Statutory Demands: Advice for Company Directors on How to Respond

February 16, 2024 / Business Insolvency

Receiving a statutory demand can be a nasty surprise. It can be seen as a final warning to directors to repay an outstanding debt, and clearly marks a creditor’s intentions. Should the statutory demand go unpaid, the creditor will likely escalate the issue by submitting a winding-up petition. This will involve the courts, giving them the final say over the debtor’s future. In many cases, this results in a winding-up order and the compulsory liquidation of a company.

While being served a statutory demand is certainly never good, it isn’t necessarily the end of your company. There are ways to respond, though time is of the essence.

In this article, Clarke Bell will break down statutory demands, what they mean for you, and how you can respond. We will also discuss how to deal with insurmountable debts of a company, once and for all, with a process called a Creditors’ Voluntary Liquidation (CVL).

What is a statutory demand?

Statutory demands can be seen as a prelude to a winding-up petition. Creditors will typically serve a statutory demand first, which functions both as a last chance to a debtor, and to collect legal evidence of the debt’s existence. This evidence will be helpful in the event that the creditor must petition the courts to help recover the debt.

Once a debtor receives a statutory demand, they will have 21 days in which to comply. This usually involves either repaying the debt in full, or negotiating a new agreement with the creditor. If neither of these outcomes is achieved, the creditor can escalate the issue using a winding-up petition. Typically, creditors can serve a statutory demand to debtors when they have an outstanding debt with them above £750.

Who can issue a statutory demand?

Creditors who meet a specific set of criteria can issue a winding-up petition after attempting other debt recovery methods. Typically, creditors will consider a statutory demand after attempting contact with the debtor, sending payment reminders, and even turning to bailiffs. Assuming debt recovery methods such as these have been tried and failed, a statutory demand could be an option, provided specific criteria are met.

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Eligibility criteria for issuing a statutory demand

Creditors must meet a set of criteria before issuing a statutory demand. These criteria are outlined in the Insolvency Act 1986, and are as follows:

  • The debtor must owe a debt of at least £750.
  • The debt must not be in dispute.
  • The creditor must not owe a debt to the debtor. This is usually relevant to stock suppliers and other such creditors, as opposed to a traditional creditor such as a bank.
  • There is no existing repayment agreement in action.
  • The statutory demand must be issued correctly using the appropriate forms. If a creditor fails to follow the proper procedure, the statutory demand will likely be set aside.

Results of a statutory demand if you do not respond

Failing to respond to a statutory demand that has been appropriately issued can be disastrous for your company, and can even have knock-on effects on your career as a director. As the time frame of a statutory demand is only 21 days, mounting an effective response can be difficult, but swift action is a must. Failing to respond appropriately within this time frame, or neglecting to respond at all, will likely cause significant problems.

By ignoring a statutory demand, an official record is created of the debt’s existence, and the debtor’s failure to repay. This makes the debt seem “real” in the eyes of the law, and allows a creditor to serve a winding-up petition. Once a petition is served, a notice will be published in the Gazette. This will notify your company’s bank, along with any other outstanding creditors you may have. This can cause a cascading effect, wherein your other creditors prepare their own legal action.

If the first creditor has decided to escalate the issue using a winding-up petition, you will be expected to attend a court hearing to state your case. It is possible that the court then serves your company with a winding-up order, which begins the compulsory liquidation process. At this stage, you will effectively lose control over your company, and an Official Receiver will be appointed to carry out the liquidation of your company. Furthermore, an investigation will be opened into your company’s finances and your conduct as a director, which could lead to additional consequences of a financial and legal nature, if any wrongdoings are identified. As such, it is best to act swiftly if you even suspect your creditor to be considering a statutory demand.

How you can respond to a statutory demand

Statutory demands are a serious warning sign for a company, but it isn’t necessarily the end of the line. There are two main options available to you, apart from letting your company go into compulsory liquidation. You can dispute the statutory demand or put the company into Creditors’ Voluntary Liquidation (CVL).

Disputing a statutory demand

Disputing a statutory demand is an option when creditors submit a demand in error. This could mean anything from intentionally falsifying information to incorrectly following procedure. If you have evidence that your creditor’s statutory demand is in some way not legitimate, opening a legal dispute could be a good solution. This can have a statutory demand be set aside, and can give your company some breathing space. However, you must not frivolously dispute a statutory demand. Doing so can result in serious legal consequences for you and your company, and is likely to do much more harm than good.

Creditors’ Voluntary Liquidation

Another available option is a Creditors’ Voluntary Liquidation (CVL). This is a popular solution for directors of an insolvent company – i.e. one which cannot pay its debts.

To put your company into a CVL, you will need to appoint a licensed insolvency practitioner (like Clarke Bell). Your company will be formally closed down / liquidated; and, if there are sufficient funds, your creditors repaid.

Once a company is entered into the CVL procedure, this stops any action being taken by any bailiffs. That 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.

For more details about CVLs, read our complete guide to the process.

Clarke Bell can help you

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

If your company is not in a position to pay its debts, 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.