Enter your keyword

Statutory Demands – Everything You Need to Know!

INTRODUCTION – WHAT IS THE PURPOSE OF A STATUTORY DEMAND?

Statutory demands are not a debt recovery procedure, but they are often (mis)used 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 are therefore cashflow 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 payable by the creditor on setting aside or the granting of an injunction can range from £2,000 upwards even if, ultimately, 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.

SPEAK TO A LAWYER NOW ON:

OR BOOK A CALL BACK:

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.

THE DO’S AND DON’TS OF STATUTORY DEMANDS

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:

DO ACT QUICKLY AND CONSULT AN EXPERIENCED SOLICITOR 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

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 balance sheet insolvent. If the debtor will not agree to withdraw the demand in writing then

DO APPLY TO THE COURT TO SET ASIDE THE DEMAND WITHIN 18 DAYS

if you are an individual. The statutory demand should specify the correct court for you to make that application to. 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. Please 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:

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
the debt is disputed on grounds which appear to the court to be substantial; or
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

the court is satisfied on other grounds that the demand ought to be set aside.
For companies, and on an application for an injunction, the court will consider, amongst other things, whether there is a genuine dispute about the sum demanded and/or whether there is a cross claim or set off, whether the creditor has another way to recover the money and whether it would be oppressive or unfair for the company to wound up.

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. Debtors may find that they’re unable to fund such legal costs even if they are ultimately paid by the creditor. However, it may be possible for the debtor to find a solicitor who will act for them on a no-win no-fee agreement.

SUMMARY:

  • Act fast to avoid missing the deadline
  • Consult a solicitor with experience in dealing with statutory demands
  • Ask for a no win no fee

 

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.

Do, above all, take some free advice from a solicitor at Helix Law before serving a demand.

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.

Book A Call Back





I have read and accept Helix Law's Privacy Standard

FAQ

A statutory demand can be a useful way to try to force a debtor (company or individual who owes you money) to make payment to you. If you are having problems recovering money owed to you this can force the hand of the Debtor by threatening either bankruptcy (if an individual) or winding-up (if a company). Serving a statutory demand on an individual is often a precursor to bankruptcy or winding up proceedings against the Debtor.

A Creditor has 4 months from the date of service to issue a bankruptcy petition or issue a winding-up petition. The demand isn’t valid after that period of time.

As a general rule a petition cannot be presented until three weeks have elasped after the statutory demand was served. There are some limited exceptions that can apply shortening this timeframe.

If no action is taken by a creditor within 4 months of service of a statutory demand, the creditor cannot rely on that demand and would need to serve a new demand or issue a claim.

A Debtor has 18 days from receipt of the statutory demand to apply to set it aside or to apply for an injunction. In reality a debtor should take steps immediately upon receiving the demand. Where instructed we use the available time to write to the creditor and try to reach an agreement that avoids either bankruptcy or a winding up petition being issued.

A statutory demand can be served when a creditor is owed monies which are properly due and owing, and which haven’t been paid. Where the debt is disputed, or where there is set off, counterclaim, or where security has been provided for the debt it may not be appropriate to use a statutory demand.

A statutory demand cannot be granted. A creditor (person or company who says they are owed monies) can use a statutory demand as the first step in the insolvency process leading to bankruptcy in the case of an individual, or winding up in the case of a company.

A Statutory Demand is a specific type of demand and notice that a creditor (person or company owed monies) can use to demand payment from a debtor (person or company). Where there are no genuine triable issues in dispute and it is clear and agreed that the monies are owed, but have not been paid, a Statutory Demand can be the first step in pursuing a debtor via insolvency. In the case of an individual insolvency means bankruptcy, in the case of a company insolvency means a winding up petition. There are a number of ways that Statutory Demands can be challenged and opposed including technical arguments (such as where the incorrect form of demand is used), or where there are genuine triable issues in dispute. Where there is a counterclaim or where the debt is already secured insolvency is unlikely to be appropriate.

A statutory demand is the first step in the insolvency process whereby a Creditor (person who says they are entitled to payment of monies) to initiate either bankruptcy or winding-up proceedings against a debtor. A recipient of a statutory demand has 18 days to either secure the creditors agreement not to rely on the demand, apply to the court to have the statutory demand set aside (if an individual) or apply to the court for an injunction preventing a winding up petition being issued (if a company recipient).

