Whilst it is possible to litigate a debt claim via the standard court process, often the most effective route to recover the debt is the “Statutory Demand” route. At the very least, this route will get the other side’s attention as if they ignore the letter you can either liquidate their company or bankrupt them. Please note though that this is generally considered an aggressive move and can lead to negative results.
It is best practice to send debt demand letters before sending a statutory demand – browse our demand letter templates here.
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Table of Contents
What is a Statutory Demand
A Statutory Demand in the context of England and Wales, particularly within a business-to-business (B2B) debt scenario, is a formal legal notice issued by a creditor to a debtor company. It demands that the debtor pays an outstanding debt or settles it through another means, such as negotiating a payment plan, within a specific timeframe, typically 21 days.
Here’s a breakdown of its key aspects:
- Legal Nature: A Statutory Demand is a legal tool that can be used prior to initiating winding-up proceedings against a company. It’s not a court order, but it carries significant legal weight.
- Criteria: To issue a Statutory Demand, the debt must be undisputed and exceed a certain threshold, which is subject to change but typically is a relatively minimal amount compared to the overall scale of corporate debts.
- Consequences: If the debtor company fails to pay the debt, reach a settlement, or secure the demand’s dismissal within the specified period, the creditor can use this as a basis to petition for the company’s winding up (liquidation). The failure to respond is seen as evidence that the company is insolvent.
- Dispute: If the debtor company disputes the debt, it can apply to the court to set aside the Statutory Demand. The company must demonstrate that there is a substantial dispute over the debt or that it has a counterclaim or set-off which equals or exceeds the amount being demanded.
- Use in B2B Debt: In a B2B context, Statutory Demands are a powerful tool to prompt payment from another business. They signal the creditor’s serious intention to recover the debt and can expedite negotiations or payment, given the severe potential consequences for the debtor.
- Process: Issuing a Statutory Demand involves preparing the document with specific information about the debt and serving it to the debtor in a prescribed manner. It’s important for the process to be executed correctly to avoid invalidation.
Using a Statutory Demand is a strategic decision in debt recovery within B2B relationships. It can facilitate faster resolution of debt issues but also escalates the situation significantly, potentially leading to the debtor’s insolvency proceedings if not addressed. It can also lead to negative consequences for the sending party, especially if sent without merit. Given its implications, legal advice is often recommended when considering issuing or responding to a Statutory Demand.
Using a Statutory Demand in Debt Recovery
Step 1 – Serve the Statutory Demand on the Debtor
Where a company owes you more than £750, or an individual owes you more than £5,000 you can make a Statutory Demand against the debtor. After valid service, in general, if the debtor doesn’t pay or challenge the Statutory Demand within 21 days, you can apply to court to either bankrupt the individual or ‘wind up’ (liquidate) the company. After the insolvency process is finished you will be paid out of the proceeds.
The forms to do this are available for free from the Government website, here. You can use this version against a company.
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However, whilst free, the process of filling the forms in and then “serving” it correctly is fairly complex. Where you can afford it we’d recommend contacting us for a quote for an expert lawyer to serve it for you – prices typically start at a few hundred pounds.
Step 2 – Institute Insolvency Proceedings
Where the debtor does not pay the debt or agree to your statutory demand within 21 days, you can then:
- start bankruptcy proceedings against any individual(s) who owe you £5,000 or more; or
- apply to wind up a company that owes you £750 or more.
You will have 4 months to apply to bankrupt or wind up your debtor. If you are outside this period you will need to explain why to the Court.
Again, we suggest you get legal help with this step as there a lot of legal formalities you need to need to comply with (filling in the right forms, preparing the right documents and formatting them in a certain way, etc.).
How serving a Statutory Demand can backfire
Serving a statutory demand on a company you believe owes you money is a significant legal step in the UK. Several issues can arise when serving a statutory demand:
- Incorrect Information: If the statutory demand contains incorrect information about the debt or the debtor, it could be set aside or dismissed. It’s crucial to ensure all details are accurate and properly documented.
- Disputed Debt: If the company disputes the debt, they may apply to the court to set aside the statutory demand. If the court finds the debt to be genuinely disputed on substantial grounds, the demand could be dismissed, potentially leading to costs being awarded against you.
- Insolvency Implications: Serving a statutory demand is a precursor to initiating winding-up proceedings. If the company is insolvent, you might end up being one of the unsecured creditors, which could result in receiving only a fraction of the owed amount or, in some cases, nothing at all.
- Reputation and Relationships: Using a statutory demand can be seen as an aggressive legal action, which might harm your business relationship with the debtor company or its stakeholders. It could also impact your reputation in the industry.
- Legal Costs and Complexities: If the statutory demand leads to further legal action, such as a winding-up petition, the process can become costly and time-consuming. There’s also a risk of the company taking retaliatory legal action against you.
- Improper Service: The statutory demand must be served correctly, following specific legal requirements. Improper service can invalidate the demand, delaying the process and potentially incurring additional costs.
How Legal Assistance Can Help
Given these potential issues, it’s often advisable to seek legal advice before proceeding with a statutory demand. A solicitor can help ensure the demand is correctly drafted and served, provide guidance on the risks involved, and explore alternative debt recovery options that might be more appropriate for your situation.
We can also help you if you have received a statutory of demand from another company.