What is a statutory demand?
When you receive a statutory demand, it can feel as if all the cards are stacked against you. However, an expert adviser, such as an Insolvency Practitioner (IP), knows that just because you’ve received a demand, it doesn’t mean that all your options have run out. With professional advice, you may be able to have the demand set aside or negotiate an arrangement that suits both you and the creditor.
It’s a fact that many creditors fail to realise, that if the debt is disputed, the statutory letter may be set aside and the creditor may find themselves responsible for both their own and the debtor’s court costs. When your adviser goes in to negotiate on your behalf, they will be using their expert knowledge of this process and of the risks run by the creditor, to get a result that will keep your business going and protect you personally.
Read on to find out about statutory demands and what you can do about them:
A statutory demand is a formal request by one of your creditors for you to pay what you owe them. The demand may come to you personally if you have taken out a loan for your business but given a personal guarantee. We’ll look at personal demands later on. Let’s look first at a company statutory demand, or what the government Insolvency Service calls a “Statutory Demand under section 123 or 222 of the Insolvency Act 1986”.
Unsurprisingly, one of the most prolific users of statutory demands is HMRC, who uses them as the first step of the process to wind up a company that hasn’t paid tax that is due.
There are strict rules about how the statutory demand must be served. The creditor should leave it at the company’s registered office. If the company doesn’t have a registered office, then they have to leave it at the main place of business.
The creditor can also serve the demand on a person, by giving it to the company secretary, a director, manager or principal officer of the company. The creditor can also ask a solicitor to arrange for a “process server” to do this. Registered post, or indeed putting the statutory demand through the letterbox should only be used if the letter cannot, for some reason, be delivered in person.
When a statutory demand can and can’t be used
- The debt cannot be in dispute. See later for more details, but this sinks the creditor’s action and may expose them to paying both sides’ costs
- The debt must be more than £5000. Beware websites that quote £750. This was the previous limit, and shows that they have out of date information
- The debt must not already be being dealt with under an agreed arrangement, such as an instalment plan
- The creditor cannot have taken security, for instance on property or assets, that is worth more than the debt
- The creditor cannot be in the position where they owe money to the debtor they are pursuing
- Statutory demands cannot be used for debts that are over 6 years old.
What happens after I get the demand?
Where a company doesn’t satisfy the demand, the creditor can ask for the company to be wound up.
However, as with an individual, the company may have a sound defence against the demand. If this is this the case, the company can obtain an injunction to stop the creditor presenting a winding up petition. There are a number of technical details and formats which must be correctly set out on the creditor’s statutory demand for it to be valid. An IP can identify a demand which is in validly presented.
Company options for dealing with a statutory demand
One of the tests for whether a company is insolvent, is whether it can pay a statutory demand. Your company has 21 days to answer a statutory demand, or 18 days to challenge it. These are the five options:
Settle the debt
However, if a statutory demand has been issued, it usually means either that there’s a dispute and the company is refusing to pay, or that the company accepts the debt and can’t pay
Try getting the debt below £5,000
Because the threshold for enforcing a statutory demand is £5000, see whether you can repay part of the debt, to bring the total outstanding to below £5000. Once you have done this, the creditor won’t be able to proceed down the path of winding up the company. A friend or relative may even be willing to lend you the amount you need, to bring the debt under the £5000 threshold.
Use a Company Voluntary Arrangement (CVA)
This will allow the company to come to an agreement with the creditor to pay the debt in instalments. It can help to restructure the company so that it is on a sounder basis going forward. Be aware that a CVA will affect the company’s credit rating across the board, and may be a heavy price to pay for a single debt. You also need to move very quickly to talk to an IP and get the CVA in place – as you only have 21 days and after that, the creditor can petition for a winding-up order.
Liquidate the company or put it into administration
Both of these actions must follow strict procedures and will need the assistance of an IP – there is information on both of these options on this site.
Defend the company against the demand
In the next section, we’ll look at defending the company by getting the demand “set aside”.
Getting the statutory demand set aside
If you act quickly – within 18 days of the demand – you can challenge the demand and stop the creditor winding up the company. However, you’ll need expert advice from an IP to make sure that you achieve the optimal results at the least cost.
The procedures are complex – for example, you need to know which court to apply to and this is dependent on the paid-up share capital of the company. If it’s under £120,000, you have to use the court nearest to the company’s registered office. Over this figure, it’s the High Court, which is not a place for amateurs, so you will definitely need professional help, although it is also important to appear in person.
The court doesn’t always hold a hearing on a setting aside application. If your grounds are good, it can set the demand aside without further ado. Examples would be where the company has a claim against the creditor who has issued the demand, which is equal to or higher than, the sum that the creditor is seeking.
