Corporate Insolvency: Care and Caution that should be taken by creditors and debtors

The current financial climate has made getting paid outstanding debts increasingly difficult. Consequently, to put pressure on a debtor, creditors sometimes resort to serving statutory demands, or proceeding with winding-up petitions as a method of debt recovery. A winding up petition is a creditor’s petition to have a company placed into compulsory liquidation by the Court, resulting in the company being wound up.

However, using a statutory demand for a commercial debt should only be embarked upon with care and caution.

In this article we explore the key considerations that should be borne in mind for creditors who are considering serving a statutory demand and debtors who receive one.

What exactly is a statutory demand?

A statutory demand is a formal written demand in prescribed form from a creditor to a debtor requesting payment of the debt within 21 days. The prescribed form is governed by section 7.3 of The Insolvency (England and Wales) Rules 2016. Where the debtor is a company, the debt must be for at least £750. (Where the debtor is an individual, it must be for at least £5,000). It is a ‘pre-cursor’ to a winding-up petition (or bankruptcy petition in the case of an individual).

Procedure for service

The statutory demand must be served personally upon the debtor’s registered office. It is best to have this personally served (by a process server or otherwise) so there can be no doubt that the demand has been brought to the debtor’s attention.

If the debt remains unpaid and unchallenged for more than 21 day, this demonstrates that a Company is unable to pay its debts, that the debt is undisputed and therefore a winding up petition may be presented. Statutory demands are, therefore, aggressive in nature and should not simply be used as a simple debt recovery tool.

What should a creditor consider before serving a statutory demand?

Does the debtor dispute the debt ?

Where there is a ‘genuine dispute on substantial grounds’ about all the sums claimed in the statutory demand or winding-up petition, the court will not hesitate to restrain the creditor from taking any further steps, by setting aside the statutory demand. Unsurprisingly, it is considered an “abuse of process” for a creditor to serve a statutory demand where the debtor genuinely disputes the debt.

The dispute must be genuine. The court will not conduct a ‘mini-trial’ to determine whether the debt is due but if it is satisfied that there is a genuine dispute, it will set aside the statutory demand on the basis the correct forum for the determination of the claim is via a County or High Court claim.

So if the debtor is not paying the debt because it genuinely disputes it, a creditor should consider alternative approaches.

The advantage of using a statutory demand is that it is usually a faster way to recover payment from a debtor than using sending a Letter Before Action in accordance with the pre-action protocol for debt claims and then issuing debt recovery proceedings. However, If the debt is disputed then the Letter Before Action route is the appropriate one.

The debtor has a serious and genuine counter- claim exceeding the debt

This article was written by Priyanka Kumar from our litigation team. Get in touch with Priyanka today to find out how she can help you by email priyanka.kumar@wellerslawgroup.com.