When Are Statutory Demands Effective?

If you are a creditor to someone from whom you are struggling to recover money, you may come across the term ‘statutory demand’. A statutory demand is one way of getting your debtor to pay their debt to you sooner rather than later. Understanding statutory demands and how they work is an effective way of recovering outstanding debt. This is also an essential aspect of knowing your rights as a creditor. 

This article will outline what a statutory demand is and how you can use one. It will also touch on some of the reasons why statutory demands are effective. 

What is a Statutory Demand?

A statutory demand is a formal written demand asking for the payment of a debt. When you give a debtor a statutory demand, they have 21 days to pay the debt. A debtor can then apply to set aside the debt, or to prevent you (as a creditor) from serving a ‘winding-up petition’. 

However, a debtor may not pay within 21 days, without applying to set aside the debt or stop you from serving a winding-up petition. A court will usually take this to mean they cannot pay their debts. At this point, you can start bankruptcy proceedings or use a winding-up petition. 

This is one way in which a statutory demand is effective, because it helps you start the process of demanding your money back. 

What are Bankruptcy Proceedings and Winding-Up Petitions?

Bankruptcy proceedings are a formal insolvency procedure. They begin with a bankruptcy order against an individual. In a bankruptcy process, the debtor’s assets will be seized and divided among all of the creditors. If there are multiple creditors or the debtor has minimal or no assets, you may not recover all of your money. This is because the money will be divided among the creditors.

Further, some creditors may have priority over others. As a result, you should communicate with your debtor to try to understand their financial situation if you are looking to initiate a bankruptcy proceeding through your statutory demand.

A winding-up petition, sometimes known as ‘liquidation’, is also a formal insolvency procedure similar to bankruptcy proceedings. The key difference is that a winding-up petition is used against a company as opposed to an individual. In this case, the company’s assets will also be taken and distributed amongst its creditors. 

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Should I Use a Statutory Demand to Start Insolvency Proceedings?

If you are planning on using a statutory demand to initiate formal insolvency proceedings, it is a good idea to assess your options before doing so. Importantly, making the debtor bankrupt or insolvent might not be in your best interest in the long term. 

Therefore, before resorting to a statutory demand, you should consider alternative dispute resolution (ADR) methods for debt recovery. Mediation, for instance, involves a neutral third party facilitating negotiations between the creditor and debtor to reach a mutually acceptable solution. This can often result in a faster and more cost-effective resolution for you as opposed to formal legal proceedings. Negotiation, whether direct or through legal representatives, can also be effective in establishing a payment plan or settling for a reduced amount.

What Else is a Statutory Demand Good For?

Aside from starting the formal insolvency processes, a statutory demand can also be a good way of informing your debtor of your willingness to use legal means to recover outstanding debt. In some cases, this can persuade the debtor to settle their debts promptly, even if you are not truly committed to pursuing formal insolvency proceedings. 

At the very least, the debtor may agree to a payment plan when you serve them a statutory demand. Finally, serving a statutory demand incurs no cost. It is usually a cheaper and quicker way to recover your debt than using dispute resolution methods. 

When Can I Use Statutory Demands?

Considering all of the above, it is finally important to know exactly when you can use a statutory demand. A statutory demand is available if:

• if the debtor is an individual, and the debt is no less than £5000; or
• if the debtor is a company, and the debt is no less than £750; 
• the debts can be fully quantified; and
• the debtor is not disputing the debt on genuine grounds. 

How Can I Serve a Statutory Demand?

Serving a statutory demand correctly is crucial to make it effective. Some ways of serving a statutory demand include: 

1. Personal Service: This is the preferred method. You or your representative (such as a process server agent) hand the demand directly to the debtor. If the debtor is a company, deliver it to their registered office. Consider alternatives if this method is not possible. 
2. Individuals: Do all that is reasonable to bring the demand to the debtor’s attention. This could include sending it by first-class post or delivering it to their last known residence.
3. Companies: Leave it at the company’s registered office. Sending by registered post may be acceptable if you can prove the company received it.
4. Electronic Service: You can now consider serving the demand by email, but be cautious with this method. Although it’s becoming more accepted, it’s not explicitly covered in the insolvency rules. If you choose to serve by email:

• ensure it is reasonable in the circumstances; 
• keep proof that the email was received and read; and 
• use it alongside traditional methods if possible. 

Regardless of the method you use, always keep a record of service. This could be a certificate of service for personal delivery, a certificate of posting, or email delivery confirmation. The person serving should keep a detailed record of what happened. You might need to prepare a certificate of service later. 

Key Takeaways

If you are a creditor and you have loaned money to a debtor who is unable to pay it back, you may consider serving a statutory demand. A statutory demand is effective for two reasons: 

• it can start the formal insolvency procedure to recover outstanding debts; and
• it can prompt the debtor to agree to a payment plan or to pay their outstanding debts sooner rather than later.

As a result, a statutory demand may be in your business’s best interests. Importantly, a statutory demand is not always the best course of action. It is usually a good idea to first try to communicate with your debtor to understand their financial position before serving a statutory demand.

If you have any questions about statutory demands, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.

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