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How should a Director deal with a Statutory Demand served on their company?

One of the most serious documents a company director can receive is the service of a statutory demand. Whatever the director’s opinion is of the person serving the demand or of the debt being claimed action needs to be taken as a matter of urgency.

The options open to the company to deal with demand are as follows:

  • Pay the sum demanded, or negotiate a reduced or deferred payment.
  • Seek an injunction to prevent winding up proceedings being commenced.
  • Wait for a petition to be issued and then challenge the petition to wind up the company.
  • Do nothing.

A prudent director should always assume that the statutory demand has not been served simply as a crude debt recovery tool but that in fact the creditor is indicating that they intend to present a winding up petition if the relevant debt is not paid.

A creditor of a company can serve a statutory demand on the company at any time when they are owed a debt in excess of £750. Unlike an individual the insolvency threshold for a company has not increased and there is no simple process to set aside the demand as there is for an individual.

If the company does not comply with the demand by paying the debt within 3 weeks of been served with the demand, the creditor is entitled to present a winding up petition against company. There is also a statutory presumption that a company on which a statutory demand has been served and which neglects to pay the sum due, or secure or compound for that sum within three weeks after service of the demand it is unable to pay its debts.

It is precisely because of this statutory presumption that if a company decides not to take any action there is a real risk of a winding up petition being presented to the court. This can have disastrous consequences for the company as the petition will be advertised and because any disposition by the company of property shall void if made between the presentation of the petition and the making of a winding up order (unless ratified by the court) it is likely that the bank account will become frozen and creditors will become aware of the insolvency proceedings. Insolvency proceedings are a class action and therefore even if the petitioning creditor is eventually paid before a winding up order is made another creditor owed £750 or over can continue with the petition.

Even if a winding up petition is not issued the company has to be mindful that there is no expiry or limitation period for a statutory demand, therefore there is always a risk that the creditor may lose patience and present a petition when least expected. The creditor on the other hand also has to keep in mind that the clock for limitation purposes continues to run and that the debt could become time-barred. Furthermore if there is a significant delay between the service of the demand and the presentation of a petition the court will question why there was a delay and will require an explanation for the failure to present a petition shortly after demand was served.

In the event that the company does not take action having been served with the statutory demand and a petition is presented it is still possible to argue against the company being wound up. However legal advice will need to be sought and if the petition is well founded, the company will be obliged to pay the petitioner’s costs, the petition as well as the petition debt itself to have the petition withdrawn. As stated above these costs are likely to have to be funded by the directors and the company bank account may well be frozen after the presentation of the petition.

If the company accepts that the debt is payable, it should contact the creditor as soon as possible and arrange to pay the debt. Where the company agrees to pay the petition debt, it should seek written agreement from the creditor not to present a winding up petition. If the petitioning creditor refuses to provide an agreement, the company may consider seeking an injunction to stop the creditor proceeding to present a petition based on that statutory demand.

If the company is unable to pay the debt in full, then negotiations will need to take place to see if the creditor will agree to payment being made by way of instalments. Often as a negotiating tool the creditor may decide they would prefer a one-off payment, albeit slightly less than the petition debt, rather than having to deal with the risk of instalments not being paid.

A creditor faced with an offer to pay less than the amount claimed in the petition may take the view it is better to receive that amount now rather than having to join other creditors in a compulsory liquidation where they will only receive a dividend from any realisations made in the liquidation.

In view of the fact that the insolvency threshold to present a winding up petition against the company is only £750 creditors will often consider serving a statutory demand as a debt recovery tool, however, the courts are quite clear that insolvency proceedings should not be used for debt recovery. However a company director whose company has received a statutory demand which is close to the insolvency threshold is entitled to pay part of the debt owing to the creditor so that the amount outstanding is reduced below the £750 threshold, the creditor could not then rely on the statutory demand as a basis for the presentation of a winding up petition.

Unlike the situation where an individual is served with a statutory demand there is no formal procedure for a company to apply to set aside a statutory demand. A company can challenge a statutory demand by applying for an injunction to restrain presentation of the petition (or the giving of notice of a winding up petition) or alternatively the company can oppose the creditor’s application for winding up order if the creditor is presenting a winding up petition on the basis of the demand.

The grounds upon which the company can challenge the statutory demand are rather limited and 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.
  • The English court has no jurisdiction.

If you are a director of the company which has been served with a statutory demand you will need to consider whether any of the above criteria apply to your situation. Legal advice should be sought as a matter of urgency and as soon as possible after the demand has been served. In the event that you have ignored the demand and a winding up petition has been presented it is still possible to apply to have the petition withdrawn if the creditor can be persuaded that there are grounds to argue that the petition should not been presented or if payment is made in which case the creditor may agree not advertise the petition and an application can then be made to court to abridge time and have the petition withdrawn.

As a creditor presenting a petition against the company if you allow the company to pay the petition debt you should also consider obtaining a validation order in order to avoid the consequences of the payment being void in the event that your petition is carried on by another creditor and that then leads to the company being wound up.

We have experience acting for both creditors and directors in the above situations and are able to act in an expeditious manner so as to minimise the consequences for you and your company.

by Darren Stone