When Are Statutory Demands Effective?

If you are a creditor to someone from who 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 important 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. This means that you will get your money back because the debtor will have to sell their assets to pay you back. However, if there are multiple creditors, then you may not get all of your money back. This is because the money will be divided amongst 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. 

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. 

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 convince the debtor to pay their debts quickly even if you are not truly committed to following up with 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 does not cost anything. It is usually a cheaper and quicker way than using dispute resolution methods to recover your debt. 

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. 

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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