We’ve noticed an increase in the number of company directors facing enforcement action, and we expect you might have too.
As a resource for those clients, Kerry Puddle will be writing an “insolvency 101” series of blogs which deal with common enforcement issues facing distressed businesses. The first article summarises the use of statutory demands.
The statutory demand
A statutory demand is a formal demand for repayment of a debt made under the Companies Act 1993. If unpaid, the demand acts as a statutory presumption that the recipient company is insolvent. A statutory demand is served as a preliminary step before an application to liquidate the company.
In a normal commercial setting, statutory demands are usually served following unsuccessful debt collection efforts. They are to be ignored at your client’s peril.
Where your client is served with a statutory demand, or you are the registered office for a company, and a statutory demand is handed to your receptionist, what do you do?
The most important starting point is to take note of the date when the demand was served, and make two entries into your calendar – one 10 working days from the date of service and the other 15 working days. You will then want to have a discussion with your client about the circumstances around the relevant unpaid amount.
When served with a statutory demand, a company must either pay the debt or reach a compromise with the creditor within 15 working days of the date the demand is served. If the company believes that the debt is not owing, or otherwise disputes that it is payable in full, then the company has 10 working days from the date of service to challenge the demand. This deadline does not have to be stated on the statutory demand, and so often catches laypeople out, especially because it is a shorter period than the period granted for payment. A challenge to a statutory demand has to be by way of an application in the High Court, which is to be accompanied by comprehensive affidavit evidence. The documents have to be filed by a lawyer, as companies are unable to be self-represented in the High Court.
Unless the dispute is straight forward, putting together a Court application to set aside the demand can be time consuming. Depending on the nature of the dispute, there may need to be extensive financial information, detailed descriptions of products or services supplied (or not supplied as the case may be), and enough background regarding the trading relationship that the Court can get a full picture of where the debt sits in that context. As there are only 10 working days to make the application, with no rights to an extension, it is a good idea to contact a lawyer immediately if the client disputes the debt.
Your client should be aware however that not all disputes will extinguish the debt, and what is important is to put before the Court enough evidence to show that there is a genuinely arguable claim that the debt is not owing. The application process can be expensive, especially if a Court hearing is required. If successful, however, then the company can claim costs against the party who has issued the statutory demand.
If your client wishes to compromise on the debt, there are various options available, including the granting of security, staged repayments, or the provision of a guarantee. Any such agreement should be clearly recorded. This process has to be concluded within 15 working days of the demand being served – if it is not, the creditor may rely on the expired statutory demand to support an application to the High Court to liquidate the company on the grounds of insolvency.
If your client sits on their hands, and only informs you about the demand after the time for payment has passed, all is not lost. An unsatisfied statutory demand only provides a presumption that the company is insolvent. If the client is in fact solvent, and can prove that with robust and up to date financial information, it can defend a liquidation application. However, the Court is likely to look at the evidence more critically if a company has ignored a statutory demand, so doing nothing is not advisable.
A couple of other points to note about statutory demands:
1. Statutory demands do not have to be formally served in the same way as proceedings. They can be served by email or ordinary post.
2. Lawyers need to be very careful before issuing a statutory demand. It can be an abuse of process to issue a statutory demand where there is evidence that the debt is disputed.
3. Statutory demands expire over time. If the demand is more 30 working days old, it cannot be relied upon as evidence of the company’s insolvency, and a fresh demand will need to be issued.
We see a lot of statutory demands in our practice. Please feel free to get in touch if you have any questions.