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Enforcing Payments: Statutory Demands

Thursday, 9 January 2014

A statutory demand is a legal instrument which can be used to force payment of an uncontested debt from an individual or a company.

Although chasing unpaid invoices can be a frustrating business, statutory demands should be seen as a last resort. They carry the threat of insolvency proceedings if they are not met so courts do not take lightly to creditors issuing them without clear reason.

It is therefore important that other avenues for expediting payment of valid invoices are exhausted before the statutory demand route is taken.

How do Statutory Demands Work?

Any creditor owed more than £750 may issue a statutory demand against a debtor. When a debtor receives a statutory demand they have 21 days to either settle the debt owed or the reach an agreement to pay the debt fully.

If there is no settlement or agreement the creditor may begin bankruptcy proceedings against an individual or winding up proceedings if the debt is owed by a company. Proceedings may also be commenced where the demand is ignored, if served properly.

A creditor should serve the statutory demand in person to the debtor or have it served by a process server.

Challenging a Statutory Demand

A debtor may decide to challenge a statutory demand. In the case of individuals they may apply to court to challenge to have it set aside within 18 days. If the proceedings are unsuccessful the time period to pay back the debt restarts.

In commercial situations, if the debtor company cannot pay, it may apply for a Company Voluntary Arrange (CVA) or apply to court to have the process stopped. A CVA is used to pay creditors over a fixed period of time if the debtor limited company is insolvent. In order to get a CVA, it must be approved by the creditors who are owed a minimum of 75% of the debt.

In the case of Collier v P& M.J. Wright (Holdings) Limited [2007] it was noted by Arden LJ that under Insolvency Rule 6.5(4) a court may set aside a statutory demand where a debt is disputed on ‘substantial grounds’. On discussing what would be deemed ‘substantial’ it was held that a mere arguable case would not be enough. It must be shown that the dispute would be ‘sustainable’. In determining what is sustainable Arden LJ said the evidence before the court should be examined and the law put before it should also be assessed.

This should be carefully noted by creditors - if a genuine and sustainable dispute is likely to be raised by the debtors regarding money owed then a statutory demand should not be issued as it is likely to be set aside with substantial costs implications for the issuer.

Issuing a Bankruptcy Petition or Winding-up Petition

Where statutory demands are ignored or challenges to statutory demands fail, the creditor may issue a bankruptcy or winding-up petition to the court.

If the petition is successful, an insolvency practitioner - the trustee in bankruptcy in individual cases or the liquidator in the case of a company - will be appointed who will sell the assets of the individual or company and act in the interests of the creditor to salvage any money owed.

Comment

It is very important that creditors be careful in issuing statutory demands because, as noted above, they can be set aside. This can have serious financial implications. For example, if the debt owed is only £800 and a statutory demand is set aside by the court the potential recovery is not worthwhile as legal costs alone will be greater than the outstanding credit.

Creditors struggling with outstanding debts or debtors in receipt of a statutory demand should seek specialist advice; contact Peter Gourri today by email PGourri@rollingsons.co.uk or telephone 0207 611 4848.

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