What should my business do if we receive a Statutory Demand?
Any business could find itself in a position where it receives a Statutory Demand. While serious, it is the way you respond to that demand which can be the difference between being able to continue to trade, and a premature end to your company.
“Although it shouldn’t be, a Statutory Demand is often used as a debt collection tool, and it can be very effective, because the next step is a Winding Up Petition,” says Simon-Steele Williams, Dispute Resolution solicitor with Parfitt Cresswell.
“Therefore, even if you believe the debt is disputed, whether in amount or principle, it is crucial that you do not ignore a Statutory Demand. You could find yourself having to pay a lot of money to avoid your company being put into liquidation—and in the worst-case scenario where the demand is ignored, your company could be wound up.”
Below, Simon explores what service of a statutory demand means for your business, and how to respond to it in a way that resolves the situation, and ensures the continuity of your business.
What is a Statutory Demand, and when is it used?
A Statutory Demand is a written demand in prescribed form for the repayment of a debt. A feature of the Insolvency Act 1986, a Statutory Demand can only be served by a creditor who is owed at least £750 by a company.
The purpose of a Statutory Demand is to show that a company is unable to pay its debts as they fall due. As such, while a Statutory Demand does not necessarily need to be used before a company Winding Up Petition is presented to court, it is often employed as a part of this process.
A Statutory Demand must either be paid or challenged within 21 days. By serving a Statutory Demand, the creditor can prove to the court in subsequent Winding Up proceedings that the company has been unable to pay its debts as and when they fell due, so long as these conditions were not met after 21 days.
A Statutory Demand should not be used when a debt is genuinely disputed. If the debt is not genuinely disputed, and the two parties fail to reach an agreement, the creditor can then move on to present a Winding Up Petition in court.
It’s always recommended to resolve a Statutory Demand where possible. Failing to do so is an extremely serious matter, as it can easily lead to your company being wound up. Once a Winding Up Petition is presented, all transactions made by your company from the date the petition is filed in court can potentially be reversed if the company is later placed into liquidation by the court.
As a result, banks will keep a close eye on any advertised petitions, and will typically freeze your company bank account as soon as they become aware of a pending petition. While it is certainly possible to make an application to court to unfreeze your account and continue to use it, this can be both expensive and inconvenient. The disruption to your cash flow will inevitably have a major impact on your finances, and ultimately your company’s ability to continue trading.
What are my options if my business receives a Statutory Demand?
A business which receives a Statutory Demand will have 21 days to deal with it before the creditor proceeds to the next stage. This will inevitably be the filing of a Winding Up Petition in court for the compulsory winding up of your business.
If your business has received a Statutory Demand, it’s important that you move quickly, and come to a definitive decision about how you plan to deal with it. The time sensitive nature of a Statutory Demand means that we always recommend taking legal advice immediately, both to formalise your position and make the consequences of overrunning the 21-day limit clear.
What if I dispute the debt?
If you fail to answer or challenge a Statutory Demand and a Winding Up Petition is brought, it is possible that the court might dismiss the petition in due course. This would result in the parties being sent back to civil court to follow the usual process, letting the court decide on the merits of the dispute.
However, this only happens in rare circumstances. In order to persuade the court that a Winding Up Order is not a reasonable outcome, there must be a substantial and merited dispute over the debt. Without valid and genuine reasons, it is highly unlikely that you will be able to successfully dispute the debt in court.
Unlike in the case of personal insolvency, there is no prescribed process to set aside or delay a Statutory Demand served on a company. If you dispute the debt and the creditor disagrees, and no agreement can be reached, the only legal recourse that can be pursued is to apply for a court injunction, which will restrain the presentation of a Winding Up Petition.
If you dispute the debt, this needs to be immediately communicated to the creditor, explaining that the debt is disputed in full or in part, and the reason for this. If you opt to dispute part but not all of the debt, you will need to either pay the undisputed part, or try to reach an agreement with the creditor on how the repayment will proceed.
A business may choose to dispute the debt because it is not due, or because they have a genuine counter claim that either equals or exceeds the debt that is being claimed against the company. In this case, you should demand that the creditor who served the statutory demand provides an immediate undertaking not to start winding up proceedings while the debt remains disputed.
The creditor should also be informed as part of your request that if they refuse, and you are forced to apply to court for an injunction to restrain the Winding Up Petition, you will seek your full costs of doing so against them, on the basis that they were given an opportunity to provide an undertaking not to proceed with a petition until the dispute was resolved.
Whatever the circumstances of a specific Statutory Demand, it should go without saying that time is of the essence. If you dispute a debt and this undertaking is not given quickly, you must allow enough time to make an application for an injunction to court.
What if I do not dispute the debt?
In most cases, a debt specified by a Statutory Demand will be genuinely due to the creditor. In these cases, it’s important that immediate steps are taken to either pay the debt, or make arrangements with the creditor to settle it. Failing this, Winding Up proceedings are likely to be commenced, and your business will be at risk of liquidation.
As with disputing a debt, payment can take time. An important part of this process is to ask the creditor to agree not to proceed with a Winding Up Petition pending payment of the debt. This request should be reasonable in order to persuade them to agree, with a sensible time frame (say 14 days) proposed for agreement, or payment, before they can issue a petition.
If you genuinely cannot pay the debt quickly, then you may be able to negotiate a reduction, or agree to pay the debt gradually through reasonable instalments. You may be able to persuade your creditor that the alternative option—winding up the company—will be less beneficial for them financially in the long run, either due to the company’s lack of assets, or the presence of other creditors who will also need to be paid if the company is wound up. A petitioning creditor does not have priority over other creditors just because they issued the petition, and should be mindful of other debts you may have incurred.
How Parfitt Cresswell can help
If your business receives a Statutory Demand, it is important that you consult an expert immediately to ensure that situation is dealt with quickly, and that the Statutory Demand is not escalated to a Winding Up Petition. A petition can often be avoided with some negotiation and cooperation, but burying your head in the sand will only lead to problems.
Our solicitors have many years of experience in this area. For further information and assistance, please use our contact form below for a complimentary consultation. Alternatively, visit our office pages to phone your local Parfitt team, and get in touch today.
