Kicking off Berwin Leighton Paisner’s series on making the most of the legal process, Melissa Moriarty explains the use of a powerful money-extraction tool
What is a statutory demand?
It’s a formal demand for payment, which carries with it the threat of a winding-up petition if payment is not made within three weeks. And you don’t need a solicitor to issue it.
Often, the mere threat of a winding-up petition is enough to encourage a debtor to pay immediately. This is a useful tool in the current climate, where many debtors delay paying purely for cash flow reasons.
If the debtor ignores the statutory demand, the next step is to apply to the High Court for a winding-up petition. This is costly, and there is no guarantee that you will recover your money if a winding-up order is made.
When it is unsuitable to use one?
Avoid this route if you want to preserve a commercial relationship, if you know that the debt is disputed, or if the debtor has a valid counterclaim. The courts view the use of statutory demands for disputed debts as an abuse of process, and the debtor could obtain an injunction preventing you from issuing a winding-up petition. If this happens the court is likely to penalise you heavily in costs.
Statutory demands may only be issued for debts of more than £750. Because of the cost of issuing a winding up-petition, they may not be cost-effective for debts of less than £5,000.
A statutory demand is also unsuitable if the debt has not crystallised, so it is unclear what must be paid and by when, or if the debtor has insufficient funds to repay the debt.
How do I start?
First, you need to establish that there is no reason for non-payment. Write to the debtor demanding your money. Make it clear which invoice you are referring to (by attaching a copy) the amount due (including any interest), and the date by which payment was due. If you don’t mention interest,
Often, the mere threat of a winding-up petition is enough to encourage a debtor to pay immediately
you will not be entitled to claim it. Give the debtor a finite amount of time to pay – seven days is normal – following which you will issue a statutory demand. Send the letter by fax and post.
I have written to the debtor and received no response. What is the next step?
Fill in the form for a statutory demand for a debt that is immediately payable (form 6.1, available from www.insolvency.gov.uk/forms/ englandwalesforms.htm). This includes a section called “Particulars of debt”. Repeat the information you put in the letter of demand.
Once you have completed the paperwork, check the name of the recipient and the address. In the case of a registered company, you can check the address on the Companies House website. Send the documents to its registered office by registered post. Alternatively you can arrange for delivery by hand, preferably by process servers. The debtor now has 21 days to pay, or to offer you security for the debt. Or, if it disputes the debt, it can apply within 18 days to get the statutory demand set aside.
Twenty-one days have passed and still I have not had a response. What now?
The next step is to apply for a winding-up petition, if the debtor is a company, or a bankruptcy order for an individual. This can be costly – court fees alone cost more than £1,000. Unlike a statutory demand it is usually necessary to instruct solicitors.
The time and date of a hearing will be fixed. Two weeks before the hearing, an advert may be placed in the London Gazette, causing the debtor’s bank to freeze its assets and making it impossible to obtain credit. This may spur the debtor to either offer payment or raise grounds – possibly spurious – for disputing the debt and demanding you withdraw the petition.
If the debtor pays up, you should immediately ask the court to cancel the hearing. If it raises grounds for disputing the debt, you must decide whether to continue or withdraw the petition. If you discontinue you will need to make an agreement as to costs with the debtor’s solicitors. You will need to attend the hearing if it goes ahead, and if a winding-up order is made, you may not recover your money. Luckily, many debts are paid before this stage.
Melissa Moriarty is a senior associate in the construction group of Berwin Leighton Paisner
This article was published under the headline: ’A matter of life and debt’