A statutory demand is the first step towards insolvency. If a statutory demand isn’t addressed properly the next step for a company debtor would be for the creditor to petition to wind up the company. For an individual a bankruptcy petition might be issued by the creditor. Both a company and an individual can prevent a statutory demand from going further by reaching an agreement with the creditor. If monies are owed and admitted then a payment of the debt should prevent any petitions being issued. Aternatively if security is offered (for example a charge against assets) or if the debtor has a counterclaim, a bankruptcy petition might be defended. Where a statutory demand is received by an individual and there is a genuine triable issue and dispute between the parties the debtor can apply to the court to obtain an order that it be set aside. That will prevent the creditor issuing a bankruptcy petition relying on the statutory demand. In the case of a comapny a debtor who disputes that the monies owed should obtain either undertakings that the creditor will not present a petition, or apply to the court for an injunction preventing the creditor from issuing a petition to wind up the company. An injunction is a serious, urgent, application to the court.

A statutory demand must be dated and signed by a Creditor. This means either the person owed monies or by a Director if the creditor is a company. Alternatively a statutory demand can be signed by any person who has been authorised to do so by the creditor on the Creditor’s behalf.

Any Creditor (company or individual) owed monies can serve a statutory demand on a Debtor.

HMCTS has published standard forms which should be used. These do change from time to time and therefore the current versions should be used. These forms have changed and old forms 6.1, 6.2 and 6.3 should no longer be used.

If served by first class post this is deemed served the day after the day after posting. More usually however Statutory Demands are served personally, i.e. they are placed into the hands of the debtor. This avoids any dispute regarding service.

If serving a statutory demand on an individual, personal service (i.e. putting into the hands of the debtor in person) is the most effective method of service. If serving a statutory demand on a Company the company registered office at Companies House should be used.

If you receive a statutory demand but then ignore it you run the risk of either bankruptcy proceedings being issued against you (if you are an individual) or a winding-up petition being issued against you (if you are a Company). If you have a defence to the petition and do not raise that until later you may be ordered to pay the creditors costs as well as your own. Therefore anyone who has received a statutory demand should act quickly to try to ensure a petition for bankruptcy or for winding up are not issued against them.

It is important that there is evidence of service of a statutory demand. Schedule 4 of the Insolvency Rules 2016 sets out the requirements for service. A reditor must ‘do all that is reasonable to bring the statutory demand to the debtor’s attention and, if practicable in the particular circumstances, serve the demand personally’. That means instructing a process server to confirm personal service ideally. If that isnt possible then the courts have allowed service by other means (including by Twitter and Facebook) but that is unusual. A statutory demand can be served on a company by leaving it at the companies registered office, as confirmed at section 123 (1)(a) Insolvency Act 1986. In either example evidence of service is important. That can include proof of posting or an affidavit from a process server confirming service.

Personal Service is always encouraged and a creditor needs to illustrate that everything has been done to bring a demand to the attention of a debtor. The legal test is that a creditor ‘must do everything possible to bring the statutory demand to the Debtor’s attention and if practicable in the particular circumstances serve the demand personally’. However if personal service (meaning putting into the hands of the debtor) is not practicable or possible, the courts can decide later that it was appropriate to have sent the demand by email. This can be known as substituted service. The courts can take a broad approach to service, especially where a debtor is trying to avoid being personally served. As an example service by Facebook has been found to be valid however the difficulty for creditors is that they risk using an alternative method of service, issuing a petition (incurring costs and court fees) and the court then saying that the method was not valid. Therefore care needs to be taken in relation to service.

Schedule 4 of the Insolvency Rules 2016 sets out the requirements for service. A creditor must ‘do all that is reasonable to bring the statutory demand to the debtor’s attention and, if practicable in the particular circumstances, serve the demand personally’. That means instructing a process server to confirm personal service ideally. If that isnt possible then the courts have allowed service by other means (including by Twitter and Facebook) but that is unusual. A statutory demand can be served on a company by leaving it at the companies registered office, as confirmed at section 123 (1)(a) Insolvency Act 1986. In either example evidence of service is important. That can include proof of posting or an affidavit from a process server confirming service.

