Responding To A Statutory Demand – A Guide For Individuals

What is a statutory demand?

A statutory demand is a formal written demand for payment of a debt to be made within 21 days. The effects of a statutory demand can be very serious. If the debtor does not comply with the statutory demand, or fails to apply to the court to have it set aside on time, it can be used as evidence that the debtor is unable to pay their debts and allows the creditor to petition to the court for a bankruptcy order. Therefore, it is crucial to act quickly when served with a statutory demand, to reduce your chances of being made bankrupt.

What are the requirements for a statutory demand?

A statutory demand is usually the last step taken by a creditor before they commence bankruptcy proceedings. To be relied on for that purpose, the debt contained within a statutory demand must meet certain criteria under the Insolvency Act 1986, namely:

• The debt must be for a liquidated sum i.e. a specific sum that has been fully and finally ascertained, by reference to a contractual formula or otherwise
• The debt must be for £5,000 or more and not in dispute
• The debtor must be an individual domiciled in the UK
• The debt must be unsecured, so the creditor must not have a mortgage, charge, lien or other security over the debtor’s property. The exceptions to this requirement are if the secured creditor is willing to give up their security, or if the value of the debt exceeds the value of the security and the creditor’s demand relates to the unsecured portion of the debt
• The debt must be payable either immediately, or at some point in the future. Unlike debts owed by companies, a statutory demand for an individual can be served where the debt is not even due yet
• The debtor appears to be unable to pay the debt or appears to have no reasonable prospect of being able to pay the debt in the future. This is presumed where the debtor does not pay the outstanding debt within 21 days of receiving the statutory demand.

If you receive a statutory demand that does not comply with these requirements, you may be able to apply for it to be set aside on technical grounds.

It is also important that a statutory demand is served correctly on the debtor. The Insolvency Rules 2016 states that when serving a statutory demand, the creditor must: “do all that is reasonable to bring the statutory demand to the debtor’s attention and, if practicable in the particular circumstances, serve the demand personally”.

It is, therefore, common for creditors to instruct a process server to effect personal service of the statutory demand and to prepare evidence of service. If personal service is not practicable, a creditor may send the statutory demand by email, first class post or delivering it to the debtor’s residence.

If a statutory demand is not served properly, it may be invalid and you may be able to apply for it to be set aside.

What should you do if you are served with a statutory demand?

Given the short amount of time a debtor has before the statutory demand expires, it is crucial for you to take immediate advice on the options for preventing a bankruptcy petition being presented. This will depend entirely on the individual circumstances of the matter. In addition to some of the technical grounds noted above, there may be other bases for challenging the validity of the statutory demand.

What to do if you dispute the debt and/or have a counterclaim against the creditor?

A debt may be disputed on factual or legal grounds, such as, for example, a breach of contract on the creditor’s part that justifies non-payment. This could also include circumstances where the debtor has a counterclaim, right of set-off, or cross claim equal to or exceeding the value of the debt.

If you receive a statutory demand in respect of a wholly disputed debt, you should obtain legal advice and/or write to the alleged creditor as soon as practicable setting out the reasons for the dispute. Any letter to the creditor should set out in detail why you do not agree with the statutory demand, and request its withdrawal to avoid the need for you to apply to the court to have the statutory demand set aside i.e. cancelled by a judge.

If you dispute part of the debt, it is imperative that you pay the undisputed sums to the creditor as soon as possible, and set out your explanation as to why the balance is disputed, following the same approach as above.

How can I challenge the statutory demand if the creditor will not withdraw it?

The Court has the power to set aside a statutory demand, but this is at the discretion of a judge. There is no exhaustive list as to what will persuade the court that it ought to set the statutory demand aside, but some of the most common arguments include:

• The creditor’s statutory demand constitutes an abuse of process – it might be said that the creditor does not actually want or intend to bankrupt the debtor, or appreciates that the debt is disputed on substantial grounds, and they are using the threat of bankruptcy as a means of improperly compelling the debtor to pay up
• The creditor has proper motives relating to the statutory demand, but to allow them to present a bankruptcy petition would not be in the interest of the body of creditors as a whole
• The statutory demand contains incomplete, misleading or inaccurate details of the debt and prejudices the debtor as a result.

In some circumstances, such as where the creditor was not actually owed a debt on the date they served the statutory demand, the court will more readily set aside the statutory demand.

How can I apply to set aside a statutory demand?

If the creditor refuses to withdraw the statutory demand, you will need to take steps to apply to the court to set aside the statutory demand promptly.

There are strict time limits to apply to the court to set aside the statutory demand, which should be carried out within 18 days of being served. There are also rules relating to the procedure to be followed and the information to be included in an application to set aside a statutory demand. The application needs to be supported by a witness statement, which should set out the date you became aware / was served with the statutory demand, why you believe the statutory demand should be set aside, and any evidence you have to support this.

When the application is made, the 21 day time limit for complying with the statutory demand is paused until the application to set aside is determined. Any bankruptcy petition brought by the creditor during this time will be stayed, adjourned or dismissed. If the application to set aside the statutory demand is unsuccessful, the Court will make an order which authorises the creditor to present a bankruptcy petition. A set aside application is therefore an important tactical step to consider.

What if I do nothing?

If the debtor takes no active steps after receiving the statutory demand, they will be presumed to be unable to pay the debt once the 21 day time limit is up. The creditor will then be entitled to present a bankruptcy petition. The debtor will still have an opportunity to make submissions at the petition hearing, to put forward any arguments as to why the statutory demand is misguided and the petition should be dismissed, but this might be the last opportunity to state your case and you will be at risk of a bankruptcy order being made.

Given the serious implications, it is recommended that active steps are taken as soon as possible after receiving the statutory demand, to assess all the options, rather than risk a bankruptcy petition being presented and losing the opportunity to get the statutory demand withdrawn by agreement, or set aside by the court.

If you have received a statutory demand or wish to serve a statutory demand on a debtor, please do not hesitate to contact our team of dedicated experts at Thomson Snell & Passmore.