A statutory demand is a written claim for a debt against a company or individual from one or more of its creditors. It's a method used to recover a serious debt, and is usually the first step before issuing a winding up petition (for a company), or bankruptcy (for an individual).
A statutory demand must be taken seriously. It costs a creditor £200-£500 to issue a demand via a solicitor, so you can be sure that they are intent on recovering their money.
Failure to pay at this stage could result in compulsory liquidation, and the end of your company.
How does it work?
Most statutory demands follow a county court judgement. This means the debt has been proven in a court of law, and the creditors are entitled to their money.
However, the creditor must meet these criteria if a statutory demand is to be issued:
- The debt must not be in dispute
- It must be more than £5,000 (as of 1st October 2015, previously £750)
- The debt is not subject to arrangement, or being paid off in instalments under a debt relief order (for individuals)
- The notice must be served on the company’s registered address
- The creditor must not have security over the assets of the debtor that is valued at more than the debt itself
- The creditor must not owe money to the debtor, otherwise there is a case for a counterclaim or set-off
- If all these terms are met, the creditor(s) will task a solicitor with issuing a statutory demand on their behalf.
It will include the contact details for both the person you can organise payment with, and the court contact with whom you can dispute the debt.
Within 18 days, the amount claimed should be settled or contested. If these options are not taken, the amount claimed should be paid in full at 21 days.
Failure to pay or reach a settlement serves as evidence that the company is insolvent. This means that creditors can legally wind up your company and force it into compulsory liquidation.
I’ve been issued with a statutory demand: What can I do?
First, you should make sure that the creditor's claim is valid. If not, you can contest the demand by contacting the court and asking for an injunction to be made to stop the proceedings.
You can also try setting aside a statutory demand – basically, having it cancelled by the court. To do this, you must check the legitimacy of the specified debt, and whether the required legal procedures have been followed by the sender. There must be a genuine dispute with the claim, and you must use the prescribed forms to challenge the demand.
If the demand is valid and you are able, you should pay the full sum as soon as you can (within the 21-day period). If not, see if you can come to an arrangement with the creditor issuing the claim.
If you cannot pay within the 21-day window, avoid a winding up petition by going into a Company Voluntary Arrangement (CVA). This is an effective restructuring method that gives a company breathing space.
Unsecured creditors are bound by this arrangement, so will accept a proportion of the debt over a 3-5-year period. A CVA is, perhaps, the best way to ensure that your company isn’t forced into liquidation.
However, the only way to know which is the best option for your business is by asking an experienced financial adviser to appraise your situation and offer advice.