09 Jul Facing a statutory demand? Here’s what you need to know.
Here we explain what a statutory demand means and the consequences it carries for companies and individuals. We also consider the steps a debtor must take, the deadlines you need to meet, and the options available to fight a demand or manage the debt.
Don’t panic if you have been served a statutory demand. The first step is to understand your legal rights and how you can resolve the situation.
What is a statutory demand?
A statutory demand is when a creditor (a person or institution that is owed money) issues a written demand for a debt which is payable now or in the future. The written demand is served on a debtor (who owes the money) which can be an individual or a company.
This type of demand does not need to be issued by the court. However, it should comply with the prescribed form set out under the Insolvency Act 1986 (IA 1986) and the Insolvency (England and Wales) Rules 2016 (IR).
The purpose of a statutory demand
The purpose of issuing a statutory demand is to prove insolvency by showing that a debtor cannot pay their debts. This is proved by the debtor not complying with the demand. As a result, the creditor can take further steps against the debtor.
What does a creditor have to prove to take the next steps?
For a creditor to take further steps, they must establish several elements which depend on whether the debtor is a company or an individual. In both cases, the debtor has 3 weeks (21 days) after the demand has been served to comply with the demand.
Company
Under section 123 IA 1986, a company is unable to pay its debt if:
- A statutory demand is served by a creditor for a sum exceeding £750; and
- The sum has been neglected by the debtor or they have otherwise failed to secure or compound for it to the reasonable satisfaction of the creditor within 3 weeks after the demand was served.
A demand is served when it is left at the registered office of a company debtor. In practice, a process server will normally be used who can then provide a witness statement in support and help to avoid issues with service arising.
Individual
Under sections 267 and 268 IA 1986, there is a difference between what is required if the debt is payable immediately and if the debt is payable in the future.
If the debt is payable immediately, it can be shown that a debtor is unable to pay their debts if:
- The debt is for a liquidated sum of £5,000 or more that is unsecured; and
- The debtor has not complied with the statutory demand, or they have not set aside the demand within the three weeks since service.
If the debt is payable in the future, the inability of the debtor to pay their debts will be proven if:
- The debt is for a liquidated sum of £5,000 or more that is unsecured;
- They have not complied with the demand, or they have not set aside the demand;
- Three weeks have elapsed since service; and
- There is no reasonable prospect the debtor will be able to pay the debt when it falls due.
Under the IR 10, the creditor must do all that is reasonable to bring the demand to the attention of the debtor to discharge their obligation. If practicable, this will mean personal service and the 3 weeks will begin when the demand is given to the debtor. If there is no proof of this or this has not been fulfilled and a bankruptcy petition is presented, the petition will be dismissed.
Consequences
If the debtor does not comply with a statutory demand, it is presumed that they are insolvent, and the creditor can present a petition against them. The procedure for this varies between company and individual debtors.
Companies
A creditor, who has issued a statutory demand against a company which has complied, will be able to present a winding up petition against the debtor company under section 122 IA 1986. This is because non-compliance with the statutory demand proves the debtor is unable to pay their debts under section 123 IA 1986.
There are other bases under section 123 IA 1986 to prove a company cannot pay its debts and also under section 122 IA 1986 on which a company can be wound up without first serving a statutory demand, but those are outside the scope of this article.
Individual
A creditor serving a statutory demand against an individual who has not complied with the demand will allow them to present a bankruptcy petition against the debtor. A demand is always needed as a first step to present a petition against an individual, unless the creditor relies on an unsatisfied judgment debt.
Options to deal with a statutory demand
There are additional options for a debtor other than paying the debt or getting the satisfaction of the creditor to prevent further action. However, the action taken will depend on whether a debtor is a company or an individual.
Company
A company can get an injunction to restrain the presentation of a winding up petition or the creditor giving notice of it. An application is made to the court under IR 7.24 for an injunction if either:
- The statutory demand is genuinely disputed on substantial grounds; or
- There is a genuine counterclaim, that would reduce the debt demanded to less than the £750 threshold.
Another option that is available to debtor companies is to contact the creditor for more details on the debt and get an undertaking from the other side agreeing that the petition will not be presented.
Individual
An individual debtor has the option to make an application to the court to set aside the statutory demand under IR 10.4. This can be made if:
- The debtor has a counterclaim or set-off that would reduce the debt demanded to below the £5,000 bankruptcy threshold (IR 10.5(5)(a));
- The debt is disputed on substantial grounds (IR 10.5(5)(b));
- The creditor holds security for the debt, full details of which have not been specified in accordance with IR 10.1(9), or the value of which is equal to or exceeds the debt owed (IR 10.5(5)(c)); or
- There are other grounds that the demand ought to be set aside (IR 10.5(5)(d)).
A debtor who wishes to set aside the statutory demand must do this within 18 days of service of the demand.
Are you seeking legal advice about a statutory demand?
If you are an individual or company that has received a statutory demand, our expert insolvency solicitors will guide you through the process.
Contact us for legal advice.
- Email info@hrjforemanlaws.co.uk
- Call Hitchin 01462 458711, Welwyn Garden City, 01707 887700, Old Harlow 01279 709100
- Complete our contact form here