Business Law: Victoria Spellman on uses and abuses of statutory demands

Victoria Spellman, a partner at Gotelee Solicitors

Victoria Spellman, a partner at Gotelee Solicitors - Credit: Archant

A statutory demand may be an effective tool for creditors trying to recover an undisputed debt. However, the improper use of a statutory demand is an abuse of process and can have harsh financial consequences.

A statutory demand is a notice in writing from a creditor to a debtor demanding payment of a debt. The notice must be in the form required by the Insolvency Act 1986. Statutory demands may be served on individuals or companies but this article focusses on demands served on companies.

Statutory demands may be served by a creditor where a debt of over £750 is not paid for more than three weeks. After service, there is then a period of 21 days within which to pay the debt. If the debt is not paid during that period, the creditor may present and advertise a petition to have the debtor company wound up.

The presentation and, particularly, the advertisement of a winding up petition can seriously affect the ability of a company to do business. Its bank accounts may be frozen and its credit rating may be irreparably affected. It is the first step to dissolving the company so, unless a company wants to risk these consequences, if a demand is not disputed and the company can pay then it should pay. Problems occur when a demand is used to try to force the settlement of a genuine dispute. The courts recognise that a company should not have to deal with a genuine dispute under the threat of being wound up. Service of a demand in these circumstances is an abuse of process.

If a company receives a statutory demand which it disputes it should act quickly, seek legal advice and contact the presenter in writing to explain in detail why the debt is disputed and ask for written undertakings that a winding up petition will not be presented or advertised. If undertakings are refused then, due to the serious threat to the company’s business posed by the demand, the company may have no alternative but to apply for an injunction to stop the presentation or advertisement of a winding up petition.

If a final injunction is granted the company should be awarded indemnity costs to acknowledge the presenter’s abuse of process. This leaves the presenter of the petition not only unpaid but also responsible for the “debtor” company’s costs.

For assistance in relation to any of the issues raised please email victoria.spellman@gotelee.co.uk .

Most Read

: : Victoria Spellman is dispute resolution partner at Gotelee Solicitors.

Become a Supporter

This newspaper has been a central part of community life for many years. Our industry faces testing times, which is why we're asking for your support. Every contribution will help us continue to produce local journalism that makes a measurable difference to our community.

Become a Supporter