Debt dispute invalidates a statutory demand
A key fact regarding statutory demands, and one that many creditors are not aware of, is that if the debt is being disputed, the statutory demand is not valid. A further problem for the creditor, as we shall see, is that they may not just fail in their demand, but they may also become liable for costs.
Valid grounds for disputing a debt might be, for example, that the creditor has waited too long to try and recover the money.
As the debtor, you don’t have to prove that the debt should not be paid. You simply have to convince the court that it is in dispute. This will result in the statutory letter being set aside, since it is no longer relevant. Furthermore, for both individual debtors and for companies, if the statutory demand is set aside, the creditor who issued it is likely to become liable for both parties’ costs.
However, if the debt has been the subject of a county court judgement, a court has already ruled that your company owes the money. Therefore, the defence that the debt is in dispute can’t be used.
If the court doesn’t agree that the statutory demand should be set aside immediately, it will fix a date for the hearing.
Individual or personal statutory demands
Dealing with debt, whether in a sole trader business, a company or as an individual, is stressful. Judgement can become clouded by anxiety and it can be difficult to know which is the best course to take. For many people in this anxious state, a complex and time-driven process such as dealing with a statutory demand is just too much.
People sometimes do not take action and suffer the consequences, when in fact, they could quite easily have stopped the process in its tracks, if they had spoken to someone with expert knowledge who could manage everything for them.
It’s often the case that a company’s finances and the director’s finances get entangled. This can happen when a loan to the company is underwritten by a personal guarantee to a bank.
As with a company demand, you have 21 days from the start date to either pay the debt or come to an arrangement with your creditor. However, there are shorter deadlines if you are going to take other actions to deal with the demand.
If you don’t settle the debt or come to an arrangement, the creditor can apply for you to be made bankrupt. So if you can’t pay, you may immediately think that the worst is going to happen and bankruptcy looms. Don’t panic, though. A lot can happen in the notice period, particularly if you have an experienced insolvency adviser to act for you and show you the way forward.
Many of the grounds for setting aside that apply to companies also apply to individuals. However, there are some other considerations for individual debtors.
If the debt is secured on a property, the court will reject the creditor’s application, provided the property is worth at least as much as the debt. If you have taken the route of bringing the debt under £5000, that too is grounds for setting aside the statutory demand.
There are also circumstances in which the debt may come under the Consumer Credit Act 1974, and in this case, the court can give you more time to pay the debt.
There is a further possibility, that if the debt forms the basis of a County Court Judgement, and you’ve kept up with the instalments, the court may set aside the demand. An experienced IP can advise you whether this is likely to happen in your case.
Your options if you accept that you owe the money
If you accept that you do owe the creditor the amount they are asking for, you have five possible options, depending on your circumstances.
– Use your property as security
You can offer to secure the debt against your house or business premises, if you own them and have enough equity to allow this. However, you need to consider whether the debt will carry on accumulating interest. This can roll up frighteningly quickly. With professional help, you may be able to get the creditor to agree to an arrangement whereby you put the house up as security, but they agree they can’t force a sale against your wishes.
– Refinance the debt
You could take out a loan to pay off the creditor who has issued the statutory demand. If this sounds like “robbing Peter to pay Paul”, it is – but it may buy you time to raise more money, or allow you to trade out of your difficulty. Obviously, this is unlikely to work if you have bad credit and you need to think carefully about any loan conditions, so advice is a must.
– Try to agree an instalment plan
The creditor may or may not agree to this, but if they do, don’t make the instalments so high that you can’t manage them easily, or the arrangement will quickly break down and you will be back in the same place.
– Provide a guarantor
The creditor may look more favourably on your instalment offer if you can provide a guarantor for the debt. Friends or relatives are sometimes willing to do this.
– Set up an IVA
This allows you to pay off your debt in instalments, usually over a period of five years. You’ll need to arrange this through an Insolvency Practitioner. Be aware that it will have a negative effect on your ability to get credit.
If you miss the 18 day deadline, all is not lost. You can still apply, if you can provide a good reason for not meeting the time limits and if the creditor has not moved to request that you be made bankrupt.
There’s a special form of words that you have to use to testify that your creditor hasn’t petitioned the bankruptcy, so this is very much an area where your IP or adviser will need to assist you.
If you can’t get the statutory demand set aside
The creditor can apply to bankrupt you, once 21 days have passed. However, if they allow more than four months to go by without petitioning for your bankruptcy, they’ll find themselves having to explain the delay to the court, who may refuse their petition. This is another example of the many wrinkles surrounding statutory demands, which IPs deal with on a daily basis.
Remember that all is still not lost. Within strict time limits, which your IP will explain, you can still ask the court to set aside the bankruptcy order. The grounds for doing this are similar to those for setting aside the statutory demand. Remember that you should always attend any hearing in person – and take your IP with you, if that is possible.