What is a Statutory Demand?

A Statutory Demand is a written notice demanding payment of a debt. A creditor of a company is entitled to serve a Statutory Demand on the company at any time when the debt owing by the company remains due and exceeds £750. If a company neglects to comply with a Statutory Demand then three weeks after service of the demand the creditor is entitled to present a petition to wind-up the company. The company will be deemed by virtue of its failure to comply with the demand to be unable to pay its debts.   

Although creditors can use Statutory Demands as a method of debt collection with no intention of presenting a winding-up petition, the consequences of such a petition are so serious that a Statutory Demand should never be ignored.

The effects on the company of the presentation of a petition to wind-up the company are extremely serious. These may include: 

·        the company’s bank will freeze its bank accounts;

·        all dispositions of the company’s property are potentially void;

·        the commercial reputation of the company will be seriously damaged and the company may find it more difficult to obtain credit from suppliers;

·        the company will incur significant expense and inconvenience in dealing with the petition itself; and

·        directors may face personal liability in respect of any personal guarantees given or in respect of any fraudulent or wrongful trading or misfeasance or breach of duty. 

As soon as directors are aware that the company is in financial difficulty they should seek external advice. See also our article entitled Directors’ Responsibilities. 

What should the company do next?

If you accept that the debt is payable, contact the creditor as soon as possible and arrange for payment. If you agree to pay make sure that you get written agreement from the creditor that they will withdraw the Demand and not present a winding-up petition. 

If you are unable to pay the debt in full, offering payments in instalments or a reduced amount may be accepted. Remember that if the company is wound up a creditor is unlikely to receive a significant amount, if anything, once the liquidation has been dealt with. Creditors may therefore allow the company to continue trading in the hope that they will recover more. If the creditor does agree to deferred or reduced payments, the agreement may not be legally binding unless you require them to execute it as a deed.   

What can be done if you do not believe the debt is payable?

A company can challenge a Statutory Demand by applying for an injunction to restrain the presentation or advertisement of a winding-up petition based on that Demand or by opposing the application for winding-up.

There are only very limited grounds on which the Statutory Demand can be challenged. These include:

·        the debt being genuinely disputed on substantial grounds;

·        the company has a genuine cross claim or right of set-off against the creditor;

·        the company has a reasonable excuse for not paying the debt (such as being prohibited by law from doing so).

If you receive a Statutory Demand in respect of which you dispute the debt, you should instruct solicitors as soon as possible to advise you in relation to it. They can help you with some of the following steps as are advisable in the circumstances:

·        write to the creditor detailing the grounds on which the debt is disputed;

·        request an undertaking in writing from the creditor not to present a winding-up petition;

·        inform the creditor that if no such undertaking is given the company will apply to the court for an injunction to restrain the presentation of the winding-up petition; and

·        inform the creditor that the company will seeks its costs for applying for an injunction and/or opposing the petition on an indemnity basis.

What if only part of the debt is disputed?

If you dispute any part of the amount of debt claimed do not simply ignore it and make no payment at all. If the correct amount can be ascertained you should pay that amount in full. 

If you would like any more information please contact Sharon Auton at the firm’s Colchester office on 01206 574431 or send an email to sauton@tsplegal.com.

The content of this article is for general information only and should not be relied on as advice.   All situations are unique and appropriate professional advice should be taken on specific matters.