Use statutory demands (for debt recovery) with discretion
Making a statutory demand for a debt can prove expensive – this process should be used with discretion.
Creditors who deal with multiple debtors will know that making a statutory demand for payment from a debtor may be an effective means of recovering the debt. However, it is not suitable for all circumstances and must be used with discretion. Here’s why.
What is a statutory demand?
If a debt is undisputed, a creditor can make a formal, “statutory demand” on a debtor for payment of that debt. If the debtor then fails to pay within 21 days, the creditor can apply to make the debtor insolvent (if a company and the debt is over £750) or bankrupt (if an individual and the debt is over £5,000).
How do you make a statutory demand?
- The creditor (or their solicitor) completes the Statutory Demand form and serves it on the debtor requiring the debt to be paid.
- The debtor has 21 days to make payment.
- If no payment is made within the three weeks from service of the Statutory Demand, the creditor can proceed to issue a bankruptcy petition (for an individual) or a winding-up order (for a company).
- A hearing of the bankruptcy / winding-up petition will take place by the court if no payment is made or a payment proposal is not accepted.
When can a statutory demand be served?
The rules are very clear about when a statutory demand can be used: there must be no dispute about the debt itself. In other words, the debtor must have no defence to the creditor’s claim for payment.
What are the downsides?
If the debtor refuses to pay after receiving a Statutory Demand and later successfully challenges the debt in court, the court can set aside the creditor’s Statutory Demand for payment. It is important to note that the debtor only has to show that there is a dispute about the debt – they do not have to prove the debt is not payable.
After a successful challenge, it is very likely that the court will order the creditor to pay the debtor’s costs relating to the Statutory Demand process.
These costs should not be underestimated as they can be substantial depending on the circumstances. If the debtor is an individual, they can exceed £5,000 and for companies, costs may be in excess of £20,000.
The consequences of issuing such a demand without checking its suitability can, therefore, exact a heavy price on creditors.
Key points - an efficient remedy but not appropriate for every debt
Not surprisingly, many debtors who receive a threat of insolvency or bankruptcy will pay up straight away.
If they do not, most creditors would regard the Statutory Demand as the obvious next step to take – especially where there are concerns about the debtor’s solvency.
However, caution should always be exercised when considering the issue of a Statutory Demand: it is not a suitable debt recovery process for every debt.
For more information about debt recovery, contact Christopher Burke on 0161 684 6941 or make an enquiry.Subscribe to our newsletter
Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.
This blog was posted some time ago and its contents may now be out of date. For the latest legal position relating to these issues, get in touch with the author - or make an enquiry now.