposed to simply “frivolous”.
A mere honest belief that payment is not due is not sufficient to oppose the statutory demand. If only part of the debt is disputed and the company fails to pay the undisputed element, then it is possible to issue a winding up petition for that undisputed amount which has not been paid. It can be used as evidence that the company is unable to pay its debts as and when they fall due. If the debtor is successful in its application to set aside a statutory demand or for an injunction to prevent the presentation of winding up petition then it is almost inevitable that the court will order the creditor to pay the debtor’s legal costs.
Depending on the circumstances these costs can range from £1,000 to over £10,000.
SUMMARY Act fast to avoid missing the deadline and consult a lawyer ASAP
WHAT SHOULD I DO IF I WANT TO SERVE A STATUTORY DEMAND? A creditor who serves a statutory demand for a disputed debt takes a big risk on costs if they do not withdraw it when the debtor has raised a dispute/defence. Don’t consider using a statutory demand instead of a county court claim unless the debt really is undisputed. Statutory demands are not supposed to be used as a debt collection tool. In reality many creditors use them exactly in this way. Do remember that if a creditor persists with a statutory demand and the debtor gets the demand set aside or an injunction against the presentation of a winding up petition then the court is likely to hammer the creditor in costs even if the creditor subsequently wins the dispute/counterclaim in normal proceedings.
WHAT HAPPENS AFTER STATUTORY DEMAND? When the statutory demand has been served the creditor will be entitled to petition for a bankruptcy order against an individual, or for a winding up petition against a company after 18 days. Therefore anyone who receives a statutory demand must take steps to address that demand within 18 days or risk a petition being issued. For an individual where the debt is disputed it is usually appropriate to request that the creditor agrees to withdraw or discontinue the statutory demand. Otherwise, if there is no agreement, the individual debtor should apply to the court for an order (and their costs) seeking the set aside of the statutory demand. In the case of a company initially the company should request undertakings that the creditor will not issue a petition failing which the company will need to obtain an injunction order from the court preventing the creditor from issuing a petition.
If you are seeking further information or advice about any of the above, please contact John on 01207654365.
Disclaimer: This briefing is for guidance purposes only. We accept no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client’s own particular circumstances.