Tips for handling a statutory demand

Firstly what is a statutory demand?

It is a written notice demanding payment of a debt to a creditor. The debtor may be a company or an individual. If a statutory demand has been issued, this indicates that the creditor intends to present a winding up petition to the business if the debt is not paid or in the case of an individual a bankruptcy petition.

It is very important to be aware of the serious implications of s statutory demand if your company is having difficulty paying its creditors. There is a legal presumption that a company which has been served with a statutory demand and does not pay the amount owed within three weeks is unable to pay its debts. In other words a court will presume that the company is insolvent and therefore has the power to wind up the business on the basis of this assumption.

There are strict rules surrounding how a statutory demand must be served on a debtor. Where it is for an individual, the creditor must take all reasonable steps to deliver the notice by hand. If the debtor is a company, the demand must be served at the registered office of the business. If this is not done, then the demand may be invalid and unenforceable.

If you have received a statutory demand, you have three weeks in which to respond to it. There are basically four options depending on your business' circumstances:

1. Pay the amount owed in full. Clearly after the creditor receives payment, the matter will be settled and the demand dropped.
2. Talk with the creditor and try to negotiate to repay the debt over a reasonable time period. A court will generally take a dim view if a creditor is simply using a statutory demand as a method of debt collection. You may be able to get the court to rule in your favour if you believe that you are making a reasonable offer to repay the debt over a longer period and the creditor is unwilling to agree to it.
3. Present the court with a counter claim as to why you believe the debt is not valid. If the court upholds this claim, the statutory demand will be extinguished and the creditor will not be able to take further action against your company.
4. You can choose to effectively ignore the demand and not pay. If the demand is valid but no payment agreement is reached after a three week period, the creditor is entitled to present a winding up (bankruptcy) petition against your business which is likely to be upheld by the court. This will have serious implications. On receipt of a winding up petition, your company bank account will be frozen. Then, if the petition is not withdrawn, the business will be closed.

It is important to understand that the court views the service of a statutory demand as the first step towards declaring a company or individual insolvent. It therefore follows, if you have received a statutory demand but cannot reach a payment agreement, the court may allow your creditor to proceed with issuing a winding up petition to wind up your company. However, any creditor would be foolish to issue a statutory demand unless they have tried and failed to collect their debt through normal collection procedures. If a creditor has not been reasonable in negotiating repayment terms or there is a genuine dispute over the validity of the debt or a counter claim could overturn it, then the court will very often throw out the statutory demand.