What Should You Do If Your Company Receives a Statutory Demand?

What Is a Statutory Demand? (Quick Answer)

A statutory demand is a formal legal demand requiring payment of a debt. If a company fails to pay the debt or otherwise resolve the matter within 21 days, the creditor may rely upon the unpaid demand as evidence that the company is unable to pay its debts and may present a winding-up petition under the Insolvency Act 1986. Although a statutory demand is a powerful debt recovery tool, it should generally only be used where the debt is due, liquidated and genuinely undisputed.

Receiving a Statutory Demand Can Be Serious – But It Does Not Always Mean Your Business Will Be Wound Up

Few documents cause more concern for company directors than a statutory demand. Whilst it should never be ignored, receiving one does not automatically mean that your company will be placed into liquidation.

The most important thing is to act quickly. Whether the debt is admitted or disputed, obtaining early legal advice can often prevent matters escalating and may significantly improve the prospects of resolving the dispute without insolvency proceedings.

At The Legal Practice Solicitors, our Commercial Litigation team advises companies, directors and business owners on statutory demands, debt recovery disputes and winding-up proceedings throughout England and Wales.

What Is a Statutory Demand?

A statutory demand is a formal written demand for payment of a debt.

Where a company fails to comply with the demand within 21 days, the creditor may rely upon that failure as evidence that the company is unable to pay its debts for the purposes of section 123 of the Insolvency Act 1986.

Although a statutory demand is not compulsory before presenting a winding-up petition, it is frequently used because it provides a relatively straightforward method of demonstrating insolvency where an undisputed debt remains unpaid.

When Should a Statutory Demand Not Be Used?

A statutory demand is not intended to resolve ordinary commercial disputes.

If the debt is genuinely disputed on substantial grounds, the insolvency process should not be used as a means of pressuring a debtor into making payment.

The courts have consistently held that insolvency proceedings must not be used as a debt collection tactic where there is a real dispute regarding liability.

If a creditor proceeds regardless, the court may:

• Dismiss or restrain the winding-up petition.
• Require the dispute to be resolved through ordinary civil litigation.
• Award costs against the creditor.
• Criticise the misuse of the insolvency process as an abuse of process.

For this reason, creditors should carefully consider whether the debt is genuinely undisputed before serving a statutory demand.

Statutory Demand vs Letter Before Action

Letter Before Action	Statutory Demand
Used before court proceedings	Used before insolvency proceedings
Suitable where liability may be disputed	Generally suitable only for undisputed debts
Starts the civil litigation process	May lead to a winding-up petition
Gives parties an opportunity to resolve the dispute	Demonstrates an alleged inability to pay debts

Understanding the difference is important. A statutory demand should never replace the normal litigation process where liability is genuinely disputed.

What Happens If You Ignore a Statutory Demand?

Ignoring a statutory demand can have significant consequences.

If no satisfactory response is received within 21 days, the creditor may present a winding-up petition.

Once this happens:

• Your company’s bank may freeze its accounts.
• Suppliers may suspend credit facilities.
• Customers and lenders may lose confidence.
• Your ability to trade could be seriously affected.
• Ultimately, the company could be placed into compulsory liquidation.

Prompt action is therefore essential.

The First Three Questions You Should Ask

1. Is the debt actually due?

Check whether payment has become due under the contract and whether the amount claimed is correct.

2. Is the debt statute-barred?

Many contractual debts become statute-barred after six years under the Limitation Act 1980, although acknowledgements, part-payments and certain other circumstances may alter the limitation period. Legal advice should always be obtained before relying upon limitation.

3. Is the debt genuinely disputed?

This is often the most important question.

The insolvency process is not designed to determine disputed contractual claims.

What Counts as a Genuine Dispute?

Simply saying “I do not agree with the debt” is unlikely to be sufficient.

The dispute must be both genuine and substantial.

In Re a Company (No 010656 of 1990) [1991] BCLC 464, the court confirmed that a mere honest belief that payment is not due will not, by itself, prevent insolvency proceedings.

Similarly, in Commissioners of Customs & Excise v The Arena Corporation Ltd [2004] EWCA Civ 371, the Court of Appeal confirmed that the dispute must be real rather than frivolous.

Examples may include:

• The amount claimed is incorrect.
• The contract has been breached by the creditor.
• Payment is not yet due.
• Defective goods or services.
• A valid counterclaim equal to or exceeding the debt.

What Should You Do If the Debt Is Not Disputed?

If the debt is accepted, the priority should be to avoid unnecessary insolvency proceedings.

Depending upon your circumstances, options may include:

• Paying the debt in full.
• Negotiating additional time to pay.
• Agreeing a repayment plan.
• Negotiating a commercial settlement.

Early engagement often produces a better commercial outcome than allowing matters to progress to a winding-up petition.

What Should You Do If the Debt Is Disputed?

If there is a genuine dispute, legal advice should be obtained immediately.

Your solicitor may:

• Notify the creditor that the debt is disputed.
• Explain the legal basis of the dispute.
• Invite the creditor to withdraw the statutory demand.
• Seek an undertaking that no winding-up petition will be presented while the dispute remains unresolved.
• Where appropriate, apply to the court for an injunction restraining the presentation or advertisement of a winding-up petition.

The appropriate course of action will depend upon the facts of each case.

Common Mistakes Businesses Make

Many businesses unintentionally make matters worse by:

• Ignoring the statutory demand.
• Assuming it is merely another debt collection letter.
• Delaying legal advice.
• Admitting liability before understanding their legal position.
• Failing to preserve important contractual documents and correspondence.

Obtaining advice at an early stage often provides the greatest opportunity to resolve matters commercially.

Frequently Asked Questions

Does a statutory demand automatically mean my company is insolvent?

No. It is a serious legal document, but it does not automatically mean your company will be wound up.

Can I simply ignore it?

No. Failure to respond may allow the creditor to commence winding-up proceedings.

Can I dispute the debt?

Yes, provided there is a genuine and substantial dispute supported by proper legal grounds.

Can a payment plan be negotiated?

Often, yes. Many creditors are willing to consider commercial settlement proposals where appropriate.

Should I instruct a solicitor immediately?

Given the strict timescales and potentially serious consequences, early legal advice is strongly recommended.

How The Legal Practice Solicitors Can Help

If your business has received a statutory demand—or you are considering serving one—our Commercial Litigation team can advise you on the most appropriate course of action.

We regularly assist clients with:

• Statutory demands.
• Winding-up petitions.
• Commercial debt recovery.
• Contract disputes.
• Shareholder disputes.
• Injunctions.
• Commercial litigation.
• Settlement negotiations.

Our advice is practical, commercially focused and tailored to the circumstances of your business.

Disclaimer

This article is provided for general information purposes only and does not constitute legal advice. The law may have changed since the date of publication, and every legal matter depends on its own facts and circumstances. You should seek independent legal advice before taking or refraining from taking any action based on the information contained in this article. The Legal Practice Solicitors accepts no liability for any reliance placed on this publication.