A statutory demand is a written demand for payment of a debt within 21 days. It is presented by a ‘creditor' to a business or individual that owes it money (the ‘debtor'). It is usually the first step in bankruptcy or insolvency proceedings. To serve a demand on a company, the sum owed must exceed £750, and for individuals it must be equal to or exceed £5,000.
Non-payment of a statutory demand can be used as evidence of a company's inability to pay its debts or in the case of an individual, to pay the debt demanded. In turn this can be relied on to wind-up a company or make an individual bankrupt. B P Collins' commercial litigation team explores what you should do if you receive one.
How to respond if you are a business
If your company receives a statutory demand, it is important that it is dealt with immediately. Failure to do so could be fatal for a company if a winding-up petition is presented against it for non-payment of a statutory demand.
If you do not dispute the debt, then contact the creditor to make payment or to try and agree a payment plan.
Is the debt disputed? For example, is there a legal basis for the debt, such as a contract? Even if the debt is not disputed, do you have a cross-claim which might reduce the debt to below the relevant threshold or extinguish it altogether?
If the debt is genuinely disputed on substantial grounds, the insolvency process should not be used to try and recover a debt and instead you should bring a claim through the courts. You should write to the creditor as soon as possible to explain why and invite them to withdraw the statutory demand and agree not to present a winding-up petition. A winding-up petition can be fatal to a company because once it has been advertised to the public then loan facilities are often withdrawn or called-in. As an insolvency event it may also affect other contracts which you have with third parties. People are reluctant to do business with a company which might be insolvent.
If the debtor still wants to present a winding-up petition then you will need to act quickly to obtain an injunction to restrain them from doing so. Our experienced commercial litigation solicitors can help you with this.
How to respond if you are an individual
If you receive a statutory demand as an individual (i.e. not against your company) you must act quickly and urgently. If you do not, the creditor may apply for you to be made bankrupt.
The factors to consider are much the same as if you were a company but additionally, and instead of applying for an injunction, you can make an application to set-aside the statutory demand, for example if the debt is genuinely disputed on substantial grounds or you have a cross-claim (as above). That application must be made within 18 days of service of the statutory demand.
There will then usually be a court hearing to decide if the demand should be set-aside and the 21-day time limit to pay the amount in the statutory demand is paused until the application has been determined. If you manage to successfully set-aside the statutory demand, it cannot be used as evidence of an inability to pay the debt demanded nor be used as the basis of a bankruptcy petition.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.