How can a statutory demand be dealt with effectively?
Many businesses will be served with a statutory demand at some point in the life of the company. How you deal with that demand can mean the difference between being able to continue to trade, or to the demise of the company.
A statutory demand is often used as a debt collection tool, and it can be very effective because if the sums under the demand are not paid, the creditor can apply to wind up the company. It is therefore essential that even if you believe the calculation of the debt is incorrect and you are disputing the amount, you do not ignore a statutory demand. You could otherwise find the company incurring substantial costs to avoid being put into liquidation.
What is a statutory demand, and when is it used?
A statutory demand is a written demand from a creditor who is owed at least £750 by a company.
The purpose of a statutory demand is to establish that a company is unable to pay its debts. Therefore, while a statutory demand is not a compulsory precursor to a winding up petition being filed in court, it is often used to prove to the court in subsequent winding up proceedings that the company is unable to pay its debts as and when they fall due. This is presumed, if the statutory demand remains unpaid (and is not disputed) by the company after the requisite 21 days.
A statutory demand should not be used when a debt is genuinely disputed.
However, if the debt is not genuinely disputed, and agreement is not reached, the creditor can proceed to present a winding up petition in court. This is a very serious matter for your company. This may lead to your company being wound up permanently. In addition to that, once a winding up petition is presented, all transactions made by the company from the date the petition is filed in court can be reversed if the company is placed into liquidation by the court later. For this reason, all banks will keep an eye on the petitions which are advertised and will freeze your company bank account as soon as they become aware of a pending petition. While it is possible to make an application to court to use the bank account and unfreeze the account, this can be costly, take time and is extremely inconvenient. A freeze on cash flow will inevitably have a devastating effect on your company’s ability to trade.
What are my options if my business receives a statutory demand?
Under the statutory demand, you will be given 21 days to deal with the statutory demand before your creditor moves on to the next stage, which is the filing of a winding up petition in court for the compulsory winding up of your business.
You must therefore decide how you intend to deal with this matter quickly. You should take legal advice on your position immediately, and assess the consequences that may arise following the 21-day period.
What if I dispute the debt?
If a winding up petition is brought based on a disputed debt, the court might ultimately dismiss the petition in due course and send the parties back to court to follow the usual civil process to let the court decide the merits of the dispute. The winding up process, and therefore also the serving of a statutory demand, should not be used as a threatening debt collection method. However, there must be a substantial dispute of some merit to persuade the court that a winding up order is not a reasonable outcome. You are not likely to successfully dispute the debt in court unless you have valid and credible reasons.
Where company insolvency is concerned, unlike in personal insolvency, there is no prescribed process to set aside the statutory demand served on a company.
In the absence of an agreement to set the demand aside, there is only one legal option that can be taken if you dispute the debt and the creditor disagrees. You need to apply to court for an injunction restraining the presentation of a winding up petition.
It is therefore recommended that you take legal advice as to the best course of action upon receiving a statutory demand. Your solicitor can negotiate with the creditor and advise you on the prospects of successfully defending the debt.
Needless to say, time is of the essence, so if agreement cannot be reached, you must allow enough time to make an application for an injunction to court.
What if I do not dispute the debt?
Where a debt is genuinely due to the creditor, then steps should be taken to either pay the debt, or make arrangements with the creditor to settle it, failing which winding up proceedings are likely to be commenced.
You should ask the creditor to agree not to proceed with a winding up petition pending payment of the debt. This request should be reasonable, i.e. with a clear timeframe for payment, in order to persuade them to agree. If you genuinely cannot pay the debt quickly, then you may be able to agree a reduction or to pay the debt through reasonable instalments. You may be able to persuade your creditor that the alternative option of winding up the company will be less beneficial for them in the long run. This is likely to be the case if the company lacks assets or has many additional creditors which will also need to be paid upon the winding up of the company. A petitioning creditor does not have priority over other creditors just because they issued the petition.
How can we help?
If your business receives a statutory demand, it is important that you consult an expert immediately to ensure that you deal with it quickly, to avoid escalation to a winding up petition. Often a petition can 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 contact Rebecca Beynon-Phillips in the dispute resolution team on 01733 882800 or email [email protected].
Rebecca Beynon-Phillips, Partner
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