What Is a Statutory Demand and What It Means for your Business?

December 17, 2021 / Business Insolvency

A statutory demand is a legal warning sent by a creditor to your company as a step towards recovering an outstanding debt.

If your company has been issued with a statutory demand it is going to be an additional burden for you to deal with, at an already stressful time. Directors need to know what to do next. Especially as there can be severe consequences if the statutory demand goes ignored.

To help, Clarke Bell has collated this guide outlining what a statutory demand is. What it means for your business and what to do if you are issued one.

What is a statutory demand?

A statutory demand is used as a way for creditors who are owed money by a company to get back what they are owed.

Following the updated guidance as a result of Schedule 10 of The Corporate Insolvency and Governance Act 2020 (Coronavirus), the creditor must be owed £10,000 or more and must have asked for their money to be repaid over 21 days ago with no success. Creditors must be owed a sum of £5,000 or more to start bankruptcy proceedings.

A statutory demand is often the last resort for the creditor to retrieve what they are owed when other means. Such as reminders or negotiation, have failed.

What are the criteria for issuing a statutory demand?

As laid out in the Insolvency Act, creditors must meet certain criteria before they can issue a statutory demand.

These include:

– Creditors must be owed a sum of £10,000 or more

– The debt must not already be in dispute

– The creditor must prove that the demand has been correctly served and using the correct forms

– The creditor must be owed a debt by the debtor company which is for a liquidated amount which is not excluded. As a result of the updated Schedule 10 guidance, excluded debts include any rent or sum or other payment that a tenant is liable to pay.

What to do if you are issued with a statutory demand

If your business is issued with a statutory demand, it’s always best to act quickly. After all, you will only be given 21 days to pay the outstanding amount owed or to arrange a payment plan.

If you wish to challenge the statutory demand, you will have just 18 days to do so.

Option 1: Pay the statutory demand

The first option is to pay the amount in full within the 21-day timeframe.

If you are unable to repay the amount, then you must negotiate an informal payment plan with the creditor. This plan will set out when and how you will pay back the money owed.

If informal agreements fail, then setting up a formal agreement might be the best option. One option is to enter into a Company Voluntary Arrangement (CVA). This lets the company director draw up a formal agreement with creditors setting out when and how they will pay back the debt owed.

Throughout the CVA process, the director remains in control of the company which will continue to operate as normal. An Insolvency Practitioner will work closely with the director to draw up a realistic plan to pay back the debt. Whilst aiming to turn the business around and bring it back to profitability.

Option 2: Ignore the statutory demand

The second option is to ignore the statutory demand and leave it unpaid.

In this case, a winding-up petition will follow.

By failing to pay the statutory demand, the creditor will have grounds to issue a winding-up petition to the courts and can cite non-payment of the demand as their reason.

Under the new Schedule 10 of The Corporate Insolvency and Governance Act 2020 (Coronavirus), the new restrictions that remain in relation to petitions presented during the period 1 October 2021 to 31 March 2022 are as follows:

  • The Creditor must give notice to the debtor company at least 21 days of their intention to present a winding-up petition
  • Following this 21-day period, the debtor company has not made any proposal for the repayment of the debt. This 21-day period is separate to that of the statutory demand.
  • The debts exceed £10,000.

The winding-up petition will be advertised in The Gazette and the business bank account will be frozen. Following this, the courts will issue the company with a winding-up order. This means that the company will be placed into compulsory liquidation and will be forced to close.

This is the most severe form of liquidation that can have a range of negative consequences including. Potentially getting the director disqualified and damaging relations with external parties.

Option 3: Challenge & set aside the statutory demand

Setting aside the statutory demand can mean that it may be cancelled by the courts.

There are several parts of the statutory demand that must be checked in order for it to be set aside. Including whether the debt is legitimate and whether the correct legal procedures have been followed. This is because the creditor must stick to strict rules when issuing the demand, or else it can be classified as invalid.

The creditor must correctly fill out Statutory Demand form 4.1 and it must be delivered to the company’s registered address. This must be done either by hand or registered post and must be signed for by an officer of the business.

Therefore, if the incorrect forms have been used by the creditor, or they did not issue the demand in the right way, the demand can be challenged and potentially reversed.

Let Clarke Bell help you with the next steps

If your company has been issued with a statutory demand, Clarke Bell can help you understand your options.

It’s important to act fast. If you fail to act within 21 days your company can be placed into compulsory liquidation.

To find out more about what the best next steps for you are, simply get in touch with Clarke Bell’s team of friendly professionals.

We have worked with companies of all sizes across the country. We will help you find the best possible outcome for you.

To see how we can help, or for some free initial advice, get in touch with the Clarke Bell team today.