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Statutory demands

Statutory Demand

Dispute Resolution solicitor George Farrer explains statutory demands: what they are, when to serve them and what happens if you receive one.

What is a statutory demand?

A statutory demand is a formal written demand for payment of a debt served on either an individual or a company.

Its content is prescribed by law (if it doesn’t include the correct content it will not be binding) and the rules and procedures differ depending on whether the Statutory Demand is for an individual or a company.

A statutory demand is not a court document, and the document does not involve the courts.

Reasons for serving a statutory demand

Serving a statutory demand on an individual

A statutory demand is often the first step taken before bankruptcy proceedings are commenced against a debtor individual. This is because a creditor can present a bankruptcy petition in respect of a debt if it can show that the debtor is “unable to pay the debt owed” or it has “no reasonable prospect of being able to pay” and the debt is for £5,000 or more.

If the debtor served with a statutory demand has not complied with it nor set it aside, and at least three weeks have elapsed since the demand was served, then the debtor is presumed to be either “unable to pay the debt owed” or have “no reasonable prospect of being able to pay.”

Consequently, an unpaid statutory demand is evidence of the debtor’s inability to pay, and therefore allows a creditor to initiate bankruptcy proceedings.

It should be noted, however, that it is not necessary to serve a statutory demand before presenting a bankruptcy petition if the debt is by way of judgment or court order.

Serving a statutory demand on a company

The reason for serving a statutory demand against a company is similar to the reasons for serving a statutory demand on an individual.

If the debt detailed in the statutory demand remains unpaid for more than three weeks, in can be used to support a winding up petition against a company on the grounds that the debtor company is unable to pay its debts. The debt owed only needs to exceed £750, as opposed to £5,000.

However, a statutory demand doesn’t have to be served on a debtor company before presenting a winding-up petition, and there are other ways a creditor can establish a company is unable to pay its debts.

Service of a statutory demand

It is imperative that the creditor has proof that the statutory demand was properly served on the debtor, if it later wishes to use the statutory demand as evidence of the debt when it presents a petition.

Serving a statutory demand on an individual

A statutory demand should be served personally on the debtor. In reality, if solicitors have been instructed, a process server (whose job it is to serve documents) is usually instructed, and they will provide the requisite evidence of service.

Serving a statutory demand on a company

A statutory demand is served on a company by leaving it at the company’s registered office.

What happens when an individual or company receives a statutory demand?

The clock starts to run from the day after the statutory demand is personally served on the debtor. From this date, the debtor recipient has 21 days in which to:

  • pay the debt; or
  • reach an agreement with the creditor to pay the debt (sometimes a payment plan or a reduced amount)

If it does not do either of these within 21 days, the creditor has an automatic right to issue bankruptcy proceedings against the individual, or winding-up proceedings against a company.

Application by an individual to set aside the statutory demand

The debtor served with a statutory demand may apply to court to have the statutory demand set aside. This must be done within 18 days from the date the statutory demand was served.

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

  1. The debtor appears to have a counterclaim against the creditor that reduces the debt to below £5,000;
  2. The debt is disputed (the grounds for dispute must be substantial);
  3. It appears that the creditor holds some security in relation to the debt claimed by the statutory demand (there are further requirements here);
  4. The court is satisfied – on other grounds – that the statutory demand should be set aside.

Application for an injunction by a company to prevent winding up proceedings

A company does not have the right to set aside a statutory demand served on it. Instead, if it wishes to avoid a creditor taking steps to wind up the company following non-payment of the debt after 21 days, it must apply for an injunction to restrain the presentation of a winding-up petition.

The grounds on which a court may grant the injunction include the company having a counterclaim which genuinely reduces the debt to less than £750, if the company disputes the debt, or if the company has a reasonable excuse for not paying the debt claimed.

For more information on statutory demands

If you want to know more about drafting and serving a statutory demand, or you or your company have been served with one, please contact George Farrer in the Dispute Resolution team for more information.

About the Author

Georgina Nicholls profile photo

Georgina Nicholls

Georgina is a Solicitor in the firm's Dispute Resolution team.

Published: Friday 30th November 2018
Categorised: Commercial Client, Debt Recovery, Commercial Dispute Resolution, Legal Services in Newcastle, Penrith, West Cumbria

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