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What is a Statutory Demand? How to Make & Serve One

A Statutory Demand is an effective way to resolve an ongoing debt issue for an unhappy creditor. Not often used as a first resort, Statutory Demands are usually issued after a period of reminders and unsatisfactory chasing of an unpaid debt.

A Statutory Demand doesn’t inevitably lead to company liquidation or personal bankruptcy. However, swift action is essential if a business or an individual receives a Statutory Demand. Otherwise, there can be severe and expensive consequences for a personal or corporate debtor.

A debtor can challenge a Statutory Demand if the debt is disputed, or the Demand has a factual inaccuracy or has been incorrectly served. Whether you are issuing a Statutory Demand or on the receiving end of one, experienced and prompt legal advice is essential.

What is a Statutory Demand?

A Statutory Demand is one amongst a number of routes open to a creditor looking to recover money owed from an individual, partnership, or limited company.

A Statutory Demand is a legal demand for payment of monies due to a creditor. Issuing a Statutory Demand doesn’t require court proceedings. A creditor can issue a Statutory Demand without going to court and obtaining a judgement.

If payment — or at least an agreement to pay — is not forthcoming, the creditor may resort to court action. Court proceedings can result in the liquidation of the debtor’s business via a winding up petition (WP). 

A Statutory Demand is a formal warning shot across the bows and usually follows previous and unsuccessful efforts to get the money repaid.

What is a Statutory Demand Notice?

A Statutory Demand is a warning Notice about an unpaid debt. A Statutory Demand is notice that the creditor will take further legal action quickly if the money is not repaid or an alternative arrangement is made.

A Statutory Demand is a warning, but it is not one you can ignore. The consequences of failing to meet — or dispute — a Statutory Demand can be dire.

How Long Does a Statutory Demand Last?

A Statutory Demand is not a court document. However, it is dated at the time of issue and, theoretically, does not expire. However, you will have to give reasons if you wait more than four months to take further action.

Receipt of a Statutory Demand creates a window of 21 days, during which time the recipient must either pay the debt or agree on a payment plan with the creditor. If an individual disputes the debt, they have 18 days to apply to the court to set aside the demand. If a company disputes the debt, it must apply to the court for an injunction before the 21 day period expires.

In reality, Statutory Demands trigger a rapid chain of events whether the debtor responds or not, irrespective of how the debtor counters the Statutory Demand. 

Statutory Demands are often used as evidence to the court that a debtor is unable to pay their debts as part of bankruptcy proceedings. A creditor relies on Statutory Demands when issuing a winding up petition or a bankruptcy petition.

Statutory Demands are very powerful as they have a domino effect that can lead quickly to personal bankruptcy or company liquidation. 

Statutory Demands remain in force and valid until events overtake them and make it clear that they have outlived their usefulness — for instance, the winding up of a company.

Can You Serve a Statutory Demand on an Individual?

Creditors can issue a Statutory Demand to request payment of monies owed from either individuals or a company.

If you are issuing a Statutory Demand against a partnership, each individual partner must receive a demand.

What Happens After a Statutory Demand Has Been Issued?

An individual who receives a Statutory Demand has 18 days from the date of service to challenge the demand or 21 days to either pay the money owed or come to an agreement with the creditor.

An individual can apply to the court to have the Statutory Demand set aside if the debt is under dispute or has been paid. An application to the court must be supported by written evidence either that the debtor cannot pay and wants to pay by instalments or that there is a valid and demonstrable dispute.

If the money is paid or an agreement reached, no further action will be taken unless the debtor defaults on the payment plan and then personal bankruptcy is a real possibility.

A Statutory Demand issued to a business is a notification that if the debt is not settled or some other action agreed upon, legal action will commence to liquidate the company. 

A company issued with a Statutory Demand may apply for an injunction to restrain a winding up petition because the debt is in dispute or there is a valid counterclaim reducing the debt below the threshold of £10,000.

Upon receipt of a Statutory Demand, if a company doesn’t dispute the debt,  negotiate a settlement with the creditor, or repay the money owed, the creditor can petition the court to wind up the business.

Service of a winding up petition will trigger a requirement to pay the debt in full within seven working days. Failure to pay after this period will result in notification in the London Gazette. 

Once the debtor’s position is made public, the company bank accounts will likely be frozen. Other creditors will typically come forward to join the petition and make claims against the debtor to protect their position in the event of the company failure.

Statutory Demand Procedure: Step by Step

There are certain defined circumstances under which a creditor may issue a Statutory Demand. The criteria are set out in the Insolvency Act 1986

First, check the amount of the debt. Is it at least £10,000 for a company and £5,000 for an individual? Statutory Demands cannot be used for debts below this figure. 

Also, the debt must not be the subject of a dispute or already part of pre-arranged payment plan.

Here is the step-by-step procedure to issue a Statutory Demand.

  • The creditor must use a Statutory Demand Form SD1 to serve a Statutory Demand on a limited company or SD2 to serve on an individual or a partnership where each partner must receive their own form
  • Forms must be correctly completed – inaccuracies or omissions can result in a formal rejection of or challenge to the demand
  • If the creditor thinks that the debtor may be able to repay the money in the future, they should use Form SD3
  • The form can be handed to the company director or another company officer or served by a process server. Postal service should only be used if personal service is not an option, and this must be to the company’s registered office address
  • Serving a Statutory Demand on an individual is usually done by personal service using a process server. If that is not possible, the creditor may attempt to serve either by post to the home address or, more commonly, by email to an address that is in verifiable use. It is much easier for the debtor to deny receipt of demands served by email or post.
  • You must keep a copy of the Statutory Demand and any supporting evidence which indicates the date and time the notice was served, e.g., proof of posting or confirmation from a process server. If the demand is ignored, it may be necessary to evidence service on the debtor
  • Statutory Demands can set off a rapid chain of events. They may expose the creditor to court costs if the debt is disputed and the recipient to possible insolvency. Always take legal advice before embarking on this process or if you are on the receiving end of a Statutory Demand

Conclusion

The window for action after receipt of a Statutory Demand is very small. It is imperative to act quickly and seek specialist legal advice

If you are the creditor, there may be other more effective routes open to you to recover a debt which expose you to a lesser risk of punitive costs if the debtor disputes the demand.

Helix Law offers specialist debt recovery advice from their experienced commercial team, acting for both creditors seeking to recover unpaid monies and individuals and companies who are in receipt of Statutory Demands.
Please don’t hesitate to contact us if you require expert advice.

Posted by:

Alex Cook
Solicitor

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