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A statutory demand is a written demand for payment of a debt, in a prescribed form, served on either:
This practice note provides more detail (Statutory demands and bankruptcy proceedings and Statutory demands and winding up proceedings). However, in general terms, a debtor who, for three weeks, fails to comply with a statutory demand for a debt of more than £750 for company debts and £5,000 for individual debts is at risk of having bankruptcy or winding up proceedings issued against it. For this reason, serving a statutory demand may be a means of exerting pressure on an individual or company to pay a debt. It is often the first step taken by a creditor who intends to present a bankruptcy or winding up petition against the debtor. However, there is no obligation on a creditor who has served a statutory demand to commence insolvency proceedings against the debtor.
A statutory demand does not commence court proceedings, and it does not need to be issued at court. The process has advantages in that it does not involve the courts from the outset; and preparing and serving a statutory demand is quick and inexpensive. It can focus the debtor’s mind and flush out details of any dispute or cross-claim.
On the other hand, serving a statutory demand may have a negative impact on an ongoing trading relationship. It may be perceived as an aggressive step and can lead to court proceedings (for example, if an individual applies to set aside the statutory demand or the debtor seeks an injunction to prevent the presentation of a petition).
This note provides practical guidance on the use of statutory demands in the context of personal and corporate insolvency.
Statutory demands and bankruptcy proceedings
Statutory demands are often used as a precursor to commencing bankruptcy proceedings against a debtor. A creditor may present a bankruptcy petition in respect of a debt if he can show each of the following:
(Section 267(2), IA 1986.)
The circumstances in which a debtor will be deemed to be unable to pay a debt or to have no reasonable prospect of being able to pay for these purposes are defined in section 268 of the IA 1986 as follows:
(Section 268(2), IA 1986.)
Accordingly, an unpaid statutory demand is evidence of the debtor’s inability to pay its debts for the purposes of bankruptcy proceedings. However, it is not necessary to serve a statutory demand before presenting a bankruptcy petition if the debt arose under a judgment or court order, and execution has been unsuccessful. If this is the case, the creditor can rely on section 268(1)(b) of the IA 1986 as evidence of the debtor’s inability to pay his debts. For guidance on the execution of judgments, see Practice note, Execution against goods and writs of fieri facias.
The rules relating to statutory demands in the context of personal insolvency are in rules 6.1 to 6.5 of the Insolvency Rules 1986 (SI 1986/1925) (IR 1986) and paragraph 13 of the Practice direction: Insolvency Proceedings (PDIP).
The prescribed forms of statutory demands are:
A statutory demand is a written demand for payment of a debt, in a prescribed form, served on either: An individual, in accordance with section 268(1)(a) of the Insolvency Act 1986 (IA 1986). A company, in accordance with section 123(1)(a) or 222(1)(a) of the IA 1986. This practice note provides more detail (Statutory demands and […]View More
Mark Jones, Woodcock & Wilson View More
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