Responding to a statutory demand – a guide for companies

Receiving a statutory demand can be a critical moment for any company. In this guide published by Insider Media, Rico Dexiades, explains what it means, how to respond effectively, and the potential risks of inaction.

What is a statutory demand?

A statutory demand is a formal written demand for payment of a debt to be made within 21 days. A creditor should only serve a statutory demand on a debtor company where the debt is undisputed and equals or exceeds £750.00.

The effects of a statutory demand can be very serious. If the debtor company does not comply with the statutory demand, or fails to apply to the court for an injunction to restrain the presentation or advertisement of a winding up petition, it can be used as evidence that the debtor company is unable to pay its debts, in support of a subsequent winding-up petition.

Therefore, it is crucial that a company’s director(s) act quickly when served with a statutory demand, to reduce the chances of entering compulsory liquidation.

What types of corporate entities can be served with a statutory demand?

A statutory demand can be served on the following corporate entities:

1. Any company or limited liability partnership registered in England and Wales
2. Any company whose centre of main interests is situated in England & Wales
3. An unregistered company (which can include foreign companies). An unregistered company is defined as “any association and any company, with the exception of a company registered under the Companies Act 2006 in any part of the United Kingdom”.

There are rules that specify how a statutory demand should be served on a debtor. If the statutory demand is served on a registered corporate entity, it should be served at the registered office address. If the statutory demand is served on an unregistered company, it should be served by leaving the statutory demand at the company’s main place of business or delivering the statutory demand to a director/officer of the company.

However, in certain circumstances, it may be possible to effect valid service by alternative means, but this will be fact specific. Sometimes, it might be possible for a debtor to seek retrospective court approval to address any defects in the service process. A careful review of the service rules should be undertaken, because if a statutory demand is not served properly, it may be invalid.

My company has been served with a statutory demand, how should we respond?

Given the short amount of time a debtor has before the statutory demand expires, it is crucial for a company’s director(s) to take immediate advice on the options for preventing a winding-up petition being presented.

This will depend entirely on the individual circumstances of the matter. In addition to some of the technical grounds noted above, there may be other bases for challenging the validity of the statutory demand.

However, if the company accepts that the debt is payable, it should contact the creditor as soon as possible and arrange to pay the debt, or look to enter into negotiations aimed at settling the matter.

How can my company challenge a statutory demand?

A statutory demand served on a company can be challenged on the following grounds:

1. Where the debt alleged in the statutory demand is genuinely disputed on substantial grounds
2. Where the company has a genuine counterclaim, cross demand or right of set-off against the creditor which equals or exceeds the debt amount claimed in the statutory demand
3. Where it appears that the creditor holds some security in relation to the debt claimed in the statutory demand, and the court is satisfied that the value of the security equals or exceeds the full amount of the debt
4. Where the court is satisfied on other grounds that the demand ought to be set aside. For example, this could be where a company has a reasonable excuse for not paying the debt claimed in the statutory demand as it is prohibited by law from paying the sum due, or where the court has no jurisdiction to wind-up the company in receipt of the statutory demand, or for technical and procedural reasons/errors, etc.

If you receive a statutory demand in respect of a wholly disputed debt, you should obtain legal advice and/or write to the creditor in the first instance and as soon as practicable setting out the reasons (as outlined above) for the dispute, and seek the creditor’s agreement to withdraw the statutory demand. A common alternative would be to negotiate a satisfactory undertaking (i.e. contractual promise) that a winding-up petition will not be presented or (if already presented) advertised.

Any letter to the creditor should set out in detail the reasons why the debtor company does not agree with the statutory demand, and request its withdrawal or undertakings to avoid the need for the debtor company to apply to the court for an injunction to restrain the presentation or advertisement of a winding up petition.

There is no formal procedure for a statutory demand to be withdrawn, but in practice the creditor’s written confirmation of withdrawal or an undertaking not to issue a winding-up petition may be acceptable.

If you dispute part of the debt, it is imperative that you pay the undisputed sums to the creditor as soon as possible, and set out your explanation as to why the balance is disputed, following the same approach as above.

How can I stop the presentation or advertisement of a winding up petition?

If the creditor refuses to withdraw the statutory demand, or to provide suitable undertakings, where one of the grounds for challenging the demand exists, the debtor will need to take immediate steps to apply to the court for an injunction to restrain (i.e. stop) the presentation or advertisement of a winding up petition.

Applying to the court for an injunction is a serious matter. If successful, the court will make an order restraining the creditor from presenting or advertising a winding up petition. These court applications need to be made quickly as there are strict time limits.

There are also rules relating to the procedure to be followed and the information to be included in an application for an injunction. The application needs to be supported by a witness statement (usually from a director of the debtor company), which should set out the reasons (as outlined above) for the order sought, and any evidence you have to support this including correspondence passing between the parties prior to seeking the court order, and evidence as to the company’s solvency.

There are also important costs considerations, and implications, that will need to be factored into your decision as to whether taking the step of making the application is worthwhile.

What happens if my company does nothing?

Ignoring a statutory demand is usually a high risk strategy. As explained above, if the company fails to respond, the creditor, on the expiry of the 21 day period for payment, will be entitled to present a petition for the winding-up of the debtor company. The debtor company will be deemed, by virtue of its failure to comply with the statutory demand, to be unable to pay its debts.

It is also important to bear in mind that if the debtor company does nothing, and unfortunately finds itself dealing with winding-up proceedings, there are legal and commercial consequences that follow, which may affect the debtor company’s ability to trade and its commercial reputation generally. This might include:

• The court rejecting the company’s grounds for challenging the statutory demand due to the delay in raising these arguments, and on the basis that it could, and perhaps should, have raised these arguments at an earlier opportunity
• The company’s bank freezing all company bank accounts, therefore affecting the company’s ability to pay its employees and/or suppliers, etc, creating secondary claims against the company and forcing them to cease trading
• Suppliers becoming wary of dealing with the company, and making it more difficult to obtain credit whilst the petition is outstanding, or possibly placing the debtor company in breach of contract/covenant with other trade partners
• Other creditors of the company deciding to pursue the company for repayment of any outstanding debts more vigorously than they would otherwise have done. The sudden demands for other outstanding debts may push the company further into financial difficulties, taking into consideration the significant legal expenses and time that will be required to deal with all the matters
• Personal liability for directors – the directors of a company in financial difficulties may face risk of allegations of personal liability in respect of personal guarantees, fraudulent trading, wrongful trading and breach of their directors’ duties.

This is by no means an exhaustive list of the consequences of the presentation of a winding-up petition, but it does highlight why a company should seek advice as soon as it receives a statutory demand to assess all the options, instead of ignoring it and risk a winding-up petition being presented. Losing the opportunity to get the statutory demand withdrawn by agreement/an undertaking, or applying to the court for an injunction, could prove to be far more costly and damaging in the long run.

If you have received a statutory demand, or wish to serve a statutory demand on a debtor company, please do not hesitate to contact our team of dedicated experts at Thomson Snell & Passmore.