What is the Difference Between a Statutory Demand and a Winding Up Petition?

December 5, 2023 / Winding Up Petition

There is often some confusion around the terms Statutory Demand and winding up petition. While part of the same procedure, these terms are very different, though equally serious for company directors. 

In this article, Clarke Bell will discuss the difference between a Statutory Demand and a winding up petition. We will also discuss what it means to have an insolvent company; and how a Creditors’ Voluntary Liquidation can sort out a company’s debt problems, once and for all.

What is a Statutory Demand?

A Statutory Demand is a prerequisite for creditors to submit a winding up petition. They can be issued by any creditor if they are owed a debt in excess of £750. In essence, they are the first step in the winding up process, acting as an official request for a company to either repay its debts in full, or reach an agreement with the creditor behind the demand. Once served, a company has 21 days to reach one of these two outcomes. If neither outcome is reached within this time frame, then this will be considered evidence that your company is insolvent, and the creditor is entitled to use other methods to recover their debt.

Statutory Demands are not issued lightly. They are typically one of the last actions considered by creditors, after a range of other actions have been tried and failed. However, once a Statutory Demand has been issued, it can be safely assumed that the creditor is very serious about recovering their debt. If a Statutory Demand is not resolved within the 21-day time frame, a winding up petition is almost certain to follow.

What is a winding up petition?

A winding up petition is the next step after a Statutory Demand has either gone unpaid, or has not paved the way for a new agreement. Creditors can initiate a winding up petition after their Statutory Demand elapses. This can be done by creditors approaching the courts with the relevant documents and particulars of the case in question. In doing so, they will formally request that the courts force their debtor into compulsory liquidation. This is not an action that will be taken flippantly; submitting a winding up petition will cost £1,600 in a deposit, plus additional legal costs. The procedure will also take a good deal of time and effort on behalf of creditors. In other words, if your creditors submit a winding up petition, then they are serious about recovering their debt.

Effects of a winding up petition

Once a winding up petition has been submitted and accepted by the courts, a date for a court hearing will be set. This hearing will give both sides, creditors and company directors, a chance to make their case. Creditors will aim to prove that the debt is valid, and liquidation is the only method of recovery, while directors have the chance to dispute the debt. 

If the court rules in favour of the company, then the winding up petition will be stopped. This allows the company to continue operating as normal. While certainly the best outcome for a company, it is also the least likely. Creditors usually have a strong case to justify their investment in the process, making a successful challenge easier said than done. 

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If the court rules in favour of creditors, the result will normally be the company being placed into ‘compulsory liquidation’. Usually, The Official Receiver will act as the liquidator initially, although a firm of insolvency practitioners will often complete the liquidation process. The result of the compulsory liquidation will be the closing of the company, any assets being sold and the distribution of any proceeds amongst creditors. There may also be legal consequences for directors, depending on their conduct.

Avoiding a winding up petition using Creditors’ Voluntary Liquidation

Given the negative consequences of a winding up petition, it is generally best for companies to avoid being served one. If your company has debts which it cannot pay back, a popular option is to put the company into Creditors’ Voluntary Liquidation. A CVL is an insolvency procedure that provides directors with a pro-active way of dealing with an insolvent company.

As it is a voluntary procedure, directors are allowed to appoint an insolvency practitioner of their choice to the role of liquidator. While in this role, the liquidator will effectively take charge of the company for the purposes of carrying out the procedure. They will identify any company assets, dispose of them for the highest amount possible, and distribute any proceeds amongst creditors. Once all distributions have been made, the company will be wound up and removed from the Companies House register. Any debts that remain will be written off, except for debts secured by personal guarantees.

The CVL procedure also grants directors strong legal benefits. Most notably, the company will be protected from legal action once it is entered into the procedure. This essentially removes the risk of a winding up petition, and the compulsory liquidation that often follows. Furthermore, should any of your creditors make accusations of misconduct, using a CVL makes for a good defence. It shows that you were prepared to act in the interests of your creditors, and took the initiative when it was appropriate to do so. 

For more information about CVLs, read our complete CVL guide.

Clarke Bell can help

Statutory demands and winding up petition make clear the intentions of outstanding creditors, and their desire to get paid what they are owed.

If your company has debts that it cannot pay back, Clarke Bell can help you. 

We have more than 29 years of helping companies reach the best possible solutions in difficult situations, and we can do the same for you. 

Contact us today, for free, and find out how we can help you.