What Does a Statutory Demand Against a Company Mean?

October 25, 2023 / Business Insolvency

A statutory demand can be a severe threat to a company. It demonstrates the willingness of a creditor to escalate their attempts at debt recovery, and can culminate in the compulsory liquidation of a company if left unchecked. For directors of struggling or outright insolvent companies, receiving a statutory demand can be a nightmare.

While the threat posed by a statutory demand is clear, what might not be is how it works. Statutory demands sit partway down the debt recovery process, and spark an entirely new process when filed. To properly respond to a statutory demand, directors would be wise to know what a statutory demand means.

In this article, Clarke Bell will cover exactly what a statutory demand against a company means, how the overall process works, and what implications it can have on you.

What is a statutory demand?

Statutory demands are legal documents demanding the full payment of an outstanding debt, or an agreement to repay the debt over a period of time fully. It is typically delivered to a company by an outstanding creditor after other means of debt recovery have failed to bear fruit.

Statutory demands have a 21-day time frame in which a resolution must be reached. Whether in the form of repayment or an alternative agreement, a company’s directors must act quickly to reach one of these outcomes. Failing to do so can lead creditors to escalate the issue, causing more problems down the line.

What does receiving a statutory demand mean?

Receiving a statutory demand is a serious move from creditors, and has two key meanings. First, your company is now in a position where it has a legal obligation to pay the specified debt. Unlike other forms of contact, a statutory demand is a formal, legal demand for repayment, and carries weight as such. Failing to adhere to this demand generates a legal record both of the debt, and of your company’s failure to pay. This can be used to justify further action, such as a winding-up petition.

Secondly, and perhaps more importantly, a statutory demand implies a creditor’s mindset toward debt recovery. Statutory demands are typically the first part of a legal cascade; other creditors may take notice and file demands of their own, and the initial creditor is almost certainly willing to serve your company with a winding-up petition. In other words, creditors that have issued a statutory demand are not concerned with a company’s future, and want their debt repaid as soon as possible.

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When can a statutory demand be issued?

Statutory demands cannot be issued whenever a creditor wishes. Certain criteria must first be met, and the process must be followed to the letter for it to have any power as a legal document. If a statutory demand is not filed correctly, it is likely to be dismissed in court, regardless of the debt. For a creditor to properly file a statutory demand, they must adhere to the following criteria:

  • For company debtors, the sum demanded must be in excess of £750
  • The debt must not have existed for longer than six years. If the debt is in excess of this time frame, other legal avenues can be pursued.
  • The creditor must not owe any money to the debtor
  • There must not be a payment plan already in effect
  • The creditor must not have a lien on collateral assets equivalent to or in excess of the debt

While these are official requirements, there is another, more subtle, requirement that must also be met. Filing a statutory demand costs money, within the region of £250-£500, demands time, and often is little more than a precursor to further action. Any creditor considering a statutory demand knows this, and will not be too eager to dive into this process without having exhausted other, less strenuous options. Naturally, this is not an official requirement that must be met, but it certainly acts as a solid barrier to entry for many undecided creditors.

What happens if I ignore a statutory demand?

Once a statutory demand has been issued, the recipient has 21 days to adhere to it. Failing to do so does not have any immediate effects, with the exception of producing legal evidence of the debt’s existence and the failure of the debtor to repay. As such, it can be easy to think there is little consequence to ignoring a statutory demand. This is far from the truth.

Failing to properly resolve a statutory demand begins a series of events that are incredibly damaging to a company. First, the creditor is entitled to serve a winding-up petition. This essentially requests that the courts get involved to compel a debtor to repay, either through an agreement, or through compulsory liquidation.

Once a winding-up petition has been submitted, the debtor will have seven days in which to respond before a notice is posted in the Gazette. This allows other creditors to join the petition, giving them the opportunity to claim their debts. Additionally, banks will see this notice and may freeze company accounts to ensure money cannot be removed from the company. Eventually, a court hearing will be held, allowing both sides to make their case. 

If the court rules in favour of the petitioners, then the company will receive a winding-up order and soon enter compulsory liquidation. This will mark the end of the company, and can have a severe knock-on effect on directors.

How to respond to a statutory demand

Responding to a statutory demand is difficult, but possible. In essence, there are three main methods of response, with the best depending on your specific circumstances. These are as follows:

Company Voluntary Arrangement

Entering into a Company Voluntary Arrangement (CVA) can be an effective response to a statutory demand. It is a formal insolvency procedure, one that aims to facilitate a new repayment agreement that benefits both creditors and the debtor. Negotiations can be handled by a licensed insolvency practitioner, who can be appointed to increase the odds of reaching a beneficial agreement. If both parties settle on a new repayment agreement, then it can be signed and will typically take effect for five years. The debtor will be expected to make repayments each month, and can be taken to court once more if the agreement is not precisely followed.

Legal dispute

Entering into a new repayment agreement with your creditors depends on a viable business model and the approval of creditors. While this can be an effective solution, it is not always a possibility. If an agreement cannot be reached, contesting the statutory demand could be a viable alternative.

Submitting a legal dispute is always an option, but it should not be done frivolously. A dispute is a serious allegation, as you will be disputing the legitimacy of the statutory demand. This can cause problems for your creditors, and could lead to penalties and legal punishments. As such, making a claim in bad faith, or casting allegations without evidence, will likely backfire and cause more problems later on.

Creditors’ Voluntary Liquidation

If you suspect your creditor is preparing a statutory demand, and the other two responses aren’t likely to cut it, then a Creditors’ Voluntary Liquidation (CVL) could be your best solution. 

A CVL is a formal insolvency procedure, one that allows directors to take the initiative before creditors do. While the procedure has a range of advantages, which you can read about in our complete guide to CVLs, we’ll focus on the main one pertinent to statutory demands. 

Once a company is entered into the CVL procedure, this stops any action being taken by any bailiffs – which will give the company’s directors a great deal of comfort. Creditors can still submit a statutory demand or a winding-up petition, so it is important to move as quickly as possible to get the company into liquidation. 

As part of the process, the company will be liquidated by a licensed insolvency practitioner, with any proceeds going to outstanding creditors. All in all, this provides directors with an effective way to voluntarily wind up an ailing company, while also offering protection from creditors looking to take legal action.

Clarke Bell can help

Receiving a statutory demand adds a new layer of difficulty to an already strenuous situation. Not only does it put creditor pressure clearly on your radar, but it can also be difficult to discern exactly what it means for you. This can make finding the right response a challenge, though it isn’t a challenge you have to face alone.

Clarke Bell has more than 29 years of experience in helping companies in such a situation. Whether it be finding the best response to a statutory demand, or tweaking an existing business model, our team always strives to reach the best possible outcome. We can do the same for you. 

Don’t hesitate to contact us today for a free, no-obligation consultation and find out exactly what we can do for you.