Statutory demands are a useful tool in one’s debt recovery toolkit. However, care is required as there are some pitfalls.
- A statutory demand is a formal demand made by a creditor for payment of a debt of at least £5,000 (for an individual) or £750 (for a company). The consequence of failing to pay within the deadline is that the debtor will be deemed to be unable to pay its debts. This, in turn, will constitute grounds for winding up (for a company) or bankruptcy (for an individual).
So why would one consider using a statutory demand instead of issuing normal court proceedings?
The advantages of serving a statutory demand are:
- Preparing and serving the demand can be done quickly
- It is inexpensive, you do not have to involve a court and do not have to pay a court fee
- You do not have to follow the demand up if you do not want to (which should be contrasted with a court claim, which is harder to back out of once commenced)
- It usually has a significant impact on the debtor. In particular, the debtor will know that the next step in the process (if it does not pay) is either a winding up (if a company) or bankruptcy (if an individual) petition. This threat can persuade most sensible debtors to pay and or negotiate
As mentioned earlier there are some pitfalls to be aware of. The disadvantages of serving a statutory demand include:
- A statutory demand cannot be used in respect of a debt which is not for a specific and known sum. For example, it cannot be used in a contractual dispute where the losses are not fully known or yet to be quantified.
- The debt must be for at least £5000 / £750.
- There are quite specific rules governing how a statutory demand must be served. These are particularly onerous when the demand has to be served on an individual. If they are not done correctly then it may thwart or delay the process.
- It is very risky to serve a statutory demand on a debtor if you know that the debt is disputed on genuine grounds. “Normal Court Proceedings” is the appropriate forum.
- If there is no response to the statutory demand or the debtor simply cannot pay, then the follow-up action is a winding-up or bankruptcy petition. This means going to court and there are costs involved. Also winding up and bankruptcy are procedures that look to pay out all of the creditors, not just you.
A statutory demand is a useful remedy to recover debts. However, it should not be used lightly. Doing it wrong can result in an abuse of process and expose you to adverse costs. Careful legal advice is needed.