If your company has experienced late payment problems, a statutory demand may prove to be a very useful method to encourage clients and customers to settle any outstanding debts. Here we look at what a statutory demand is, and the steps you must take to ensure that your demands are issued correctly.
A company is insolvent when a debtor owes money to a creditor, and the debtor is unable to pay its debts as they fall due and payable.
A debt is simply a legally enforceable liability. A creditor has the right to insist payment of an outstanding balance. Until a formal insolvency procedure has begun, the creditor is free to seek payment of its debt by any legal means.
- are a formal written request for payment;
- commonly used debt collection technique made available by the Insolvency Act 1986;
- are not an insolvency procedure, but more of a precursor to insolvency proceedings;
- may be issued to a debtor for an unsecured, uncontested debt of over £750.
- Do not require any form of approval before service on a debtor; it is a matter between a creditor and debtor.
A statutory demand is a quick and inexpensive route to find out whether a debtor will pay their debt. After service, a debtor has 21 days to respond. In the commercial context, if the debtor fails to comply or contests the demand, it is taken as evidence of an inability to pay a debt and the presumption of insolvency arises. The creditor may then continue with debt recovery procedure and petition for winding up the company.
It is important a statutory demand is served in accordance with the rules, otherwise it could be deemed invalid, and the party that has served the demand could be held liable to pay the debtor’s costs.
Statutory demands are written demands which have a standard form as prescribed by the Insolvency Act 1986. Different forms are used for corporate debtors and individuals. Before completing a form, a creditor should consider the likelihood of the debt being disputed – and a genuine dispute at that – or if the debtor possesses a genuine cross-claim.
- must be signed and dated by the creditor, or suitably authorised agent.
- must be issued for a liquidated debt.
- are available to be issued for debts in excess of £750, and not older than 6 years old, whether it is a commercial debt or judgment debt;
- must be for unsecured debts;
- must state how the debt arose;
- must specify interest claimed separately, and the grounds for claiming interest set out.
- are limited to sums owed at the date of the demand.
- must specify the debt be paid, secured or compounded to the satisfaction of the creditor.
- must provide the debtor complies within 21 days or disputes the demand within the same time frame. This is part of the standard forms referred to above;
- provide an explanation to the debtor setting out the purpose of the demand and the consequence of non-compliance.
- The methods of compliance available to the debtor must be set out and to whom the debtor should reply if they wish to secure or compound the debt.
It is an abuse of process to present a statutory demand against a solvent company in respect of a disputed debt. If there is a genuine dispute on substantial grounds, the debtor may apply for an injunction to restrain the creditor relying on the statutory demand in the future.
It is for the creditor to deliver (or serve) the statutory demand on the debtor. Statutory demands are usually served at debtor company’s registered address or personally serving the debtor by:
- handing it to a director; or
- handing it to an officer or employee of the company authorised to accept service of documents on the company’s behalf (such as a receptionist); or
- leaving it at the registered office of the debtor company in such a way that it is likely to come to the attention of such persons attending the office.
If this is not possible, a statutory demand is served if sent by registered post to the company’s registered office and the company acknowledges it by signing the Post Office receipt. It is advisable to ensure that there the creditor places itself in a position where can prove that the statutory demand was served.
Once the statutory demand has been properly served, the debtor has 21 days to comply or apply to Court to dismiss the demand.
In the event of non-compliance with the statutory demand, whether by failing to pay the debt due or failing to apply to the Court to set aside the statutory demand, the creditor is able to continue insolvency proceedings and issue a petition to wind up the company. A certificate of service and a statement of truth providing details on how the statutory demand was served must be filed at court with the petition. The certificate of service should be made by the person who served the statutory demand.
Once the debtor has failed to comply with the statutory demand, another creditor, the directors, members or contributors may also rely upon the evidence of non-compliance to present a winding up petition,. However, the insolvency process is a collective one, in that it is conducted for the benefit of all creditors. The petitioning creditor will be put in no better position and will receive payment of its debt in line with other unsecured creditors.
The costs of the petitioner are paid in priority to creditors claims but the creditor will need to assess if there will be sufficient assets to do so. It can nevertheless, be a way to establish the debt is lost. To abuse the demand process in this way, the creditor must recognize the service of the demand may have serious consequences for the debtor, who may regard the non-compliance as a sufficient warning to cease trade or seek protection by some form of insolvency.
Olivia Herbert is a paralegal with Drukker Solicitors. Olivia assists clients to recover debts and assists our solicitors in debt collections and recoveries, and is training to be a commercial and business lawyer. Leigh Ellis is solicitor at Drukker and specialist IT lawyer, assisting businesses on corporate and commercial legal issues.