A statutory demand is essentially a final ultimatum for a payment due to your creditors. A statutory demand for payment cannot be sent to you in the post but served by one of the following methods:
- Handing it to the individual who owes the debt.
- Leaving it at the registered office in the case of a limited company or limited liability partnership.
- Giving it to a company director, secretary of other principle officer.
The above methods usually involve arranging for a process server to deliver the same as they can provide a report to the court confirming proper service.
From the date of service of a statutory demand, you have 21 days in which to pay the sum demanded. If the balance outstanding exceeds £750, a winding up petition can be issued by the creditor as appropriate. In the case of an individual, with the debt exceeding £5,000, a bankruptcy petition can be submitted. Both can result in your business being placed into formal insolvency proceedings and your assets sold to pay creditors.
How to respond to a statutory demand?
There are three possible ways you can respond to a statutory demand form, if you wish to avoid a winding up petition:
- Pay the debt in full within the 21 days.
- Negotiate a payment plan with your creditor.
- Apply for an order setting aside the statutory demand (which we’ll come to shortly).
At the end of the day, creditors are just looking to get paid the amounts they are due. Issuing a statutory demand is not to be taken lightly. If they are likely to receive more by agreeing to a payment plan, than by issuing a winding up petition against your company, this is likely to be a preferable route. You should ensure that you keep to the terms of the payment plan. If you are having difficulties in making particular payments, you should contact the creditors before the date the payment is due to discuss alternative arrangements.
The only other reason not to respond to a statutory demand is if you already believe the company is insolvent and wish to take steps to wind up the company yourself. Alternatively, you may wish to submit a company voluntary arrangement to your creditors. If you are considering starting up the business under a new company, creditors voluntary liquidation may be a better option than allowing the creditor to present a winding up petition. This will allow you to retain control of the timings of the process.
Setting aside a statutory demand
If you dispute the debt listed on the statutory demand form, you have the option to apply for the statutory demand to be set aside. If you wish to do this, your application must be filed in court within 18 days of being served with the statutory demand for payment.
The application should only be made if you have good grounds for the setting aside of the statutory demand. It is a court process, and if you use it as a delay tactic, it will result in a costs order being made against you, increasing the debt level. Proper grounds for setting aside include:
- The debt is disputed in full or in part.
- The debt is less than £750 for a company, or £5,000 for an individual.
- You have a counterclaim against the amount due where the above point applies.
- The statutory demand has not been served or prepared correctly.
- There are ongoing legal proceedings to decide the debt and the statutory demand is being used to sidestep these proceedings.
You must make the application in the correct form and provide as much detail, in a witness statement, about why the statutory demand should be set aside. You must also provide as much supporting evidence as possible. The creditor issuing a statutory demand will also be given an opportunity to put forward their evidence that the debt is due. There will then be a hearing to decide whether it should be set aside or not. If you engage a solicitor to assist and are successful, there may be an order made that the creditor should pay your costs for the same.
If it is deemed that the statutory demand should stand, the creditor can issue a winding up petition against your company. Alternatively, they can submit a bankruptcy petition against you personally, whichever is appropriate.
If you are unsuccessful in setting aside the statutory demand and unable to pay the debt off, it may be time to take advice on your options. Depending on whether you are a sole trader, partnership or limited company the following options may include:
- Individual voluntary arrangement.
- Partnership voluntary arrangement.
- Creditors voluntary liquidation.
- Company voluntary arrangement.
These options quickly become even more limited if a winding up petition is issued against your company. Our business rescue experts can give you the advice you need either before the hearing, so you are prepared for the worst, or after you have a definitive answer from the court.