Responding To A Statutory Demand

In the wake of the COVID-19 pandemic, many companies were provided with relief through the temporary insolvency measures introduced by the government.

The Corporate Insolvency and Governance Act 2020 (CIGA 2020), which came into effect on 25 June 2020, introduced a temporary suspension on serving a statutory demand against a company. Demands served from 1 March 2020 to 30 September 2021 were deemed void. During this period, businesses could focus on navigating through the pandemic without the threat of insolvency hanging over their heads.

With the partial easing of the temporary restrictions as from 1 October 2021, many creditors will be entitled to initiate the insolvency process against companies who are unable to pay qualifying debts by serving a statutory demand as a pre-cursor to a winding up petition. Under the latest measures, a creditor must also serve a prescribed form of notice under Schedule 10 of CIGA 2020 seeking proposals for payment of the debt.

Given the serious consequences of a winding up petition being made against a company, it is imperative that immediate action is taken following service of a statutory demand.

Taking no action

If a company fails to pay the debt set out in the statutory demand within a 21-day period, the creditor will be entitled to present a winding up petition against the company on the basis that it is deemed to be unable to pay its debts.

A petition to wind up the company is not to be taken lightly. In the event that a company is wound up by the court, any transactions concerning the company’s assets entered into from the date of the petition will be void. The company’s bank will likely take steps to protect itself by freezing its bank accounts leaving the company unable to access funds to make payments, i.e., to suppliers and employees.

Furthermore, news of the petition is likely to reach the public and the company’s suppliers or existing creditors. The company may find it difficult to secure credit from suppliers whilst also having to fend off existing creditors who are likely to want to recover their outstanding debts before any winding-up order is made.

The company may, as a result, have little option but to cease carrying on business.

Naturally the company will be put to cost in dealing with the petition, including taking legal advice and instructing solicitors to deal with the petition hearing. If the petition is made out on reasonable grounds, the company will also be required to pay the creditor’s costs of the petition on top of the debt, which may not be a feasible proposition if the company cannot access funds or additional finance, and is hindered from carrying on business.

Pay the debt

A company served with a statutory demand for a debt which is properly payable should make contact with the creditor without delay and make arrangements to pay the debt.

The parties could agree to a payment plan which the creditor must consider due to the temporary measures in place under CIGA 2020. A payment plan provides a company the opportunity to continue to trade and reduce its debt. It’s often the case that entering into a payment plan is more advantageous to creditors who may otherwise only receive a nominal dividend, or nothing, if the company is ultimately wound up.

Challenging the statutory demand if the debt is disputed

If the debt claimed in the statutory demand is disputed, a company should obtain advice on its legal position as soon as possible, as it will need to establish that the debt is genuinely disputed on substantial grounds. Generally, the court will not allow a winding up petition to be made against a company based on a statutory demand which is genuinely disputed.

Once a company is satisfied that there is a genuine dispute, the creditor should be informed of the grounds on which the debt is disputed and request undertakings from the creditor not to present a winding up petition.

If the creditor does not provide the undertakings, the company will need to consider making an urgent application to the court for an injunction to restrain the creditor from presenting a winding up petition, given the adverse consequences that is likely to follow if a petition is made.

Inviting the creditor to provide undertakings in the first instance will be useful evidence if the creditor presents a petition despite any dispute raised, as the court will take this into account when determining any liability for costs.

If a company wants to avoid a petition being made, it will need to ensure an application for an injunction to restrain the presentation of the petition is made promptly so that any order by the court, if successful, is made prior to the statutory demand expiring. A company will therefore be at risk of a petition being made unless the creditor provides sufficient undertakings not to do so, or has the benefit of an injunction against the creditor.

The inherent threat of a winding up petition on grounds of an unpaid statutory demand should not be casually dismissed given the consequential effects of a petition being made. A company should always seek prompt legal advice to protect its interests and ensure it has sufficient time to obtain undertakings or otherwise make a court application for an injunction against the creditor if necessary.

For more information regarding debt matters, or if you have been threatened with a statutory demand and/or a winding up petition and want advice, please contact our Dispute Resolution team on 0116 281 6231 or email to farhaan.pathan@bhwsolicitors.com.