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, and an abrupt end to the company.
‘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 Kiran Solanki Solicitor at Crane and Walton Solicitors LLP. ‘Therefore, even if you believe the calculation of the debt is incorrect and you are disputing the amount, it is vital 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, or worse, the company may be wound up while you are ignoring the inevitable.’
Kiran Solanki looks at what a statutory demand means for your business, and how to deal with it.
What is a statutory demand, and when is it used?
A statutory demand is a written demand drafted by 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 company 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 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 move on 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 and 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?
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. It is advisable to 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 civil court to follow the usual 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.
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 therefore, there is only one legal option that can be taken if you dispute the debt and the creditor disagrees, and that is to apply to court for an injunction restraining the presentation of a winding up petition.
The first action you should take if you dispute the debt is to tell the creditor that the debt is disputed, either in full or in part, and why this is disputed. This should be fully detailed. If you dispute part of the debt, but not the rest, you should either pay or try to reach an agreement on repayment of the undisputed part with the creditor.
You might dispute the debt because the debt is not due at all, or it might be that you have a valid counter claim or cross claim that at least equals or may exceed the debt claimed against your company.
In this case, you should demand that the creditor who served the statutory demand on you provide an immediate undertaking not to start winding up proceedings while the debt remains disputed. You should notify them as part of your request that if they refuse, and you are forced to apply to court for an injunction to restrain the petition, then you will be asking for 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 is resolved.
Needless to say, time is of the essence, so if 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?
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.
Again, you should first 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. For example, give a time frame for agreement, or payment, before they can issue a petition. Perhaps, say 14 days to reach an agreement.
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, winding up the company, will be less beneficial for them in the long run due to the lack of assets the company may have, or the additional number of creditors of the company who will also need to be paid on 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.
For further information and assistance, please contact Crane and Walton Solicitors LLP in Coalville on 01530 834466. Crane and Walton LLP also has offices in Ashby, Leicester and Melbourne.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.
