Statutory Demands

What is a Statutory Demand?

A Statutory Demand is a formal demand that is served on a company or individual, and requests that payment of an outstanding debt is made within 21 days. 

In order to be effective that demand must be made in the prescribed form and it must also be properly served on the company or individual, usually at either its registered office, trading premises or home.  More often than not a process server is engaged by the creditor to personally serve the demand, and a formal statement by the process server is then made stating when and where the demand was served.

That statement can then be used as evidence in any later court proceedings to demonstrate that the Statutory Demand was properly served.

The demand must also clearly set out the amount that is owed, and sufficient details regarding that debt must be included so that the recipient can clearly understand what is owed.

When is a Statutory Demand Used?

Statutory demands are typically used when a creditor believes a debt is due and payable but has been unable to collect the debt through other means. Common situations where a statutory demand might be issued include:

• Unpaid Loans or Overdue Invoices: When a borrower or business owes a specific amount of money that has not been paid by the due date.
• Business Debts: Companies may issue statutory demands when customers or clients fail to pay for goods or services rendered.
• Personal Loans: Creditors may use a statutory demand to recover personal loans, credit card debts, or other unsecured loans.

The Implications of a Statutory Demand

The implications of an unsatisfied Statutory Demand are serious, because if the debt is over £750, and remains outstanding for 21 days, then under Section 123 (1) (a) of The Insolvency Act 1986 the Company would be consider insolvent because it was unable to pay its debt as and when they fell due.

If this is the case then the creditor would be able to issue a Winding Up Petition against the Company, and further details in respect of Winding Up Petitions can be found by clicking the link.

At the Winding Up Hearing the Courts are likely to take the view that an unsatisfied Statutory Demand was sufficient evidence of insolvency and therefore a Winding Up Order could be made against the Company, and further details regarding Winding Up Orders can be found by clicking the link.

For an individual the matter is equally serious.  If the debt is over £5,000 and remains outstanding for 21 days, the creditor would be entitled to issue a bankruptcy petition.

How Does a Statutory Demand Work?

A statutory demand is a legally binding document and must follow specific procedures to be valid, which are as follows:

• Issue: A creditor must formally issue a statutory demand for a debt. This document must specify the amount owed, the nature of the debt, and a deadline for payment — usually 21 days.
• Delivery or Service: The statutory demand must be properly served on the debtor. This can be done in person or sent via registered mail. Failure to serve the demand correctly can invalidate the process.
• Response: The debtor must respond within the time frame (usually 18 or 21 days). If the debtor pays the debt or disputes it, the matter is resolved. If the debtor does not pay and does not dispute the debt, the creditor may proceed with further legal actions.
• Consequences of Non-Compliance: If the debtor ignores the statutory demand, the creditor can proceed with actions such as:

Filing for Bankruptcy (for individuals): If the debtor is an individual and the debt exceeds £5,000, the creditor may apply to the court to declare the individual bankrupt.

Initiating Liquidation (for companies): If the debtor is a company, the creditor can petition for the company to be placed into liquidation, which can lead to the sale of the company’s assets to settle the debt.

What Can You Do is the Debt is Disputed and you are an Individual?

If you are an individual and the debt is disputed, then you can apply to Court to have the Statutory Demand set as side. That application must be made within 18 days of bering served with the demand.

This will involve a Court hearing and therefore you may wish to take legal advice on the mattter as soon as possible.

It is also important to note that it is not enough to simply dispute part of the debt, if there is an undisputed element of the debt, and that amount is greater than £5,000, a Bankruptcy Order could still be made. 

What Can You Do if the Debt is Disputed and you are a Limited Company?

Unlike personal insolvency it is not possible to apply to Court to set aside the Statutory Demand if the debt is disputed, and you must instead write to the creditor.

The issuing of a Statutory Demand is not supposed to be used as a debt collection tool, particularly if there is an ongoing dispute regarding that debt.  If there is an ongoing issue, issuing a Statutory Demand would be considered an abuse of process.

Purnells would normally recommend writing to the creditor to warn them that the debt is disputed, and clearly setting out the reasons why.  It should be highlighted to the creditor that disputed debts should be dealt with through the County Courts (subject to certain limits) and that using a Statutory Demand in this fashion is an abuse of process that will be brought to the attention of the Court.

The creditor should be invited to withdraw the demand and agree not to issue a petition.  If the creditor refuses to agree to do this, then an injunction may need to issued against the creditor to prevent any petition being advertised, which could lead to the Company’s bank account being frozen and therefore being unable to continue to trade.

Accordingly if the debt is disputed immediate insolvency and legal advice should be sought, otherwise the Company could find itself dealing with a Winding Up Petition and potentially a Winding Up Order.

What Can You Do if the Debt is Not Disputed?

If the debt is not disputed then the first thing that you could do would be pay the debt.  If funds to settle the debt are not immediately available it may be possible to negotiate with the creditor to pay the debt over a period of time.

If it is not possible to settle the debt, or come to an agreement with the creditor, or if there is other creditor pressure, then formal insolvency action may need to be taken which could include:

1.    Administration

2.    Creditors Voluntary Liquidation

3.    Company Voluntary Arrangement

Further information on the above processes can be found by clicking on the above links.  However the best option would be to take advice from a Licensed Insolvency Practitioner.

FAQs About Statutory Demands

Q: How long do I have to respond to a statutory demand?
A: You typically have 21 days from the date the demand is served to respond. If you do not respond within this period, the creditor can apply for bankruptcy or liquidation. If you are and individual, and wish to apply to set aside the demand, you must make that application within 18 days from the date the demand was served.

Q: Can a statutory demand be used for any debt?
A: A statutory demand can only be issued for certain types of debts that are due and payable and are not disputed. It’s commonly used for unpaid loans, credit card bills, rent arrears, or business debts.

Q: Can a statutory demand be set aside?
A: Yes, if you are an individual, a statutory demand can be set aside by applying to the court. You must provide valid grounds, such as a dispute over the debt or improper service of the demand.

Q: What should I do if I receive a statutory demand?
A: If you receive a statutory demand, you should immediately take legal and insolvency advice. You should then consider whether you should pay the debt, entering into negoitations with the creditor or dispute the demand in court.

Do you Need Help with a Statutory Demand?

If you have received a statutory demand or are considering issuing one, it’s important to understand your rights and obligations. They may also be cost impications that you need to be aware of.  Accordingly it is also good to seek early legal and insolvency advice from a solicitor or a licensed insolvency practitioner.

If you wish to have a free meeting to discuss your company or personal affairs please contact Chris Parkman on 01305 458 383 or by email at help@purnells.co.uk and he would be happy to provide you with whatever advice you need.