How To Challenge or Defend a Statutory Demand
Has your company received a Statutory Demand?
A prompt response is essential — even if you believe you can offer clear evidence that your company does not owe the disputed amount to the Creditor.
Once you receive a statutory demand, your business only has 21 days to:
- Pay the debt in full
- Make an arrangement with the creditor
- Obtain an injunction preventing a winding up petition from being issued against the company.
If you wish to challenge the Statutory Demand, you must do it within 18 days. An injunction application takes time to prepare. In reality, you need to act almost immediately.
Here we outline what a Statutory Demand is, the chain of events following your receipt of a Statutory Demand — and what you can do to achieve a favourable outcome for your business.
What Is a Statutory Demand?
A Statutory Demand is a formal demand from a creditor to a business to repay a debt under Section 123 of the Insolvency Act 1986. The amount claimed must exceed £10,000 for a Company and £5,000 for an individual.
Upon receipt of a Statutory Demand, a company has 21 days to either pay the amount owed in full or come to a mutually acceptable payment arrangement with the creditor.
If you dispute the Statutory Demand, it is fundamental to establish the details of your defence and response even more quickly — not least to try to prevent the need to apply for an injunction.
Has Your Company Received a Statutory Demand? What Happens Next?
After a company receives a statutory demand — and fails to pay within the allotted timeframe — the next step is for the creditor to issue a winding up petition.
If a winding up order is made, the company will cease to exist.
Even where a debt is disputed, the issuance of a winding up petition itself can be disastrous for any company. Usually, all company bank accounts will be immediately frozen once the court issues the winding up petition — leaving directors with no access to company funds. An asset freeze is crippling for any company.
A winding up petition will result in publication in the London Gazette. Aside from leading to your company bank accounts being frozen, your other creditors are likely to seek the repayment of debts once they are aware that insolvency proceedings have commenced.
The potential loss of access to company funds via a winding up petition makes a prompt response to a statutory demand imperative.
Defending or challenging a Statutory Demand requires a specific form and procedure, including applying to the court for an injunction — a complex, urgent, and high-level process.
Successfully filing a challenge almost inevitably requires professional advice. Helix Law is experienced in these matters. We routinely act for parties who have received statutory demands and are unclear on the next best steps.
Whether you choose to dispute or pay the Statutory Demand in full, time is of the essence.
If you don’t act appropriately with the allotted timeframe, the Creditor can move to issue a winding up petition, and your company may be declared insolvent.
Depending on the amount of time available, we will typically try to avoid the need for (and cost of) an injunction by writing to the creditor first. We will outline any difficulties you may be experiencing or dispute with the amount owed.
Often we can force the creditor to withdraw — or undertake not to rely on — the petition.
If that proves unsuccessful and we must apply for an injunction, we’re experienced in helping you recover your legal costs from the creditor.
Recovery of costs is not inevitable — it’s always at the court’s discretion. But it is a realistic possibility when a creditor acts unreasonably in pursuing the statutory demand — even after we have set out details of your dispute.
The court can order a creditor to reimburse your legal costs even if you are later found liable for the debt.
Instructing us to act on your behalf can be incredibly powerful as a result, as the threat of seeking recovery of your legal costs can be powerful leverage.
Grounds to Challenge a Statutory Demand
Companies or their legal representatives can dispute statutory demands. Unless a court has already ordered that monies are due and owing, the threshold to dispute a statutory demand is relatively low.
In simple terms, the courts don’t like to see companies wound up when the debt is disputed. Where there are genuine triable issues in dispute and a debtor can illustrate these, there can be solid grounds to avoid a winding up petition being issued.
A challenge to a statutory demand’s validity must be made within 18 days of service on the debtor. It’s important to note, a successful challenge does not result in the court confirming the monies are — or are not — owing. The court will simply determine that a statutory demand and winding up is not currently appropriate as the alleged debt is disputed.
The primary grounds to challenge a statutory demand are as follows:
Illustrate There Is a Genuine Dispute
Disputing the debt is the most common response to a Statutory Demand.
You can challenge a Statutory Demand if the debt — or an element of the debt — is part of a genuine dispute between your business and the Creditor.
You will need to provide detailed evidence of a legitimate dispute to the Court. The threshold is relatively low, as the court in an insolvency setting will not want to litigate or have a mini-trial. But the debtor will need to establish that the suggestion of a dispute has substance, with genuine triable issues in dispute.
