Statutory Demands on the rise as creditors face higher costs to recover debts

The increased cost of taking court action to recover a debt has resulted in creditors looking for alternative methods of collection. One potential way is via a statutory demand.

Statutory demands don’t attract court fees, and are seen by some as a quick way to recoup their money. The threat of being wound-up often results in a debtor paying quickly, even when their creditor had no real intention of submitting a winding-up petition.

If you have received a statutory demand, it is essential to seek professional advice on what to do next. Begbies Traynor can offer guidance on how to proceed, and advise on the best course of action for you in the long-term.

What exactly is a Statutory Demand?

A statutory demand is a formal demand for payment, and gives the recipient 21 days in which to settle their debt. The power behind it lies in the threat of winding-up, which could follow if payment is not made. This is often all that is needed for creditors to quickly recover their money.

With no court fees to pay, taking this route is a popular ‘last resort’ for creditors. A statutory demand is only really appropriate when the debt is not in dispute, otherwise the issuer may have to pay their debtor’s legal expenses in the event of an application to Court by the debtor - an ironic situation when the initial reason for using a statutory demand was to avoid the high costs of taking action through the courts and in doing so save time.  

It is worth noting that a creditor must be owed more than £750 by the debtor Company to be eligible to use this method.

The ramifications of receiving a statutory demand

If you fail to respond to a statutory demand, your creditor has the right to apply for a petition to wind-up your company. Once this petition has been made, you have seven days before the petition can be advertised in the London Gazette with a number of potentially adverse consequences. .

The petition will be advertised publicly in the Gazette, alerting other creditors and your bank, who are highly likely to freeze your bank accounts to protect their position in the event of liquidation even if the account has no money or is overdrawn. Once a winding-up order is granted, a liquidator will be appointed to realise your assets and close down the company.

The liquidator will also investigate director conduct during the time leading up to insolvency, with a view to identifying misconduct or fraudulent trading. Allegations of this type can lead to disqualification if proven, financial penalties, and even a prison sentence if the circumstances are serious.

What to do if one of your creditors has issued a Statutory Demand

As we mentioned earlier, you should obtain professional guidance if your company has received a statutory demand. It’s vital to act quickly, as you only have 21 days to do one of the following:

• Pay the amount in full
• Seek to take another formal route into insolvency without further legal complications , such as a Company Voluntary Arrangement, Administration or voluntary liquidation
• Challenge the statutory demand

In making a challenge you’ll apply to the court to prevent your creditor from petitioning for the company’s winding-up and have the application set-aside. If the debt is in dispute, you will have the opportunity to put your case at a hearing, and explain why the debt specified is not owed.

The fact that a creditor has issued a statutory demand signifies their determination to recover the debt. They may have tried several other avenues with no success, and have reached the conclusion that this is the only remaining course of action open to them.

Your company could face compulsory winding-up if you do nothing, or take the wrong type of action following receipt of a statutory demand. Begbies Traynor can offer a same-day meeting to discuss your situation, and decide on the best way forward.