What is a statutory demand?
A statutory demand is a demand for payment of a debt to be made within 21 days of service upon an individual in accordance with s. 268(1)(a) Insolvency Act 1986. It is a document served by a creditor upon a debtor that is intended to prove that the debtor owes a specified sum of money.
A statutory demand is the first legal step to winding up a company if the debt is over £750 or making an individual bankrupt if the debt is £5,000.
A statutory demand can be served as soon as the debt is due. A process server is recommended for personal service.
If a debtor receives a statutory demand, they should seek legal advice is sought as soon as possible because you only have 18 days from the time of service to seek the Court’s permission to set aside the statutory demand. Should you apply outside the mandated time period, the application to set aside the statutory demand will only be listed at the Court’s discretion.
What are the rules of service of a statutory demand?
A creditor must follow the correct rules of service, as incorrect service may be fatal to the debt claim. Serving a statutory demand does not involve the court and no court fees are payable.
The statutory demand is intended to be relied upon in further legal proceedings against a debtor and it should:
- give financial details of the claim, along with interest calculated to the date of the demand;
- be served on you the debtor personally (via a process server) or by post; and
- tell the debtor what to do to enable you to comply with the statutory demand, have it set aside and the consequences of doing neither.
Why should a creditor serve a statutory demand?
The advantages of serving a statutory demand include:
- a statutory demand can be a more cost-effective and a speedier method to ensure the debtor pays the debt rather than instigating court proceedings;
- the statutory demand process does not involve the Court, there are no court fees or delays in waiting for a court hearing – a court hearing will be necessary if the debtor challenges the statutory demand (i.e. if they dispute the debt);
- a statutory demand starts the time running for a debtor to honour its debts, as once served, the debtor has 21 days within which to pay the debt;
- the demand carries a threat of bankruptcy (or winding-up if it is served upon a company), and could focus the mind of a debtor to ensure re-payment of the sums is expedited or encourage engagement in settlement negotiations.
What are the disadvantages for a creditor serving a statutory demand?
A statutory demand can only be served if the debt is for £5,000 or more for an individual.
A creditor must consider ongoing trade relationships and consider whether serving a statutory demand would affect its business relationship with the debtor.
A creditor cannot serve a statutory demand for a liquidated debt i.e. a debt for as yet an unknown or an unquantifiable sum.
If the debt is disputed on genuine grounds, there are significant risks to a creditor of serving a statutory demand as normal court proceedings would instead be the proper forum to hear the dispute.
Although serving a statutory demand is not overly expensive – compared to litigation, if the debtor cannot pay, then the next step is to present a bankruptcy petition against them, which will increase costs.
There are specific rules for serving a statutory demand and presenting a bankruptcy petition, therefore it is important to seek legal advice at the outset, because if a mistake is made in service, then this will delay or even prevent the re-payment of the debt as well as mean you could be liable for the debtor’s legal costs in defending the claim.
The format of a statutory demand must follow the guidelines set out in the Insolvency Rules 2006.
Following Rule 10.1 Insolvency Rules 2016, the contents of a statutory demand are as follows:
- headed either “Statutory demand under section 268(1) (debt payable immediately) of the Insolvency Act 1986” or “Statutory demand under section 268(2) (debt not immediately payable)”;
- provide identity details for the debtor;
- has the name and address of the creditor;
- contains a statement of the amount of the debt (which must be over £750), and the consideration for it (or, if there is no consideration, the way in which it arises);
- if the demand is made under section 268(1) and founded on a judgment or order of a court, the date of the judgment or order and the court in which it was obtained;
- if the demand is made under section 268(2), a statement of the grounds on which it is alleged that the debtor appears to have no reasonable prospect of paying the debt;
- if the creditor is entitled to the debt by way of assignment, details of the original creditor and any intermediary assignees;
- has a statement that if the debtor does not comply with the demand bankruptcy proceedings may be commenced;
- provides the date by which the debtor must comply with the demand, if bankruptcy proceedings are to be avoided;
- a statement of the methods of compliance which are open to the debtor;
- a statement that the debtor has the right to apply to the court to have the demand set aside;
- a statement that rule 10.4(4) of the Insolvency (England and Wales) Rules 2016 states to which court such an application must be made; and name the court or hearing centre of the County Court to which, according to the present information, the debtor must make the application (i.e. the High Court, the County Court at Central London or a named hearing centre of the County Court as the case may be);
- a statement that any application to set aside the demand must be made within 18 days of service on the debtor; and
- a statement that if the debtor does not apply to set aside the demand within 18 days or otherwise deal with this demand within 21 days after its service the debtor could be made bankrupt and the debtor’s property and goods taken away.
You should really consider seeking legal advice before serving a statutory demand. We know the best way to get your unpaid debts paid up quickly. This may involve Insolvency or Litigation proceedings. You will receive strategic legal advice from a barrister at an initial fixed fee meeting.