What is a statutory demand?
A statutory demand is a written demand for payment of a debt served on either:
- An individual
- A company
In general terms, a debtor who, for 21 days, fails to comply with a statutory demand for a debt of more than £750 (for companies), or a debt of £5,000 or more (for individuals), is at risk of having bankruptcy or winding-up proceedings issued against them. Therefore, serving a statutory demand may be a means of exerting pressure on an individual or company to pay a debt.
It is often the first step taken by a creditor who intends to present a bankruptcy or winding-up petition against the debtor. However, there is no obligation on a creditor who has served a statutory demand to commence insolvency proceedings against the debtor.
A statutory demand does not commence court proceedings, is not a court document and thus does not need to be issued at court.
There are several advantages and disadvantages to making a statutory demand:
The advantages of serving a statutory demand (with a view to recovering a debt) are:
- Preparing and serving the demand can be done quickly. It should be noted, however, that the debtor will have 21 days in which to pay.
- It is inexpensive.
- You do not have to involve a court and do not have to pay a court fee.
- It usually has a significant impact on the debtor. In particular, the debtor will know that the next step in the process (if it does not pay) is either a winding up or bankruptcy petition. The demand will particularly concern the debtor if it wants to save its business and/or its owners have invested in it or they have given personal guarantees. Often the service of a statutory demand will lead to the debtor paying or negotiating a payment plan.
The disadvantages of serving a statutory demand are:
- A statutory demand cannot be used in respect of a debt which is not for a specific and known sum. For example, it cannot be used where a debtor’s breach of contract has caused losses which are yet to be calculated.
- The debt must be for at least £5,000 in respect of individual and £750 in respect of corporate debtors.
- It may have a negative impact on an ongoing trading relationship.
- It may be perceived as an aggressive step and can lead to court proceedings (for example, if an individual applies to set aside the statutory demand or the debtor seeks an injunction to prevent the presentation of a petition).
- There are quite specific rules governing how a statutory demand must be served. These are particularly onerous when the demand has to be served on an individual. It is important to note, however, that if the debtor does not pay, then the creditor will not be able to pursue the matter to the next stage if there has been defective service.
- It is very risky to serve a statutory demand on a debtor if you know that the debt is disputed on genuine grounds or if the debtor has been silent and there is a risk that the debt could be disputed on genuine grounds. This may well lead to the debtor applying to court either for an injunction to restrain any further action on the statutory demand, or to set it aside. If they make such an application and succeed, or if they make such an application and you withdraw the demand, then you will very likely be ordered to pay the costs of the application. This could lead to a situation where you do not recover your debt quickly and in fact you are required to pay the debtor money.
- If there is no response to the statutory demand, or the debtor simply cannot pay, then the follow-up action is a winding up or bankruptcy petition. This is significant, as it is costly, time-consuming procedure and, because winding up and bankruptcy are collective procedures for the benefit of all creditors. Typically, the debtor’s assets are realised by an independent insolvency practitioner and are then paid out in a specific order of priority. Therefore, unsecured creditors may not receive anything or just a small portion of the debt, and the money will likely take months to arrive.
Reasons for serving a statutory demand on an individual
Statutory demands are often used as a precursor to commencing bankruptcy proceedings against a debtor. A creditor may present a bankruptcy petition in respect of a debt if he can show each of the following:
- The debtor appears either to be unable to pay the debt or to have no reasonable prospect of being able to pay.
- The debt is for a liquidated sum of £5,000 or more, payable either immediately or at some future time, and is unsecured.
Reasons for serving a statutory demand on a company
In practice, a statutory demand is often used by a creditor because, if it remains unpaid for more than three weeks, this can be used to support a winding petition on the grounds that the debtor company is unable to pay its debts.
The circumstances in which a company is deemed to be unable to pay its debts are as follows:
- If a creditor to whom the company is indebted in a sum exceeding £750 then due has served on the company, by leaving it at the company’s registered office, a statutory demand and the company has, for three weeks, neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor.
- If it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due
- If it is proved to the satisfaction of the court that the company is insolvent on a balance sheet basis
- Execution or other process issued on a judgment, decree or order of any court in favour of a creditor is returned unsatisfied in whole or in part in England and Wales
Accordingly, in the compulsory liquidation regime, serving a statutory demand provides one way of establishing a company’s inability to pay its debts.
It is not strictly necessary for a creditor to serve a statutory demand on a debtor company before presenting a winding-up petition to the court. The creditor may be able to establish that a company is unable to pay its debts by relying on other relevant evidence such as:
- The failure of the company to satisfy a judgment debt or a court order requiring payment.
- The failure by the company to pay a debt that is due and undisputed
- The company’s accounts or statements made by officers or employees of the company.
How we can help you
If you want to claim an outstanding debt or have had a statutory demand served on you.
We’ll help you work out your options and give you detailed advice on the effects of each option to suite your business needs. For more advice please contact us at Onyx solicitors, on 0121 268 3208 or email us at firstname.lastname@example.org with your query.