What is a statutory demand?
A statutory demand is a written demand for payment of a debt. A statutory demand can be served on either an individual or on a company. The statutory demand has to be in a prescribed form in accordance with the Insolvency Act 1986. This section of our website will deal with statutory demands served on individuals. If you need information on statutory demands relating to companies, please click here [link to contentious insolvency business section].
In general terms, a debtor who, for 3 weeks, fails to comply with a statutory demand, is at risk of having bankruptcy proceedings issued against them. For bankruptcy proceedings to be commenced, an individual has to owe that particular creditor £5,000 or more.
A statutory demand does not commence court proceedings and nor does it need to be issued by the court. Serving a statutory demand has the following potential advantages: it does not involve the court from the outset, preparing and serving a statutory demand is quick and inexpensive and it can either result in prompt payment of the debt or flush out details of any dispute or cross-claim. On the other hand, serving a statutory demand may have a detrimental effect on an ongoing trade relationship and can be perceived as an aggressive step and lead to an individual making an application to the court to have the statutory demand set aside.
Reasons for serving a statutory demand
Statutory demands have to be served before any bankruptcy proceedings can be commenced against an individual. An unpaid statutory demand is evidence of a debtor’s inability to pay its debts which is one of the tests the court will consider when deciding whether to make an individual bankrupt.
When can a statutory demand be served?
It is possible to serve a statutory demand on an individual who lives outside of England and Wales. It is also possible to serve a statutory demand in respect of a foreign currency debt.
Statutory demands should not generally be served if the debt is secured. However, there is an exception to this rule and this is that the debt need not be unsecured if either the creditor is willing to give up its security in the event a bankruptcy order is made or the bankruptcy petition is not made in respect of the secured part of the debt.
Preparing and serving a statutory demand
A statutory demand has to comply with the formal requirements of the Insolvency Rules 1986. These are quite complicated and it is best to seek advice from a solicitor as to the preparation of a statutory demand.
A statutory demand should be served personally on the debtor where at all possible. This means that the creditor must do all that is reasonable to bring the statutory demand to the attention of the debtor. We have excellent relationships with process servers who can arrange personal service of statutory demands on individuals at a relatively low cost. Process servers can also provide a witness statement proving service of the statutory demand which will be required in any bankruptcy proceedings brought.
Effect of a mistake in a statutory demand
Making a mistake in a statutory demand can cause delay and costs. The court has the power to set aside a statutory demand if it can be shown that a statutory demand was defective in some respect. Statutory demands that contain incomplete, misleading or inaccurate details of the debt claimed and statutory demands that are issued by the incorrect creditor have been held by the courts to be defective.
Applications to set aside a Statutory Demand
An individual who has a statutory demand served on them can apply to the court to have the statutory demand set aside. This application must be made within 18 days of the statutory demand being served.
The court may grant an application to have a statutory demand set aside where one of the following apply:
- The debt is disputed on substantial grounds.
- The debtor appears to have a counterclaim which exceeds or equals the amount of the debt.
- The creditor holds security for the value of the debt.
- The court is satisfied on other grounds that the demand ought to be set aside.
Please note that an application to have a statutory demand set aside made after a bankruptcy petition has been issued will not render a bankruptcy petition void. However, it is unlikely that the court will make a bankruptcy order whilst an application to have a statutory demand set aside is being dealt with.
As a general rule, a bankruptcy petition may not be presented until 3 weeks has elapsed since the service of the statutory demand. There is an exception to this rule however and that is where the creditor alleges that there is a serious possibility that the debtor’s property or value of any property would be significantly diminished during the 3 week period. This may be the case even if the debtor makes an application to have the statutory demand set aside.
There is no requirement to serve a petition immediately after the 3 week period has elapsed. However, if a creditor issues a bankruptcy petition more than 4 months after service of the statutory demand, the creditor has to provide the court with reasons for the delay.
When not to present a bankruptcy petition
- If the debtor pays the debt in full.
- If the debtor discharges part of the debt so that the amount outstanding is less than £5,000.
- If the debt is disputed on substantial grounds or the debtor has a counterclaim or set off that would reduce the debt to less than £5,000.