Any dispute that is not authentic will simply be viewed by the Court as a delaying tactic. An injunction application to prevent a winding up petition from being issued would likely fail under these circumstances.
Demonstrate a Valid Counterclaim Against the Creditor
Under the insolvency rules, the court will also consider whether you have a counterclaim or set-off against monies you are said to owe.
For example, a creditor serves a statutory demand on your company for £50,000 owed for goods/services — which on face value you accept. But, in response, you claim that you are owed £75,000 due to something the creditor has or hasn’t done (or hasn’t done to an adequate standard).
The court will consider these arguments and may determine that the statutory demand is not a valid recourse for the creditor.
Setting out your arguments — together with the threat of seeking recovery of your costs in an injunction application — can often force a creditor to back down.
If you intend to dispute the debt, it is vital to respond in writing within 18 days setting out the full details of why. The letter must give detailed grounds for disputing the statutory demand and provide any documentary evidence to support your claim.
Based on the dispute, you can seek to have the creditor undertake (or give a legally binding form of promise) not to rely on the statutory demand. If that approach is taken, no further steps will be required.
If an undertaking is not provided, it is usually advisable to obtain an injunction from the court. You will need to pay a law firm for the time, costs and work involved in obtaining an injunction. But if an injunction application is required, an experienced representative would seek to recover legal costs from the creditor on your behalf.
If your business is a limited company, you may apply for injunctive relief if the creditor doesn’t withdraw the Statutory Demand after you have notified them of the dispute.
There can be technical reasons why a statutory demand should fail. The content of a statutory demand is in a precise and prescribed form. Where an incorrect approach is taken, it can be possible to challenge the validity of the demand even if the substance of the content and the alleged debt is admitted.
At Helix Law, we routinely see examples where a creditor has used an incorrect form or has incorrectly completed the demand. There may also be other technical arguments we can put forward to challenge the statutory demand — regardless of whether the monies are owed or not.
How To Avoid a Winding Up Petition
If none of the grounds for challenging a statutory demand outlined above apply, there are few options available to a company to avoid the issuance of a winding up petition.
Pay the Debt
Unsurprisingly, this is the most straightforward way to prevent the subsequent consequences of a statutory demand — which may include a winding up order and insolvency. If you do not dispute the debt and accept the monies are owing, there is no valid reason not to pay, and you should do so immediately to avoid further steps being necessary.
Even if you dispute the debt, if you have insufficient evidence to challenge it successfully, the most pragmatic solution may be to discharge the debt in full and avoid the consequences of nonpayment.
If you pay the debt, you should also obtain a written confirmation from the Creditor that they have received the monies and that no steps will be taken to issue a winding up petition.
Negotiate a Resolution via Payment by Instalment
Another alternative can be to arrange a payment plan with the Creditor to pay all or part of the debt in instalments. You can often take this approach where some aspects of the debt are in dispute, but there is an underlying willingness to compromise.
A payment plan can also be a viable option when there is insufficient evidence supporting either a dispute via injunction or a counterclaim.
It is always easier to try to negotiate a resolution to a dispute from a position of strength. Often it is possible for an expert solicitor to set out challenges to a statutory demand, including why it isnt valid or the monies arent owed, but then at the same time seek to negotiate a favourable resolution on an off the record basis.
Negotiations and settlement exchanges usually take place in parallel with any dispute on what is known as a ‘without prejudice basis’. Where any communication (telephone calls or emails or letters) are sent and received marked ‘without prejudice’ they cannot be referred to a judge other than where they also include ‘save as to costs’ in which case they can be shown to a judge after any trial when the judge is considering who should pay costs.
Sending a creditor on the one hand a well drafted letter disputing their demand, but then also (at the same time) an offer to resolve the dispute can be a highly effective approach. Especially where you are seen to be taking the dispute seriously by instructing specialist litigation solicitors.
A Statutory Demand against your company can trigger a disastrous chain of events. Inaction is not an option if your business receives a Statutory Demand.
Failure to act means your company can face a petition to be wound up in as little as three weeks.
There are numerous ways you can immediately try to protect and improve your position. Expert advice is essential to protect your company from the risk of a winding up petition.
How and in what form you respond can make or break your chances of achieving a favourable outcome.
Doing the wrong thing can be catastrophic — doing nothing almost certainly will be.
Helix Law has an expert commercial team experienced in stepping into commercial disputes at short notice. We will quickly assess the facts and circumstances and offer professional and strategic advice for your business when faced with a Statutory Demand for an unpaid debt.