The do’s and don'ts of statutory demands
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Statutory demands are often served by personal service on the debtor as the creditor needs to prove that the demand has come to the debtor’s attention. If you are served with a demand Do act quickly and consult an experienced solicitor immediately.
If a valid statutory demand is served on you as an individual and it is not satisfied within 21 days or if you dispute it and it is not set aside by the court following an application made by you within 18 days then it could result in your bankruptcy. If you are a limited company and you have not applied for an injunction restraining the creditor from presenting a winding up petition then an unsatisfied demand could result in the winding up of the company. In the case of an individual the creditor needs to demonstrate that an undisputed and unsecured debt of at least £5,000 is outstanding 21 days after service of the demand. In the case of a company the threshold is £750.
Don’t ignore it, particularly if you dispute the debt or you have a counterclaim or setoff to the amount demanded. Contact the creditor and set out why you dispute the demand in writing and ask them to withdraw it. However, if over £750 for companies and £5,000 for individuals of the demand remains undisputed and unpaid then that is still an act of insolvency/evidence of an inability to pay debts as they fall due and the demand could be relied on by the creditor in insolvency proceedings against you. Often creditors use a statutory demand as a debt recovery tool and will not want to incur the cost of actually petitioning for bankruptcy or winding up if the debtor doesn’t pay. Those costs to the creditor can be in the thousands and will not be recovered by the creditor if the debtor really is insolvent. If the debtor will not agree to withdraw the demand in writing then Do apply to the court to set aside the demand within 18 days if you are an individual. The statutory demand should specify the correct court for you to make that application to. If you are a company and the demand and/or threat of the presentation of a petition will not be withdrawn, then you must apply for an injunction restraining the creditor from presenting a winding up petition. Please note a statutory demand is not always required before the creditor can present a winding up petition. For individuals the court has the power to set aside the demand on the following grounds
(a) the debtor appears to have a counterclaim, set-off or cross-demand which equals or exceeds the amount of the debt or debts specified in the statutory demand; or
(b) the debt is disputed on grounds which appear to the court to be substantial; or
(c) it appears that the creditor holds some security in respect of the debt claimed by the demand and either the statutory provisions relating to the disclosure of the nature and amount of the debt are not complied with in respect of it, or the court is satisfied that the value of the security equals or exceeds the full amount of the debt; or
(d) the court is satisfied on other grounds that the demand ought to be set aside
For companies, and on an application for an injunction, the court will consider, amongst other things, whether there is a genuine dispute about the sum demanded and/or whether there is a cross claim or set off, whether the creditor has another way to recover the money and whether it would be oppressive or unfair for the company to wound up.
If the debtor is successful in its application to set aside a statutory demand or for an injunction to prevent the presentation of winding up petition then it is almost inevitable that the court will order the creditor to pay the debtor’s legal costs. Depending on the circumstances these costs can range from £1,000 to over £10,000. Debtors may find that they’re unable to fund such costs even if they are ultimately paid by the creditor. However, it may be possible for the debtor to find a solicitor who will act for them on a no-win no-fee agreement.
A creditor who serves a statutory demand for a disputed debt takes a big risk on costs if they do not withdraw it when the debtor has raised a defence. Don’t consider using a statutory demand instead of a county court claim unless the debt really is undisputed. Statutory demands are not supposed to be used as a debt collection tool. In reality many creditors use them exactly in this way. Do remember that if a creditor persists with a statutory demand and the debtor gets the demand set aside or an injunction against the presentation of a winding up petition then the court is likely to hammer the creditor in costs even if the creditor subsequently wins the dispute/counterclaim in normal proceedings.
Do, above all, take advice from a solicitor immediately.
Jonathan Waters is the founder of Helix Law. Before qualifying as a Solicitor he worked in industry and in investment banking for over a decade. He was also the Partner in charge of Commercial Litigation, Employment Law and Property Litigation at Stephen Rimmer LLP. Jonathan has wide experience of helping and advising businesses to avoid or to deal with commercial disputes and in particular construction disputes.
This article is written to raise awareness of the issues it discusses and it may not be updated after it is first written, even if the law changes. It is not intended to be legal advice and cannot be relied on as such. Helix Law is not responsible or liable for any action taken or not taken as a result of this article. If you think the matters set out affect you and you wish to apply them to your particular circumstances then we are happy to give you free initial telephone advice.