What is a statutory demand?
A statutory demand is a written notice in the form prescribed by the Insolvency Rules 1986, demanding payment of a debt owing by a company to a creditor . The service of a statutory demand on a company by a creditor indicates that the creditor intends to present a petition to wind up the company if the relevant debt is not paid.
A creditor is entitled to serve a statutory demand on the company at any time when the debt owing by the company remains due and exceeds £750 in amount.
Where a statutory demand has been served, the creditor will be entitled to present a winding up petition against the company if it does not comply with the demand by paying the debt due within three weeks. It is presumed that should the debt remain unpaid after this period, then the company is unable to pay its debts. On the basis of that presumption, a court has jurisdiction to wind up a company in such circumstances.
What if the company does nothing?
Winding up proceedings may be started
If a company neglects to comply with the statutory demand in time, the creditor will be entitled to present a petition to wind up the company.
There is no expiry or limitation period for a statutory demand. Therefore, a winding up petition can, in principle, be presented some time after the service of a statutory demand. However, you should be careful in ensuring that the claim does not become time-barred by waiting too long.
Consequences of winding up proceedings being started
The consequences for a company of failing to deal with a statutory demand, and thereby allowing the creditor to present a petition to wind up the company, can be extremely serious.
The presentation of a winding up petition against a company can cause substantial harm to its commercial reputation. A company may also find it difficult to obtain credit from suppliers while the petition is outstanding. Existing creditors of the company may also pursue the company for repayment of outstanding debts more vigorously than would otherwise be the case.
The company will incur expense and inconvenience in dealing with the petition itself. This may involve taking legal advice. Further, if the petition is well founded, the company will be obliged to pay the petitioner’s costs of the petition as well as the debt itself.
Risks for directors
There are potential risks for the directors of the company personally. A director of a company in financial difficulties could face personal liability in respect of:
– Personal guarantees.
– Fraudulent trading
– Wrongful trading
– Misfeasance or breach of duty (including the general statutory
duties under the Companies Act 2006).
– Where the company is a public company, serious loss of capital.
– Where the company is listed, under the Listing, Prospectus,
Disclosure and Transparency Rules and the Financial Services Markets
– Additional offences under the Insolvency Act 1986.
As soon as the directors are aware that the company is in financial difficulties, they should seek external advice.
The company agrees that the debt is payable: what should it do?
Contact the creditor and arrange payment immediately. A written agreement from the creditor not to present a winding up petition is also paramount. If the petitioning creditor refuses to provide an agreement, the company may consider seeking an injunction.
If the company is unable to pay the debt in full, it could consider offering to make payments in instalments or to pay a reduced amount. There is often a practical advantage to creditors in accepting deferred or reduced payments where a company is unable to pay its debts in full, rather than seeking to have the company wound up by the court.
If the company discharges part of the debt owing to the creditor, so that the amount of the outstanding debt is reduced to below £750, the creditor is not entitled to rely on the statutory demand as the basis for the presentation of a winding up petition.
On what grounds can a company challenge a statutory demand?
There are only very limited grounds on which a statutory demand served on a company can be challenged. The court will not ordinarily allow a winding up petition to proceed against a company based on a statutory demand where:
• The debt alleged in the demand to be owing is genuinely disputed on substantial grounds by the company.
• The company has a genuine cross-claim or right of set-off against
the creditor which exceeds the amount claimed in the demand.
• The company has a reasonable excuse for not paying the debt claimed
in the demand, such as where the company is prohibited by law from
paying the sum due.
• The English court has no jurisdiction.
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