A guide to statutory demands

When can you serve a statutory demand? What can you do if you receive one? Our Debt Recovery Team’s guide to statutory demands explains the key points.

Options for creditors seeking to recover a debt may include court proceedings, a negotiated settlement, or insolvency proceedings (service of a statutory demand followed by a winding-up or bankruptcy petition). This guide sets out the key points in relation to statutory demands.

What is a statutory demand?

A statutory demand is a formal demand served by a creditor on a debtor company or individual warning them that the creditor intends to “present” (file) a winding-up or bankruptcy petition at court if the outstanding debt is not paid within 21 days.

If the debtor fails to either pay the debt (or satisfy or secure it to the creditor’s satisfaction) or challenge the statutory demand within the 21-day period, this will create a presumption that they are insolvent (on an inability to pay basis). This presumption provides the grounds for the presentation of the winding-up or bankruptcy petition by the creditor.

Advantages for creditors

• A statutory demand is not issued at court, so no court fee is payable and there is no need to obtain a judgment in respect of the debt before a demand can be served.
• The risk of winding-up or bankruptcy proceedings can put considerable pressure on a debtor to pay promptly, or it may flush out details of a dispute or counterclaim.
• Having served a statutory demand, the creditor is not obliged to commence winding-up or bankruptcy proceedings against the debtor.

Disadvantages for creditors

• Serving a statutory demand is likely to be perceived as an aggressive step by the debtor and may have a negative impact on an ongoing trading relationship.
• The debtor may take steps to challenge the statutory demand which would mean that the creditor would be drawn into court proceedings at an early stage.

Minimum sum

A statutory demand may be served where:

• In the case of a debtor company, the debt exceeds £750.
• In respect of an individual debtor, the debt is for an unsecured sum of £5,000 or more.

There is actually no minimum debt level for a demand, however for a debtor company the threshold for the next stage (a winding-up petition) is £750 and for an individual debtor the threshold for the next stage (a bankruptcy petition) is £5,000. In view of this, most creditors will only usually serve a demand if the level of the debt is in excess of the minimum threshold.

Key requirements

If the creditor knows that the debt is genuinely disputed and/or the debtor has a genuine counterclaim against the creditor, a demand should not be served.

A demand should be in the prescribed form, and it must include the required information about the parties, the debt, interest or other charges, etc.

A demand should be served on a debtor company by leaving it at the company’s registered office or, if it is an unregistered company, its principal place of business. If the debtor is an individual, the demand should be served on them personally or it may be appropriate to send it by email and/or post. In practice, a creditor will often use the services of a process server to serve the demand and prepare evidence of service.

If a demand does not comply with these requirements, it may be susceptible to challenge.

If the debtor does nothing

If the debtor neglects to deal with the statutory demand within the 21-day period, the creditor is entitled to present a winding-up or bankruptcy petition to the court.

There is no obligation to present a petition. If the court makes a winding-up or bankruptcy order after a petition is presented, the debtor’s assets will be realised for the benefit of all their creditors which may mean that an unsecured creditor recovers only a few pence for each pound of debt, or nothing at all. In view of this, the creditor should consider whether it is still in their interests to proceed or if another option e.g. court proceedings would be preferable.

If the debtor pays or settles the debt

The creditor is not entitled to rely on the statutory demand as the basis for the presentation of a winding-up or bankruptcy petition if the debtor either:

• Pays the debt in full.
• Discharges part of the debt so the amount of the outstanding debt is reduced to below £750 for companies or £5,000 for individuals.

The debtor should act quickly and contact the creditor to arrange payment.

They should also seek written confirmation from the creditor that the demand is withdrawn or an undertaking that the creditor will not present a petition. If the creditor fails to comply, the debtor may challenge the demand (see below).

If the debtor offers deferred payment, or payment in instalments, and the creditor agrees, there is a risk for the debtor that the agreement may not be legally binding on the creditor. In these circumstances, the debtor may wish to obtain legal advice in relation to the agreement.

If the debtor raises a dispute or counterclaim

The creditor is not entitled to rely on the statutory demand as the basis for the presentation of a winding-up or bankruptcy petition if the debtor either:

• Genuinely disputes the debt on substantial grounds.
• Has a genuine counterclaim against the creditor that would reduce the debt to below £750 for companies or £5,000 for individuals.

The debtor should act quickly and provide the creditor with the relevant details in writing.

They should also seek written confirmation from the creditor that the demand is withdrawn or an undertaking that the creditor will not present a petition. If the creditor fails to comply, the debtor may challenge the demand (see below).

The creditor should consider how to proceed which may include court proceedings or engaging with the debtor with a view to negotiating a settlement.

If a debtor company challenges the statutory demand

There is no process for a company to apply to the court to “set aside” (cancel) a demand.

The company may apply for an injunction to prevent the creditor from presenting a winding-up petition. This should be done within the 21-day period for responding to the demand.

The court may grant the injunction if it appears that the company is solvent and one of the grounds in the following (non-exhaustive) list applies:

• The debt is disputed on grounds which appear to be substantial.
• The debtor appears to have a counterclaim which equals or exceeds the debt.

If successful (or the creditor agrees that the demand should be withdrawn after the injunction has been applied for), the creditor will ordinarily be liable to pay the company’s costs.

Alternatively, the company could oppose the creditor’s winding-up petition, if presented.

If an individual debtor challenges the statutory demand

An individual may apply to the court to “set aside” (cancel) a demand.

An application must be made within 18 days from the date the demand was served.

The court may grant the application if any of the following apply:

• The debt is disputed on grounds which appear to be substantial.
• The debtor appears to have a counterclaim which equals or exceeds the debt.
• The creditor holds security for the value of the debt.
• The court is satisfied, on other grounds, that the demand ought to be set aside.

If successful (or the creditor agrees that the demand should be withdrawn after the application has been made), the creditor will ordinarily be liable to pay the individual’s costs.

Alternatively, the individual could oppose the creditor’s bankruptcy petition, if presented.

How can we help?

If you would like advice in relation to statutory demands, please contact our debt recovery team. The team recovers commercial and consumer debts of all sizes for businesses, organisations and individuals. Please view our Debt Recovery Pricing Guides here.