Receiving a Statutory Demand: Advice for Company Directors

February 2, 2024 / Business Insolvency

Receiving a statutory demand can be quite a shock to directors. If you have received one, you need to do something about it, and fast.

Statutory demands can lead to a company’s creditors taking serious action, often culminating in a winding-up petition and forcing the end of the company. A response must be given within 18 to 21 days of receiving a statutory demand. The gravity of a statutory demand, coupled with the relatively brief window for a response, can leave directors feeling unsure of what to do. However, while statutory demands are certainly serious, they do not necessarily pose a hopeless situation.

In this article, Clarke Bell will offer company directors advice on how to handle a statutory demand, including a breakdown of what the document is, its potential effects on a limited company, and what you can do in response.

What is a statutory demand?

A statutory demand is a formal, written ultimatum for debt repayment given to a company by its creditors. The statutory demand details the debt or debts in question, including amounts payable, outstanding creditors, and other pertinent information. Once received, the company has to make a decision:

  • pay the debt in full
  • reach an agreement with the specified creditors
  • contest the statutory demand in court
  • pursue insolvency procedures.

Ignoring a statutory demand is not a good option, as it can result in creditors forcing your hand and taking control over the situation. In a worst-case scenario, you risk losing your company to compulsory liquidation.

How can a statutory demand affect a company?

Statutory demands typically show just how willing creditors are to collect a debt. They mark a significant step up from a simple letter or phone call, and usually precede a creditor pursuing further action should the statutory demand not be adhered to. This threat is essentially the main effect of a statutory demand.

Should a company receive a statutory demand, it has 18 days to contest it in court, or 21 days to adhere to the demands. If directors fail to meet either deadline, then the statutory demand will be considered ignored. This makes creditors eligible to take further action, such as submitting a winding-up petition. A winding-up petition is a significant escalation from a statutory demand, as it can result in the company being forced into compulsory liquidation.

When might creditors submit a statutory demand?

Statutory demands are not typically the first option considered by creditors. This is because they can be time-consuming and require a fee to be paid, and there is no guarantee that a creditor will recover their debt with this process. Instead, most creditors will pursue other debt recovery methods before escalating the situation. Creditors will usually contact company directors as a first port of call, with formal notices marking the next step if creditors cannot establish contact. Should these approaches fail to bear fruit, some creditors will turn to debt collectors, while others will pursue other avenues. Statutory demands tend to be one of the last options considered by creditors.

While a statutory demand can lead to a company making a full repayment to its creditors, many others will not have enough money to do so. As such, statutory demands are almost always submitted by creditors who are willing to ‘go the distance’. So, they should be treated seriously.

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What options do directors have?

Statutory demands can pose a serious threat to the longevity of a company. They clearly show the intentions of creditors, and can easily lead to a company being forcefully shut down if mishandled. However, statutory demands do not mean a company’s closure is a foregone conclusion. Depending on the circumstances, directors have several options available to respond to a statutory demand.

Pay the statutory demand in full

Occasionally, a statutory demand will be issued to companies who can pay their debts, but haven’t for one reason or another. This could be due to an honest mistake on behalf of directors, or due to the impatience of creditors. In any case, if your company can pay its statutory demand, you may do so within 21 days of receiving the notice.

Reach an agreement with creditors

In the event that your company cannot pay its statutory demand immediately, but will be able to do so over a longer timeframe, you may consider negotiating with your creditors. To do so, your company must have a viable business model, one capable of lasting well into the future despite its current problems.

You may also consider appointing a licensed insolvency practitioner to enact a Company Voluntary Arrangement (CVA). This procedure, as negotiated by the insolvency practitioner, will aim to reach a new agreement that benefits both the company and its creditors. Ideally, the company will have the immediate pressure on its finances relieved, while its creditors will receive a full repayment over the course of the CVA…typically five years.

Contest the statutory demand in court

In some cases, a statutory demand will be filed in error. This error could be that it was delivered to the wrong company or for an incorrect sum.

If you have evidence that your statutory demand has been filed improperly, you may take the issue to the courts and have it set aside. You should avoid making a frivolous appeal, as the courts may well apply a penalty to you for doing so.

Consider insolvency procedures

If the statutory demand is both legitimate and unpayable, you may be best served looking to insolvency procedures for a solution. A Creditors’ Voluntary Liquidation (CVL) is often the best option. This procedure aims to provide insolvent companies, i.e. those that cannot repay their debts as they come due, with a way of dealing with their company’s debt problems once and for all.

A CVL allows directors to appoint a licensed insolvency practitioner as the liquidator of their company. Once in this position, the liquidator will take the reins of the company, selling off any assets and distributing any proceeds amongst outstanding creditors. In doing so, the CVL procedure ensures that directors reach a solution to their debt problems, while still upholding their obligations to outstanding creditors.

Clarke Bell can help

Statutory demands are a severe problem for any company. If left unchecked, they can result in a company being closed against its directors’ will, with any assets being sold off to repay its debts. This constitutes a worst-case scenario for most companies, though all hope is not lost. Directors have a range of options at their disposal to deal with a statutory demand. Clarke Bell can be there to help you find the best one.

We have more than 29 years of experience in helping companies solve their financial problems, through business rescue, insolvency procedures, or otherwise. We can do the same for you.

Contact us today for a free, no-obligation consultation to find out how we can help you.