A statutory demand is a formal demand for payment. Once served, a debtor who fails to pay within 21 days is at risk of having bankruptcy or winding-up proceedings issued against them.
Serving a statutory demand can therefore be seen as a method of putting pressure on a debtor to make payment. While the use of statutory demands is not intended to be a debt recovery tool, it is undoubtable that they are an effective weapon in the armoury of creditors. With the introduction of the Pre-Action Protocol for Debt Recovery, which came into force on 1st October 2017, it may well be the case that there is an increase in the use of statutory demands by companies who are owed money from individuals. The introduction of the new Debt Recovery Protocol will make it more onerous for businesses to recover unpaid debts from individuals.
Debts Owed by Individuals
In respect of debts owed by individuals, a statutory demand can only be served if the debt is undisputed and over £5,000.
It is prudent to have the statutory demand personally served by a process server who can prepare the necessary certificate of service.
Following the statutory demand being served on the individual, they have 18 days to make an application to set aside the statutory demand if the debt is disputed. When an application to set aside a statutory demand has been made, the time for complying with the demand stops until the application is heard by the court. There is no court fee required to make an application to set aside a statutory demand. If the application to set aside the statutory demand is successful, it is likely the creditor would be ordered to pay the debtor’s costs.
If no application to set aside the demand is made, and the debt remains outstanding 21 days after service of the demand, the creditor can present a bankruptcy petition to the court. There is no requirement to serve a bankruptcy petition immediately at the end of the 21 day period, but if the bankruptcy petition is presented 4 months after the demand was served, the court will want to know the reasons for the delay.
Debts Owed by Companies
In respect of debts owed by companies, a statutory demand can only be served if the debt is undisputed and over £750.
While service can be effected by leaving the statutory demand at the company’s registered office, in reality it is often useful for the statutory demand to be personally served.
Following service of the statutory demand on the company, if the debt remains unpaid for more than 21 days, it can be used to support a winding up petition on the grounds that the debtor company is unable to pay its debts.
Strictly speaking, it is not necessary for a company to issue a statutory demand as a precursor to issuing a winding up petition although they are often used in practice.
Unlike with individuals, it is not possible for a company who has been served with a statutory demand to make an application to set it aside. Therefore, if the debt is disputed and the creditor is unwilling to withdraw the statutory demand, the debtor’s remedy is to apply for an injunction restraining the presentation of the petition. This is expensive and if the debtor succeeds in obtaining an injunction the creditor is likely to be heavily penalised in costs.
While statutory demands can be considered an aggressive step, where a debtor is being slow in making payment, aggressive action is often needed to ensure payment. Particularly in cases where a debtor may owe money to numerous creditors, it is often the case of “he who shouts loudest gets paid first”. If a debtor is on the verge of insolvency, obtaining payment before the company is wound up or the individual is made bankrupt can be very significant in recovering the debt.
Serving a statutory demand is not without risks and if a statutory demand is served in respect of a debt which is disputed the creditor may be penalised with heavy costs penalties. Careful appraisal must be given to all of the circumstances of a case to decide whether it is appropriate to serve a statutory demand.
If you have been served with a statutory demand, or are considering serving one for an unpaid debt which you are owed, it is important to take legal advice.
Paul Davis is an Associate Solicitor at BHW Solicitors in Leicester and regularly writes and advises on all aspects of debt recovery and commercial litigation. Paul can be contacted on 0116 281 6231 or at firstname.lastname@example.org.