What is a Statutory Demand?
A Statutory Demand is a prescribed demand for payment. This is a preliminary demand for payment notice served before the institution of insolvency proceedings.
It is, however, possible to institute insolvency proceedings without first serving a statutory demand.
If a corporate recipient of a Statutory Demand does not contest the demand and does not pay (or secure or compound) the debt within the prescribed twenty-one-day period, then it will be deemed to be unable to pay their debts as they fall due. This is one of the grounds upon which the Court may make a winding-up order against the company.
In the case of bankruptcy, the effect will be if the demand is ignored, is that the recipient of the statutory demand will be deemed to unable to pay the debt specified in the statutory demand- which is a ground for a bankruptcy order to be made by the Court.
We would mention that even if a Statutory Demand is ignored, it is still possible to defend a Petition on the grounds that the debt claimed is disputed or upon other permissible grounds.
There is another nuance in that if a Statutory Demand is contested before the Courts and this is unsuccessful, then as a matter of law, it is generally not possible to dispute the debt again at the Petition Hearing. Accordingly, it is best to be legally represented in contesting a Statutory Demand. No consideration will be given by the Court that a person at this first stage of the process is representing themselves.
We set out below issues in relation to the defence of Statutory Demands and also when they can be used as a useful method of debt collection.
What should you do if you are an individual and receive a Statutory Demand?
It is always best to act promptly. If you are an individual, an application should be made to the Court to set aside the Statutory Demand within eighteen days of service. The Court has jurisdiction to extend the time period for such application and in fact, obtaining such extension of time is not too difficult. However, it is always best to make the application within time. If an application is made within the eighteen days, then the Claimant will not be able to issue a Bankruptcy Petition until the application to set aside has been determined. This is always a risk if the application is, in fact, only made after the 18-day time limit has passed. Once a petition has been issued, then it is not possible to apply to set aside the statutory demand
There are a number of grounds of contesting a Statutory Demand.
The normal ground is that the debt is disputed upon substantial grounds. The hurdle is relatively low and if the individual can establish that there is an arguable bona fide defence to the debt claim then normally the Statutory Demand will be set aside. It is also a defence if there is a bona fide and substantial cross-claim or counterclaim.
The defence or cross-claim/counterclaim must be sufficient to reduce the amount claimed in the statutory demand to below the bankruptcy limit (which is currently £5,000.)
There is also a defence that there is an offer to pay (or compound) the debt claimed or to secure it. In practice, the ambit of an offer of security is fairly limited. In relation to a property, it is generally necessary that the property be on the market and the purchaser to be in the wings waiting to buy the property.
The offer of compounding the debt is also fairly limited. A Court will allow a relatively short period for payment to be made by instalments say over two months. But do not expect to defend a Statutory Demand on the basis that you want to pay the debt over a longer period of time by instalments.
In practice in this situation where the debt is not disputed, it is not uncommon to obtain specialist finance (usually bridging finance) to pay the debt and therefore avoid bankruptcy.
Bankruptcy would usually be a financial disaster. It is possible to annul or set aside a Bankruptcy Order, but this is a relatively expensive exercise. It would involve paying all of your creditors as well as the costs and expenses of the bankruptcy. The costs of the Official Receiver will be a general fee of (currently) £6,000 if bankruptcy remains with the Official Receiver, but a private Trustee is appointed such costs could amount to more than £30,000 or £40,000 or even more. (in fact, it is possible to challenge the costs of a private trustee within the context of an annulment application).
If a Trustee in Bankruptcy were to sell your property, then the sale price that is achieved is usually not that good. This, unfortunately, is relatively common with forced sales.
Also, any monies realised by a trustee in bankruptcy will need to be banked by the Trustee into the Bank of England Insolvency Services account. Tax (known as ad valorem duty) (which is used to run the Insolvency Service) is deducted from the money paid into this account at different scale rates, but the average rate is 15%. Accordingly, if money is banked in the Bank of England Insolvency Services account by the Trustee, an average of 15% is lost in tax.
Accordingly, the raising of bridging or insolvency finance to pay off a bankruptcy Statutory Demand – or indeed a bankruptcy petition if the matter is at that stage, is usually a fairly worthwhile exercise.
There are a number of specialist lenders who can provide such finance, and we can introduce you to an independent broker – who has no connection with our firm, who may be able to assist.
Bridging finance normally involves an arrangement fee (often in the region of £5,000) together with a rolled-up interest over six to twelve-month period. No monthly interest is paid- but the interest is rolled up. The intention is after the Bankruptcy Petition has been set aside for the money to be re-financed in the market at usual commercial rates – which are much lower. Alternatively, the property will need to be sold to pay off the bridging finance.
An application to set aside a Statutory Demand will be subject to directions hearing and which is followed by a contested Hearing. The evidence would be given by way of Witness Statements.
The matter, however, is commonly settled by agreement between the parties.
Judgment or liability Order
Generally, a Court would not go behind a Judgment or Liability Order. There are difficulties in applying to set aside a Judgment Order or Liability Order after a Bankruptcy Order has been made due to the fact that all rights of the bankrupt at that point in time vests in his Trustee in Bankruptcy – initially being the Official Receiver. And accordingly, urgent action needs to be taken at Statutory Demand stage to deal with any issues such as applying to set aside a Judgment in default which has been obtained (such as where the proceedings have not been received by the debtor, and the debtor wishes to contest the Claim).
In relation to a liability order, an application can be made to set such order aside, – which ahs to be made promptly- or in the case of council tax, the matter can also be appealed (after raising a formal complaint with the Local authority) to the decision of the First-Tier Tribunal.
We are very aware of the stress which can be caused by receiving a Statutory Demand, and we will use our experience to assist and endeavour to resolve the matter. If the matter is urgent, we will endeavour to see a new client on the same day.
For companies, a different procedure is used to contest a statutory demand. This is an application for an Injunction.
This is a very expensive exercise and could involve costs of over £10,000. The reason why it is important for a company to prevent a Winding-Up Petition being issued is that after being issued and served, the Petition may be advertised. This will result in the bank account of the company being frozen.
This action would normally result in the company being put out of business. It is possible to apply for an Injunction after a Petition has been served but before an advertisement, but it is always better to stop the Petition being issued in the first place.
We would generally ask the petitioning creditor’s solicitors to give an undertaking not to file a Bankruptcy Petition without giving to us fourteen days prior written Notice – while dialogue ensures us in relation to a disputed Claim. This prevents substantial costs being incurred through the need to have to make a formal Injunction application.
For companies, the key issue is to prevent the advertisement of a Winding-Up Petition which may very well result in the death of a company irrespective of whether the debt is disputed.
Use of Statutory Demand by a Creditor
A Statutory Demand can be a very useful vehicle to collect money but only if a debt is not disputed on bona fide grounds.
For a disputed debt using the insolvency process can result in financial disaster with an application for an Injunction or to set aside the Statutory Demand being successful with a substantial adverse Cost Order.
Our normal advice to a client where it is not clear if the debt can be disputed is to issue proceedings in the normal way and apply for Summary Judgment- that is a judgment that upon the grounds that the there is no arguable defence to the claim. This is a better and more certain way of proceeding.
We have used debt collection via insolvency process very effectively. But this route has dangers, and you should engage a legal representative who knows this area of law to prevent an adverse costs disaster from occurring.
Please call 0208 446 6223 for an initial telephone call and to arrange a meeting. If your matter is urgent, we can try and see you on the same day. Alternatively, please email Michael Abraham, our specialist bankruptcy partner, directly with your enquiry.
