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Debt Recovery: Statutory Demands and Bankruptcy

Friday, 13 January 2012

It's a business reality that invoices and debts are not usually paid immediately. One reason is that businesses have monthly account payment cycles and a few weeks' delay is normal. However, there may be occasions where you are dealing with a business debtor and you have serious doubts about their intention to pay. You can spark the debtor into action with a statutory demand. This is a very effective debt recovery tool because debtors can be made bankrupt if they ignore a statutory demand.

Conversely, if you have been served with a statutory demand by someone claiming to be owed money by you (a creditor), you may wish to dispute all or part of their claim. There are formal procedures for disputing the creditor's claim that need to be carried out within a set period of time. The clock starts ticking the moment you are served with the statutory demand so you need to act quickly.

This article discusses how to pursue a debt using the statutory demand process and, for those who have been served with a statutory demand, what you have to do to contest it. Finally, this article explains the procedures which must be followed where the debtor is a company.

Are you serving a statutory demand?

A statutory demand must be in the form required by the Insolvency Rules. Certain information, such as clear details of how the debt arose, the total amount being claimed and the amount of interest claimed, must always be contained in a statutory demand. A statutory demand cannot be used if the amount claimed is below £750.

There are two main types of statutory demand. The first is known as a " Statutory Demand under section 268(1)(a) of the Insolvency Act 1986 - Debt for Liquidated Sum Payable Immediately". This type of statutory demand is used in the ordinary situation of the debtor owing you a sum of money.

The second type is a " Statutory Demand under section 268(1)(a) of the Insolvency Act 1986 - Debt for Liquidated Sum Payable Immediately Following a Judgment or Order of the Court". This type of statutory demand is used where you have already taken the debtor to court for non-payment of the debt, successfully obtained a court judgment against the debtor and wish to enforce that court judgment against the debtor using the statutory demand process.

After the statutory demand has been prepared it must be served on the debtor. This means handing the document personally to the debtor, usually through a process server or bailiff. If a debtor proves hard to track down, there are formal procedures available to bring the statutory demand to the debtor's attention by alternative means, such as delivering it to their business address or their solicitor.

The court is not involved in the preparation and service of a statutory demand, so no court fee is payable.

Once the statutory demand is served, the debtor has 18 days to formally dispute the debt. The dispute procedures are discussed below.

If there is no dispute of the debt, the debtor has 21 days from the date they were served with the statutory demand to do one of the following:

  1. Pay the amount claimed,
  2. Offer to secure the amount claimed with property, or
  3. Make you some other offer of settlement, for example, payment by installments, that you agree to.

If the debtor does not dispute the debt or satisfy the debt in one of the three ways specified above, you can petition to make the debtor bankrupt. This is the main reason statutory demands are so effective in dealing with problem debtors. The consequences of bankruptcy are serious, including debtors having to sell their property to pay their debts and getting poor credit references. Because of this, where there is no dispute about the debt, debtors will usually try to avoid bankruptcy after being served with a statutory demand by paying the debt in full or coming to some other arrangement satisfactory to the creditor. Either way, one of the main problems with debt recovery - being ignored by the debtor - is often overcome by serving a statutory demand.

Setting aside a statutory demand

21 days after serving a statutory demand on you the creditor who claims you owe them money can petition the appropriate court for a bankruptcy order against you. As discussed above, having a court make a bankruptcy order against you is highly undesirable and should be avoided if at all possible. You can prevent a bankruptcy order by:

  • Paying or giving security for the debt claimed within 21 days of being served with the statutory demand; or
  • Making an application to set aside the statutory demand within 18 days of being served with the statutory demand.

If you have been served with a statutory demand and wish to contest it you therefore need to act promptly. Successfully contesting a statutory demand is known as "setting aside a statutory demand".

You have the right to contest the statutory demand if there is a substantial dispute about whether the debt is payable or if you have your own claim against the creditor which offsets the amount the creditor is claiming from you (sometimes referred to as a "counterclaim"). To contest the statutory demand you or your solicitor will need to prepare and lodge the following documents with the correct court:

  1. An Application Notice; and
  2. A statement of why you dispute the claim or why you feel you have an offsetting claim. The statement needs to be very detailed and must attach copies of all necessary documentary evidence.

A court will then decide whether the dispute is substantial and whether to either set aside the statutory demand or allow the creditor to take the next step in the debt recovery process and lodge a bankruptcy petition against you.

While not all applications to set aside a statutory demand are successful, they can often result in a negotiated outcome between the parties, meaning the debtor can avoid the creditor filing a bankruptcy petition with the court.

What if the Debtor is a Company?

A statutory demand can also be served on a company that owes you money. The same general principles apply to pursuing debts from companies as those discussed above. The major differences where the debtor is a company are as follows:

  1. The correct form to use is known as " Statutory Demand under section 123(1)(a) or 222(1)(a) of the Insolvency Act 1986".
  2. Service of the statutory demand on the company usually must take place by either (1) leaving a copy of the statutory demand at the company's principal place of business; or (2) personally handing a copy of the statutory demand to a secretary, director, manager or principal officer of a company.
  3. As with individuals, companies must pay within 21 days of being served with the statutory demand; if a company fails to pay and fails to dispute the debt, a Winding Up Petition can be filed against the company. "Winding Up" is the company equivalent of individual bankruptcy. The Winding Up Petition is filed with the court and where the court makes a winding up order against the company, the company is placed into liquidation. A liquidator will then be appointed to sell and distribute all of the company's assets to creditors of the company following which the company will no longer exist.
  4. The process for disputing the statutory demand is slightly different for companies. A company with genuine grounds for disputing the debt should make an application to court within 21 days of being served with the statutory demand asking the court to make an order preventing the creditor from filing a Winding Up Petition. This kind of order is known as an "injunction".

We realise that legal proceedings to recover a debt can be expensive. In certain cases Rollingsons is therefore happy to consider taking a case on a "no win no fee basis".

To find out more about how Rollingsons Solicitors can assist you to pursue or defend debt recovery action efficiently, including whether your case may be suitable for a "no win no fee" arrangement, please contact James Crighton on 020 7611 4848.