Statutory Demands : What to expect if a company responds

Introduction

Statutory demands are a popular mechanism for creditors to recover debts due by limited companies. If correctly used they may prove to be quicker and cheaper than taking court action.
A statutory demand is a formal written notice through a debt exceeding £750, demanding payment of the debt due by a limited company to a creditor. Service of the demand indicates the creditor intends to present a petition to wind up the company if the debt remains unpaid.

There is a presumption, by law, that if the debtor company does not satisfy the demand within three weeks after its service the company is unable to pay its debts. A court has jurisdiction to wind up a company on these grounds. The demand really does send a strong message to the debtor company.

What happens to the debtor company if winding up proceedings start ?

If the company is actually wound up after a petition has been presented following upon its failure to pay the sums due then any disposition of the company’s property, occurring after the date of the presentation of the Petition.

Practically, this will have serious consequences for the company. For example the bank will freeze the company’s bank accounts. Existing creditors will push harder for payment. And because any disposition of the company’s property may potentially be void, its directors will have to be very careful about the company entering into transactions or otherwise disposing of its assets, or they could be personally liable.

Also with the veil of incorporations being lifted, such issues as their being personally liable for fraudulent or wrongful trading or for misfeasance arising out of breached of duty can come up.

What should the Company do if they agree the debt is due ?

If the company agrees the money is due then is should pay the debt within the twenty one days and thereby comply with the demand. In so doing, it should seek an assurance from the creditor that it will not petition of the company’s winding up.

However, whilst the debt may be undisputed, it may not be able to pay the debt in full. If able to do so, the company should offer to repay the debt by instalments. The advantage to the creditor will be that if payments are made then the financial return will be significantly greater than if they petitioned for the company’s liquidation. In these circumstances, if the company is wound up, they will only be an ordinary creditor and may only be able to look forward to receiving a small percentage in the pound by way of dividend. Sometimes a third party, a director, will offer third-party money in full and final settlement of the debt.

What should the Company do if they challenge the Demand ?

This can be done by applying to the court for an injunction to restrain the presentation of a winding up petition or the advertisement of the petition. If a petition has been filed with the court to wind up the debtor company, it can always do this on the basis that the sums due under the demand are denied and, hence, the company is not insolvent.
Grounds for challenging the demand include :
• There being a genuine dispute that the debt is due :
• The debtor company has a genuine counter-claim or right of set off in excess of the sums due stated in the demand;
• There is a reasonable excuse for non-payment, this may include a legal prohibition against paying what is due.
• The court has no jurisdiction to wind up the company.

What constitutes a genuine dispute ?

The dispute will have to be genuine, as opposed to merely frivolous. The debtor company will have to provide the court with sufficient evidence that there is a genuine dispute, as opposed to there being simply an honest belief that payment is not due.

If such a genuine dispute exists the debtor company should contact the creditor setting out the nature of the dispute and request a written undertaking from the creditor that they will not present a winding up petition. Should such an understanding not be forthcoming the company should advise the ‘creditor’ that they will seek a court order restraining the presentation of a winding up petition.
If the debtor company admits that part of the debt is due they should pay the undisputed amount. Obviously, if they do not volunteer the undisputed amount then they will be deemed to be unable to pay their debts for the purposes of the Act.

If the debtor company does have a genuine dispute that part only of the demand is disputed the demand remains effective in respect of the undisputed amount, which as before has to exceed £750.

Genuine Counter Claim of Set Off

If the company has a genuine counter claim then the creditor will not be entitled to present a winding up petition. There are exceptions to the rule, including the situation where the debtor company is no longer trading and no prejudice would be caused to the company’s creditors if it were to be wound up.

That apart, if there is a genuine counter claim for an amount exceeding the debt owed to the creditor, the debtor company should respond in the same way as where the debt is disputed. The company should approach the creditor detailing the counter claim and seek an undertaking from them not to present a winding up petition. Should such an undertaking not be forthcoming the company should seek an order restraining the creditor from presenting a petition.

Conclusion

Statutory demands a speedier and less costly means of recovering overdue cash from limited companies, than going to the High or County Court. However, creditors do have to be somewhat circumspect in their use, particularly if an underlying dispute emerges. In these situations the creditor may regard the dispute as spurious.

However the debtor company may not give into pressure. What then happens is a battle which can be lengthy as well as costly in legal fees. Ultimately the creditor may have to abandon the statutory demand process and start a court proceedings. This is what probably should have been done in the first instance, rather than arguing the matter before an insolvency forum.

However, notwithstanding which approach is adopted, if a debtor company does respond either positively or negatively to the demand the creditor will have achieved something very positive. And this ‘positive’ is not being ignored. It is being ignored which is often the most perplexing issue which arises following service of the demand. And why is the creditor being ignored ? Because the debtor company has no assets, and are not bothered either way.