An overview of Statutory Demands

A statutory demand is a formal written document demanding payment of a debt within 21 days. If the debtor does not pay within the 21 period, and either fails to apply to have the demand set aside (where the debtor is an individual) or fails to apply to restrain the creditor from presenting a winding-up petition (where the debtor is a company), the creditor may use the statutory demand as grounds to present a petition to the court for either a bankruptcy or winding-up order.

A statutory demand can be used to support the presentation of petitions because non-payment of a statutory demand within 21 days may be deemed evidence of the debtor’s inability to pay its debts (in the case of a company) or to pay the debt demanded (in the case of an individual).

To send a statutory demand to an individual or company it should be noted: –

• The debt must be £5,000 or more for individuals (section 267(4), Insolvency Act 1986).
• The debt must exceed £750 for companies (section 123(1)(a), Insolvency Act 1986);
• The amount claimed should be a liquidated sum (the amount is certain)
• The debtor appears either to be unable to pay, or to have no reasonable prospects of being able to pay, the debt 

Setting aside a statutory demand

A debtor may apply to the court to set a statutory demand aside.  The application must be made within 18 days of service of the demand.  There are four grounds on which the court can set aside a statutory demand:

1. The debtor has a counterclaim, set-off or cross-demand against the creditor which equals or exceeds the debt claimed in the statutory demand; or
2. The debt is disputed on grounds which appear to the court to be substantial; or
3. The creditor holds some security in respect of the debt which equals or exceeds the full amount; or
4. The court is satisfied, on other grounds, that the demand ought to be set aside.

When not to use a statutory demand against an individual

If the creditor has been in correspondence with a debtor, and the debtor has raised a defence to the sum claimed, or other legitimate issue, careful consideration will need to be given to what the debtor says.  What the debtor says may constitute substantial grounds for disputing the debt.  If so, the statutory demand procedure will not be the best route for the creditor to follow. 

If an application to set aside a statutory demand succeeds, there may be costs consequences for the creditor if the debtor had made it clear there was a genuine dispute regarding the sum claimed. If so, an alternative option available to the creditor is to issue court proceedings (but not use an insolvency process).

When not to use a statutory demand against a company

There is no similar procedure for a company to apply to set aside a statutory demand.  However, a company may apply for an injunction to restrain the creditor from presenting a winding up petition.  Similarly, if the winding up petition has already been presented the company may apply for an injunction to restrain the creditor from advertising the petition. 

The court will grant an injunction if the petition is considered to be an abuse of the process; a petition will be considered to be an abuse of the process if there is a bona fide (genuine) and substantial dispute over the debt.  This route cannot therefore be used where the debtor has a genuine dispute to the claim.

How can Pinney Talfourd help?

Our Commercial Litigation and Debt Recovery Team regularly act for individual and corporate clients based in Essex, London, Europe and further afield.  We can assist with:

• Preparing and serving statutory demands against both individuals and companies if you are owed a debt
• For individuals, applying to the court to set aside a statutory demand if you have had a demand served on you
• For companies, seeking an injunction to either restrain the presentation of a winding up petition or stopping advertisement of the winding up petition.

To discuss any of these options further, please contact Nick Hatchett or Emma Rayner on 01708 229 444.