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Understanding a Statutory Demand and what it means for Company Directors

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Understanding a Statutory Demand and what it means for Company Directors

Published: 23rd May 2016

A statutory demand is a written demand for payment, and forms a powerful part of the debt recovery process. Often followed by a winding-up petition, it indicates your creditor’s determination to collect their debt, and should not be ignored.

Being unable to recover their money using other means such as reminders and informal negotiation, your creditor may feel that this is the only remaining option.

You need to act quickly on receipt of a statutory demand – there are 21 days to pay the amount owing or arrange a payment plan, and only 18 days in which to challenge it.

 

Criteria for issuing a statutory demand

The Insolvency Act, 1986, sets out the requirements for issuing a statutory demand. These include:

  • The debt must be more than £750, and not in dispute
  • The creditor must be able to prove the demand has been served correctly
  • Your creditor must not have security over assets to the value of, or exceeding, the debt
  • The money due is not already part of a payment arrangement
  • Your creditor does not owe you money
  • The demand is made using the correct forms

How it is served is an important part of the process. If not served correctly, there may be grounds to have it set aside. Statutory demands are often served in person by the creditor, a bailiff or other third party, but can also arrive through the post.

Why is a statutory demand so powerful?

A statutory demand will generally precede a petition for winding-up, and with only 21 days to respond, it is a strong incentive for the debtor company to negotiate payment. They are often used by creditors as a last resort, when the amount owing is significant, and do not require the input of a court.

Although the threshold for sending a statutory demand to a company is £750, creditors often use them to recover larger amounts. HMRC are known to use this method because no court procedure is involved, and debts can be recovered quickly.

What you need to do on receipt of a statutory demand

Taking action quickly will give you the best chance of successfully dealing with the situation, and seeking professional advice on how to proceed will help you understand all your options.

Initially, however, you should make sure the amount demanded is correct, that the debt is not in dispute, and that it has been served in the proper manner. If there is no possibility of paying the money in full, you may be able to successfully negotiate an affordable repayment plan.

What happens if you do nothing?

Ignoring a statutory demand will have serious ramifications – this is a potential timeline of events if you fail to respond:

  •  Non-payment makes the debt exist in law, and your creditor can now apply for a winding-up petition
  • The petition is advertised in the Gazette, alerting your bank and other creditors to the situation
  • The bank will freeze company bank accounts, and other creditors may begin legal action
  • You only have seven days to act before a winding-up order will be granted by the court, once a petition has been made

As you can see time is of the essence, so what can you do to save the company?

If informal negotiations with your creditor have failed, you may be eligible to enter a Company Voluntary Arrangement, or CVA. This is a formal insolvency option, and can help you pay this, and other company debts, without losing control of day-to-day operations as a director. 

This is assuming there are no grounds to dispute the demand. Again, a financial expert will be able to identify any anomalies, and act to set it aside if appropriate. Setting aside means applying to the court to have it cancelled.

The format and delivery method used by your creditor is specified by the Insolvency Act, and errors can be used as the basis for setting aside. Statutory Demand Form 4.1 must be used for a limited company debtor. It has to be delivered to the registered address by hand or registered post, and signed for by an officer of the company.

Getting professional help

In all stages of this process, from the day you receive a statutory demand, seeking professional help should be a priority. Events take place very quickly, but we have vast experience of assisting company directors in this situation.

Real Business Rescue will quickly establish the legitimacy of the demand, and help you take action to set it aside, or negotiate the most appropriate type of arrangement to pay in affordable instalments.

Despite this being a profitable business, the delay of several key contracts was having a negative impact on cash flow. After reviewing the company’s financial position, we arranged for a short-term loan to be put in place, allowing the company to continue trading while awaiting payments from the delayed contracts to be made.
Read the Case Study   View all Case Studies

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