statutory demand

A statutory demand is a written request for payment of a debt. Where a creditor is owed £750.00 or more and the debt is undisputed, the creditor can serve the debtor with a statutory demand.  On receipt of the statutory demand, the debtor will have 18 days to apply to set it aside and 21 days to make full payment of the debt or reach an agreement with the creditor.

Consequences for Non-Compliance

Should the debtor fail to respond or fail to make payment or arrange a suitable payment plan during the 21 days, the creditor is entitled to move towards insolvency proceedings. This will take the shape of a winding up petition if the debtor is a company, or a bankruptcy petition where the debtor is an individual. Service of a statutory demand on an individual is essential before issuing a bankruptcy petition. There is no requirement to do so on a company before presenting a winding up petition; that is to say, a creditor is able to present a petition without serving a statutory demand. The advantage of doing so is that failure to comply with a statutory demand results in a presumption of insolvency. Service is usually recommended because puts the company on notice of the creditor’s intentions, amongst other reasons.  

Pro Formas

Under the Insolvency Act 1986, there are prescribed forms to be used, which depend on the nature of the debt.

• Form 6.1 – debt is for a specified amount payable now;
• Form 6.2 – debt is for a specified amount payable ordered to be paid by a Court;
• Form 6.3 – debt is payable in the future;  
• Form 4.1 – if it is a registered or unregistered company.

Serving Statutory Demands

Due to the serious consequences of failing to comply with the requirements of a statutory demand, a creditor must do everything he can to bring the statutory demand to the attention of the debtor, particularly individual debtors, by either:

• Personally delivering it to the debtor (an individual, a company director, an employee ); or
• Instructing a process server to serve it on the debtor on the creditor’s behalf.

Where the demand cannot be delivered in person, it is possible to send it by registered post or put it through the debtor’s letterbox to effect service. That said, it will be for the court to decide whether service has been effective.

If the creditor fails to follow the correct procedure of service, the statutory demand could be deemed invalid and the creditor could be held liable to pay the debtor’s legal costs if defended.

Creditors may also serve a statutiry demand by registered post, or commonly known in the UK as "recorded delivery".

Preparation

Statutory demands are relatively inexpensive to prepare, and can lead to effective to obtain payment. However, if payment is not forthcoming, the costs of issuing insolvency proceedings will be more than £750, which on occasions, can outweigh the debt. Currently, to present a creditor bankruptcy petition, there is a court fee of £220.00 plus the Official Receivers deposit to administer and manage the bankruptcy of £700.00 to pay. To issue a winding up petition against a company, the court fee is £220.00 and the Official Receivers deposit is £1,165.00.

Challenging a Statutory Demand

Where the debtor is an individual, if he disputes the debt and wishes to challenge the sum claimed in the statutory demand, he must make an application to Court within 18 days of being served. The grounds for challenging the statutory demand include:

• There is a genuine disputes in respect of the debt said to be owing to the creditor;
• The debtor has a counterclaim or a right of set off against the creditor;
• There is a reasonable excuse for non-payment; and
• There is a defect in the statutory demand or the supporting affidavit.

If the debtor fails to apply to Court in time to set the statutory demand aside or to does not apply for an injunction to restrain the creditor from issuing a bankruptcy petition within 21 days, the creditor will be entitled to proceed with issuing a bankruptcy petition. 

Once a statutory demand has been served, a bankruptcy petition must be presented within 4 months, failing which, the demand will expire and the creditor will need to serve a fresh statutory demand on the debtor and start the process again.

Cautionary Note

The insolvency process is should only be used where the creditor is confident that the debtor will and cannot not raise a bona fide defence. Although a statutory demand should not be considered as a method of debt recovery, experience has shown that where a debtor refuses to pay a debt, serving a statutory demand can be a powerful tool. The mere threat and consequence of insolvency proceedings on the individual or a company may be usually enough to force action to settle the sums owing.

Creditors should also be aware that as soon as insolvency proceedings have been issued, they can lose control of the matter, especially when a winding up petition has been advertised as there could be other creditors who may support the petition and take control. It is therefore important to be aware of the likely outcomes before serving a statutory demand.