Statutory Demand

A statutory demand is a formal written request made by a creditor to a debtor, demanding payment of a debt that is due and unpaid. The demand is usually in a specific form and must be served on the debtor personally or by post.

It is a legal procedure that can be used as a precursor to a winding-up petition (for companies) or bankruptcy petition (for individuals) in some jurisdictions, if the debt is not paid or disputed within a specified period of time.

The demand is used as a formal way for a creditor to demand payment of a debt from a debtor. It serves as a warning to the debtor that legal action may be taken if the debt is not paid or disputed within a specified period of time. The statutory demand can also be used as evidence in court to demonstrate that the debtor is unable to pay their debts, which is a key requirement for a winding-up petition (for companies) or bankruptcy petition (for individuals) to be successful.

Additionally, it can also be an effective tool for a creditor to put pressure on a debtor to pay a debt, as the debtor may want to avoid the potentially negative consequences of a winding-up or bankruptcy petition.

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Why is a statutory demand so powerful?

A statutory demand will generally precede a petition for winding-up, and with only 21 days to respond, it is a strong incentive for the debtor company to negotiate payment. They are often used by creditors as a last resort, when the amount owing is significant, and do not require the input of a court.

Although the threshold for sending a statutory demand to a company is £750, creditors often use them to recover larger amounts. HMRC are known to use this method because no court procedure is involved, and debts can be recovered quickly.

What are the requirements for issuing a statutory demand?

A creditor can only issue a statutory demand to a business if the circumstances meet certain criteria. These criteria are set out in the Insolvency Act 1986:

  • The debt must be at least £750
  • The debt must not be in dispute
  • The creditor must not hold security equal to or greater than the debt
  • The debt is not already part of a payment arrangement
  • The creditor must not owe you money
  • The demand must be made in the correct format and following the correct procedures

There are rules and regulations that specify how a demand must be served. If the creditor does not adhere to these rules, there may be grounds for you to have the demand ‘set aside’ (more about this below).

The creditor must use a statutory demand Form SD1 and must serve it by:

  • Giving it to the company director, company secretary, principal officer or manager
  • Leaving it at your company’s registered address or main place of business
  • Asking a ‘process server’ to serve it for them

It can only be sent by registered post or put through a letterbox if the creditor is unable to serve it in person.

Act quickly if you have received a Statutory Demand

It may well be that you or your business has a legitimate dispute and don’t want to pay the debt as claimed, as it is common for creditors to issue statutory demands to put pressure on you to pay up. This could be a result of a breakdown in communications or mistrust as a result of promises you found you just couldn’t keep. None the less you have a limited time to respond and defend the action.

Therefore you need to take action immediately as you only have 18 days to seek to set aside (dismiss) the demand, pay or take other protective action, to stop a winding up or bankruptcy order and legally ring fence you and your business. If ignored a Statutory Demand could result in you being made bankrupt and your business being closed permanently and liquidated.

The probable course of events is described below:

    • A creditor petitions the court to wind up the company, citing non-payment of the Statutory Demand as their reason
    • The winding up petition is advertised in the London Gazette
    • Because banks check the Gazette for notice of insolvent companies, your business bank accounts will be frozen
    • Other creditors may hear about the company’s financial position, and begin their own legal action
    • After a period of seven days, the court can issue a winding up order which sets in motion the liquidation of company assets in order to meet creditor demands
    • Following liquidation, your business will cease to exist.

This outcome, although not inevitable, can happen very quickly. It is most important, therefore, to check the validity of the Statutory Demand served on you as soon as it is received.

Remember, you have only 18 days to act if you are to successfully set aside this demand through court process.

Setting aside a Statutory Demand

‘Setting aside’ a Statutory Demand means having it cancelled by the court. Several elements of the demand need to be carefully checked, including the legitimacy of the specified debt – whether it is correct in full or only in part, and if the required legal procedures have been followed by the sender.

Not adhering to specific rules and regulations could render the demand invalid. It must be presented on a Statutory Demand Form 4.1, and delivered to the company’s registered address in one of the following ways:

    • By hand
    • By registered post
    • Signed for by an officer of your business.

Just as the creditor must complete the correct forms and serve the demand in a given format, you as the recipient need to make sure that you also use the prescribed forms in challenging the situation.

There must be a genuine dispute to be able to challenge the demand. Sometimes a creditor may considerably ‘inflate’ the cost of their labour or time within an invoice, and if it comes to light that the debt was in genuine dispute, the creditor could face accusations of abusing court process.

Some unscrupulous creditors use Statutory Demands in the hope that debtors will succumb to pressure and the threat of liquidation. If, however, there is only a small mistake in the amount owing, the Statutory Demand is unlikely to be set aside.

The value of receiving professional help in these circumstances cannot be underestimated. It would be a travesty if your company was liquidated simply because you failed to comply with administrative requirements.

We are the UK’s market leader in corporate recovery, and can assist at every stage of this process.

What are valid reasons for reversing a Statutory Demand?

You may be successful in having the demand rescinded if one or more of the following are true:

    • The amount stated in the demand is in dispute, or is less than £750
    • The creditor holds security equalling or exceeding the debt
    • You are paying by instalments and have not reneged on any payments
    • You are owed money by the creditor
    • The demand was made in error
    • The creditor failed to use the correct forms and/or required method of serving the demand.

If your challenge is accepted by the court, a hearing will be called to discuss the debt and the payment deadline suspended pending this hearing. Should your application be successful, the demand will be rescinded and the creditor will face liability for all court costs.

We can help if you have received a Statutory Demand

Using or seeking advice from a professional will enable you to understand what your next step is and what to expect at each stage. It may also be an opportunity for you and the professional to look at your business and implement a strategy that will stop any legal proceeding being brought against your company. If the amount you owe is a small amount of money or thousands we can assist you to deal with your statutory duty to deal with these type of demands.

We will offer you an initial consultation that is completely free and we will only give you professional, trusted and compliant advice that will enable you to stop worrying and get on with running your business.

We will ensure that your problems are dealt with swiftly and with the minimum amount of disruption. Contact us online today to deal with a stationary demand you may have received.