Standard forms are published which are updated and amended from time to time. The current versions are SD 2, SD 3 and SD 4. The old forms, which should no longer be used, are form 6.1, Form 6.2 and Form 6.3.

Statutory demands are not issued or approved by the court. A creditor drafts a Statutory Demand and then sends it to the debtor. If the debtor fails to make payment the creditor is then entitled to issue a petition with the court (either winding up if a company or bankruptcy if an individual), relying on the statutory demand. The starting point is that the courts only review the content of a statutory demand at that point.

Statutory demands are used by creditos as a debt recovery or credit control function. Sometimes statutory demands can be used inappropriately by a creditor who may suggest that a debt is due and owing without taking into account that hte debtor disputes that the monies are owed. The easiest way to avoid a statutory demand is to disucss the position with creditors, including in writing, in order to try to avoid a statutory demand ever being issued. If a demand is issued then there are very specific steps that must be taken to avoid a bankruptcy petition being issued (in the case of an individual) or a winding up petition being issued (in the case of a company).

The correct form of statutory demand must be used. This varies depending on whether you are pursuing an individual or a company. The Statutory Demand then needs to be served on the debtor.

The Statutory Demand is served on the Debtor by or on behalf of the Creditor. Once the designated time elapses, the Creditor can issue (or lodge) a bankruptcy or winding-up petition depending on whether the Debtor is a Company or an Individual and use the statutory demand to support their case in those proceedings. Usually at the very least one Affidavit is filed in support of the petition for bankruptcy or winding up petition.

There can be lots of ways to defend a statutory demand many of which can be technical in nature. For example statutory demands can be served using an incorrect form, be unsigned or contain incorrect particulars. The first step therefore is to see whether there is an easy ‘win’ or a technical defence. Otherwise the most common way to defend a statutory demand is to dispute the debt. If there is a genuine triable issue in dispute then the court will usually agree to set aside the statutory demand in the case of an individual, or order an injunction to prevent a petition being issued in the case of a company. Taking these steps can be important because if a creditor unreasonably refuses to withdraw a statutory demand or give undertakings not to present a petition then it can be possible to obtain a cost order against the creditor for being forced to have to apply.

There is a specific form of demand that must be used to serve a statutory demand on a company or individual. For a company any demand must comply with section 123 (1)(a) or 222 (1) (a) of the Insolvency Act 1986. For an individual a written demand must be in accordance with section 268 (1) (a) of the Insolvency Act 1986. In simple terms a creditor owed monies completes the statutory demand and then serves it on the debtor.

There is no formal procedure for withdrawing a statutory demand. In practice, the Creditor may simply confirm in writing that the statutory demand is withdrawn. The Creditor may also give an undertaking not to present a winding petition on the basis of the demand in the case of a company.

There is no formal procedure for withdrawing a statutory demand. The creditor can simply confirm in writing that the demand is withdrawn in the case of an individual. In the case of a company the creditor can undertake not to present a petition based on the statutory demand. These routes usually apply where the demand has been served and the debt has been paid, or there the debtor has validly disputed the statutory demand.

When a statutory demand is served on a Company, the Creditor will be entitled to either issue a bankruptcy petition if an individual, or present a winding up petition against a Company if the debtor does not repay the debt. A winding up petition prevents a company from continuing to trade and the outcome is therefore catastrophic for a company. Similarly for an individual the impact is significant as bankrupcy continues for at least one year. The Official Receiver then becomes the trustee in bankrupcy and has authority to manage the bankrupts estate on behalf of creditors. This can mean forcing the sale of assets or recoving monies to pay creditors some or all of the monies owed to them.

When a statutory demand is set aside it can no longer be relied upon by a creditor. Where we obtain a court order setting aside a statutory demand we usually also seek a cost order that the creditor should pay the debtor’s costs

Yes, any statutory demand served by a creditor will expire after four months if a petition for bankruptcy or winding up has not been issued.

Yes, provided the Company would be subject to the English and Welsh Courts insolvency jurisdiction those are Companies whose centre of main interest is situated in England & Wales.

Contact Helix Law on 01273 761 990 or email: info@helix-law.com