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How to respond to a statutory demand

If you receive a Statutory Demand, as a business owner it can be a worrying time and difficult to know what to do for the best; whether the debt is admitted or disputed in whole or part. Acting quickly upon receipt of a Statutory Demand is crucial, so we have summarised the key things you need to be aware of to point you in the right direction from the outset.

What is a Statutory Demand?

A Statutory Demand is a written document served under the Insolvency Act 1986 and which a creditor – an individual or company who alleges that your business owes them money in excess of £750 – has served upon you with a view to presenting a petition to “wind up” your company, in the event that the debt in question is not repaid. The document itself is prepared in accordance with Rules 7.2 and 7.3 of the Insolvency Rules 2016.

After a Demand has been served upon your business, you have three weeks in which to comply by paying the debt. If you do not do so, the court has jurisdiction – on the basis of a statutory presumption – to wind up your business, if the creditor presents a winding-up petition to the court in the absence of payment, or any attempt to secure or compound the sum owing.

What are the risks of doing nothing if presented with a Statutory Demand?

The risks involved if you do not act upon being served with a Demand are twofold: there are the consequences of winding-up proceedings being started to consider, and the personal risks to you as a company director. Both have extremely serious implications, and caution is advised in failing to act at all, for the reasons set out in brief below.

Consequences of winding-up proceedings being started

Your company’s bank will freeze any assets and is entitled to do so at any time after the presentation of the winding-up petition. This can have huge ramifications in that you may be left without funds to pay employees and suppliers, therefore leading to your business being unable to continue trading. It is also worth highlighting that your company’s reputation and eligibility to obtain credit may be harmed, and that there will be inevitable legal costs in dealing with the hearing of the petition itself.

Risks for directors

As a director, you may face personal liability in respect of wrongful trading, personal guarantees and misfeasance or breach of duty, to name but a few examples.

What steps can you take if you want to pay off the debt?

The first thing you should do if you accept that the debt is owed is to contact the creditor to make the appropriate arrangements for repayment. It is imperative that if you do this, you request written agreement from the creditor that they will not present a winding-up petition to the court. If they refuse, it is recommended that you seek specialist advice from a business dispute solicitor about the possibility of applying for an injunction to prevent this from happening.

What if you can’t pay off the debt in full?

There is nothing to prevent you from offering to make payments via instalments or asking the creditor to consider deferring payment or accepting a reduced amount. Do not rule out making this suggestion to them as pointless because, in the event that your company was ultimately wound up, the creditor may receive less than they are owed because the costs of any liquidation take first priority, with unsecured creditors only receiving a dividend after this. Quite often, it is the case that unsecured creditors only receive a few pence for each pound of debt, or even nothing at all. Therefore, there is no harm in being upfront with the creditor if you can’t pay off the debt in full.

Is any agreement with the creditor to accept deferred or instalment payments legally binding on them?

It is worth bearing in mind that any agreement you may reach with the creditor to accept deferred payment or payment by instalments may not be legally binding. There is a heavy reliance on goodwill in such circumstances, but one way of ensuring that any agreement would be enforceable would be to seek to give effective consideration – if in any doubt, it is best to seek legal advice on this.

Can a Statutory Demand be set aside?

No formal procedure exists for setting aside a Demand once it has been served upon your company. The only avenues for challenge are by way of applying for an injunction to prevent the creditor from presenting a winding-up petition to the court, or by formally opposing the petition itself, if the creditor takes this step if the debt remains unpaid.

What if you want to challenge the Statutory Demand?

The following, very narrow grounds are summarised below as the only ways in which a Demand can be challenged:

  • You genuinely dispute the debt which is the subject of the Demand on substantial grounds.
  • Your company has a genuine cross-claim or right of set-off against the creditor, which exceeds the amount set out in the Demand.
  • Your company has a reasonable excuse for not paying the debt.
  • The English court has no jurisdiction.

Each ground will be examined in more detail below.

Genuine dispute on substantial grounds

The court will not make a winding-up order in cases where there is such a dispute, but it is worth bearing in mind that the threshold for this is high. The court will expect to see an appropriate amount of evidence and, if it is satisfied, the dispute should then be resolved outside the scope of insolvency proceedings.

Genuine cross-claim or set-off

If you have a cross-claim that exceeds the amount that the creditor says you owe them as set out in the Statutory Demand, you should respond in the same way as if the debt were genuinely disputed on substantial grounds, as outlined above. You should also write to the creditor and set out why you believe you have a valid cross-claim, and request an undertaking from them not to take steps to present a winding-up petition to the court. Again, if this is refused, you should consider injunctive action.

Although there are exceptional circumstances in which the court may still allow a winding-up petition to be presented against a company, the general approach is that it usually will not, if satisfied that the cross-claim is genuine and based on substantial grounds.

Reasonable excuse

This is not commonly a successful ground upon which to challenge a Statutory Demand and can generally only be relied upon if your company is prohibited by law from paying the sum demanded by the creditor. Even in instances where the Demand contains an error (unless the error can be proven to be prejudicial), or has not been properly served at your company’s registered office but has nonetheless come to your attention, there is little to be gained in bringing a challenge on either basis.

English court’s jurisdiction to wind up companies

The English courts can only wind up companies registered in England and Wales. It also has jurisdiction over companies that have their “centre of main interests” in either of these countries, and additionally, it has jurisdiction over winding up unregistered companies. If your business falls outside of these criteria, then you may have viable grounds to challenge the Statutory Demand.

Steps to take to dispute the debt

The action to take will vary depending on whether you dispute the whole debt, or only part of it.

What action to take if you dispute the whole debt

Acting quickly in these circumstances is vital, and you should endeavour to get legal advice as soon as possible. You should also write to the (alleged) creditor who has served you with the Statutory Demand, setting out the following:

  1. The grounds upon which the debt is disputed.
  2. A request that the alleged creditor refrains from presenting a winding-up petition to the court because the debt is disputed and provides a written undertaking to this effect.
  3. Notification of your intention to apply for an injunction against them, should they refuse to provide the written undertaking referred to above.
  4. Notification of your intention to apply for an injunction restraining the giving of notice of the petition, should the alleged creditor present a winding-up petition to the court notwithstanding the dispute, and confirmation that you will be opposing the making of any winding-up order at the court hearing of the same.
  5. Confirmation that you will be seeking your costs of applying for an injunction if one is required, and/or your costs incurred in opposing the petition.

In any circumstances where applying for injunctive relief is a possibility, you are strongly advised to seek legal advice before taking action.

What action to take if you dispute the debt in part

In cases where the creditor has overstated the debt on the Statutory Demand, you should pay the correct amount owing if both the correct amount can actually be ascertained, and if the creditor agrees to accept that payment as payment in full satisfaction of the debt.

If you cannot reach an agreement with the creditor as to the correct amount, you should usually pay or tender a sum which represents the undisputed part, and then proceed to oppose the presentation of a winding-up petition on the basis of the disputed balance.

The seriousness of your company being presented with a Statutory Demand cannot be understated. It is important to ensure that you follow the correct course of action for the scenario which you face – whether the debt is accepted in full, in part or wholly disputed. Our experienced dispute resolution solicitors possess the necessary know-how to help you take the right steps towards resolving any issues of this nature that your company is facing.


What next?

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