If you receive a statutory demand, as a business owner it can be a worrying time and it’s difficult to know what to do for the best, whether the debt is admitted or disputed in whole or in part. Acting quickly upon receipt of a statutory demand is crucial, so our business dispute solicitors have summarised the key things you need to be aware of to point you in the right direction from the outset.
Jump to:
- What is a statutory demand?
- How long do you have to respond to a statutory demand?
- What are the risks of doing nothing if you are presented with a statutory demand?
- What steps can you take if you want to pay off the debt?
- Can a statutory demand be set aside?
- On what grounds can you set aside a statutory demand?
- What evidence do you need to challenge a statutory demand?
- Steps to take to dispute the debt
What is a statutory demand?
A statutory demand is a written document served under the Insolvency Act 1986 by which a creditor – an individual or company claims that your business owes them money in excess of £750 – served upon you with a view to presenting a petition to “wind up” your company if the debt isn’t repaid.
After a demand has been served on your business, you have three weeks in which to comply by paying the debt. If you don’t, the court has the power to wind up the company if the creditor presents a winding-up petition in the absence of payment, or any attempt to secure or compound the sum owing.
How long do you have to respond to a statutory demand?
If you’re served with a statutory demand, you need to act quickly because there’s a strict 21-day time limit to respond from the date of service of the demand upon you. Within those 21 days, you can either pay the debt or reach an agreement with the creditor to pay it off in a timeframe that’s acceptable to them. If you want to challenge the statutory demand and have it withdrawn on the basis that you don’t accept you owe the money or the creditor is out of time to take court action against you, then you must do so within 18 days of service upon you. In technical terms, this is known as applying to set aside the demand.
If you were in a different country (i.e. not in England or Wales) when the statutory demand was served on you, you have slightly longer – 21 to 34 days, depending on which country you were in – to apply to have it set aside.
What are the risks of doing nothing if you are presented with a statutory demand?
The risks involved if you don’t act are twofold: there are the consequences of winding-up proceedings being started to consider, along with the personal risks to you as a company director. Both have very serious implications and caution is advised in failing to act at all.
Consequences of winding-up proceedings being started
Your company’s bank is likely to freeze your company bank accounts and is entitled to do so at any time after the presentation of the winding-up petition. This can have huge ramifications as you may be left without funds to pay employees and suppliers. Your company’s reputation and eligibility to obtain credit may also be harmed and there will be the inevitable legal costs in dealing with the hearing of the petition itself.
Risks for directors
As a director, you may face personal liability for 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’s important that if you do this, you request a written agreement from the creditor that they won’t present a winding-up petition to the court, whilst discussions are underway. If they refuse, it’s 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’s nothing to prevent you from offering to make payments via instalments or asking the creditor to consider deferring payment or accepting a reduced amount. Don’t 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’re owed because the costs of any liquidation take first priority, with all unsecured creditors (not just the petitioning creditor) only receiving a dividend after this if there are no assets available. Quite often, it’s the case that unsecured creditors only receive a few pence for each pound of debt, or even nothing at all. This means there’s 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’s 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’s 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’s 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’s 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 if the creditor takes this step if the debt remains unpaid. If a deal in relation to payment is reached, its worth asking the creditor to confirm that the demand has been withdrawn.
On what grounds can you set aside a statutory demand?
The following, narrow grounds are summarised below as the only ways in which a Staturory 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.
- The English court has no jurisdiction.
Genuine dispute on substantial grounds
The court will not make a winding-up order in cases where there is a dispute as to whether the debt is due, but it’s worth bearing in mind that the threshold for this is relatively 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, i.e. through the County or High Court.
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. 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. 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.
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 it has jurisdiction over winding up unregistered companies. If your business falls outside of these criteria, then you may have grounds to challenge the statutory demand.
What evidence do you need to challenge a statutory demand?
You’ll have to provide the court and the creditor with an application form that’s accompanied by a witness statement and within these documents you’ll be expected to provide your evidence to back up your challenge to the statutory demand. This could be:
- If you’re alleging that there’s a genuine dispute around the debt that’s centred on substantial grounds, you might be able to prove this by gathering together contracts and correspondence, for example.
- If you believe that you have a valid counterclaim or set-off against the debt the creditor says you owe them and which either equals or exceeds it, evidence for this could include invoices, financial records and again, correspondence between you and the creditor.
- If you’re of the view that there’s been some kind of procedural error in the statutory demand or relating to the way it’s been served, you’ll need to highlight what this is and show how the error has come about.
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 take 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:
- The grounds upon which the debt is disputed.
- 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.
- Notification of your intention to apply for an injunction against them, should they refuse to provide the written undertaking referred to above.
- Notification of your intention to apply for an injunction, should the alleged creditor present a winding-up petition to the court and confirmation that you will be opposing the making of any winding-up order at the court hearing of the same.
- Confirmation that you’ll 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 were applying for injunctive relief is a possibility, you’re 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 if both the correct amount can be determined, and if the creditor agrees to accept that payment as payment in full satisfaction of the debt.
If you can’t reach an agreement with the creditor, you should 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.
