Statutory demands are an efficient debt recovery tool. For creditors, they provide an effective means to claim payment for undisputed obligations without going to court. If you receive a statutory demand, it is essential that you do not ignore it as this could lead to bankruptcy proceedings for individuals or a winding up petition being made for a company.
Whether you are issuing or responding to a statutory demand, understanding the process is critical to safeguarding your financial position. This guide provides an overview of statutory demands, their legal framework, how they work, and the consequences of inaction- empowering you to take the right steps when faced with this legal tool.
What Is a Statutory Demand?
A statutory demand is a formal notice from a creditor requiring payment of an undisputed debt that exceeds (at the time of writing):
- £750 for businesses, or
- £5,000 for individuals.
It acts as a precursor to insolvency proceedings, such as a winding-up petition (for companies) or bankruptcy petition (for individuals), if the debt remains unpaid because a debtor who fails to make payment of a statutory demand is treated as being unable to pay its debts.
Issuing a Statutory Demand: Steps for Creditors
A statutory demand is an effective and relatively low-cost method for creditors to get payment without the involvement of the courts. To issue one:
- The debt must be liquidated, not in dispute and exceed the legal limits (as set out above);
- Use the relevant statutory demand form and clearly state the amount owed, often with supporting evidence; and
- Ensure proper service of the demand.
Following proper processes decreases the likelihood of the demand being contested in court.
A statutory demand provides short window for payment or resolution. If the debtor chooses to make payment in full, that is often the end of the matter, or the parties may come to a negotiated settlement.
If a debtor wishes to challenge a statutory demand, the process is different depending on whether the debtor is a company or an individual.
Response to a Statutory Demand: Key Steps for Debtors
Receiving a statutory demand can be stressful, but taking timely action can help alleviate the situation.
- Review the demand. Confirm the debt information and verify for errors or omissions.
- Determine a course of action.
- If the debt is valid, you can pay it or negotiate with the creditor.
- If the debt is challenged, you can apply to the court to set aside the demand (for individuals) or
- File an injunction to prevent a winding-up petition (businesses).
- Consult a solicitor. Legal assistance will help you find grounds to fight the demand, such as:
- The debt is not owed.
- The demand was not served properly.
- You have a counterclaim or setoff.
Timelines are critical.
Challenging a statutory demand
Creditors should be aware of the grounds debtors are able to rely on to challenge a statutory demand. The process is different depending on whether the debtor is an individual or a company. Below are some of the key considerations for each:
Individuals:
- An individual can apply to the court to set aside a statutory demand, but they must act quickly as the application must be made within 18 days of the demand being served. Grounds for setting aside a statutory demand include:
- The debt is genuinely disputed on substantial grounds.
- The creditor holds security over the debt that is equal to or exceeds the value of the debt.
- The demand was issued for an amount below the statutory threshold of £5,000.
- There is a counterclaim, setoff, or cross-demand that equals or exceeds the amount claimed in the demand.
- The statutory demand was not properly served in accordance with the rules.
- If the application is successful, the court may set aside the demand and potentially award costs in favour of the debtor.
Companies:
- Companies can also challenge a statutory demand by applying to court for an injunction to prevent the creditor from presenting a winding-up petition. Common grounds for challenging a statutory demand against a company include:
- The debt is subject to a genuine dispute. For example, disputes over the amount or liability can render the demand invalid.
- The company has a counterclaim or setoff that equals or exceeds the debt.
- The statutory demand has been issued improperly or in bad faith.
- The demand does not meet the statutory threshold of £750.
For both individuals and companies, timely action is critical. Ignoring the demand or delaying the challenge could significantly limit available options and lead to further insolvency proceedings. Seeking legal advice promptly is strongly recommended to ensure the best possible outcome.
Consequences of Ignoring a Statutory Demand
Failing to address a statutory demand can have serious consequences:
- For Businesses: A winding-up petition could result in company liquidation. This involves:
- The company’s assets being sold to repay creditors.
- Directors potentially facing investigation into their conduct, with possible disqualification if misconduct is found.
- Severe damage to the company’s reputation, making future business opportunities difficult.
- For Individuals: You may face bankruptcy proceedings, which can result in:
- The appointment of a trustee to manage your assets and distribute them among creditors.
- Restrictions on obtaining credit or acting as a company director.
- The potential loss of personal assets, including your home, depending on the circumstances.
Ignoring a demand is treated as evidence of insolvency, so addressing it promptly is critical.
How We Can Help
At Nockolds we provide expert advice on all aspects of statutory demands:
- For Creditors:
- Issuing statutory demands.
- Ensuring compliance with legal requirements
- Assisting with negotiations
- Taking further action if debts remain unpaid.
- For Debtors:
- Challenging statutory demands.
- Defending against insolvency proceedings
- Assisting with negotiations
- Negotiating settlements or repayment plans.
Our Commercial Litigation team is here to guide you through this complex process, helping you protect your financial interests while minimising risks. Contact a member of our Team today on 0345 646 0406 or fill in our online enquiry form and a member of our Team will be in touch.