I have a Statutory Demand - What does this Mean?

A statutory demand is a written notice demanding payment of a debt owed by a company or an individual to a creditor. If a statutory demand has been issued, this indicates that the creditor intends to present a petition to wind up the business if the debt is not paid or a bankruptcy petition if the debt is not paid by the individual.

If your company is struggling to pay its creditors, then it is extremely important to be aware of the implications of receiving a statutory demand which can be very serious. 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. If the debtor is an individual, then the creditor must take all reasonable steps to deliver the demand by hand to ensure that it is received. 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:

Pay the amount owed in full. Clearly after the creditor receives payment, the matter will be settled and the demand dropped.
Speak to the creditor you owe money to and come to an agreement to repay the debt over a sensible 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. As such, if you believe that you are making a reasonable offer to repay your debt (perhaps over a longer period) but your creditor is unwilling to agree to this, the court may rule in your favour if you argue that the creditor has been unreasonable.
Present a counter claim to the court to argue why you believe that the debt claimed by the creditor is not valid. If this claim is upheld by the court, the statutory demand will be extinguished and the creditor will not be able to take further action against your company.
Ignore the demand and make no payment. 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. As such, if you have received a statutory demand but cannot reach a payment agreement, the court may allow your creditor to proceed with issuing a 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 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.

Derek Cooper - September 2009

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Derek Cooper is Managing Director of Cooper Matthews Limited and a member of the Turnaround Management Association UK.

Cooper Matthews specialise in Business Refinancing and Business Recovery Services Advice providing practical insolvency advice for businesses with financial problems to turn your business around. They have significant experience in working with small to medium sized businesses.

Derek's experience of both corporate insolvency and business management puts him in a position to be able to understand the challenges facing businesses in today's economic climate.

More details at http://coopermatthews.com/winding-up-petition.html