Resolving Debt Disputes – The Power of Setting Aside Statutory Demands
Problem: Statutory demands are often the first step in an insolvency action and can be used to recover debts from individuals and companies. However, statutory demands can sometimes be misused or based on incorrect information. The real challenge for individuals or businesses served with statutory demands is understanding how to respond effectively, especially when the debt is disputed or the demand itself is defective.
Outcome: Successfully applying to set aside a statutory demand can prevent bankruptcy or insolvency. When a statutory demand is set aside, it stops the creditor from using it as the basis to initiate insolvency proceedings, providing significant relief to the debtor. The outcome of such an action not only preserves the debtor’s financial status but also ensures that justice prevails in instances where the statutory demand was issued in error, on disputed debts, or without proper legal grounds.
Both creditors and debtors should be aware of their legal rights and obligations concerning statutory demands to avoid unnecessary litigation or financial loss. For those uncertain about the insolvency process and debt recovery options, please call our expert insolvency and debt recovery lawyers for a Free Consultation on 0207 459 4037 today.
What is a Statutory Demand?
A statutory demand is a formal notice for payment issued under:
- Section 268(1)(a) of the Insolvency Act 1986 for individuals demanding payment of £5,000 or more, or
- Section 123(1)(a) for companies in the UK, demanding payment of a debt usually exceeding £750.
It is a critical step used by creditors as it can lead to bankruptcy or winding-up proceedings if not addressed. The statutory demand must be in the prescribed form — Form SD1 for individuals or Form SD2 for companies — and should specify the total amount of debt, provide evidence of the debt owed, and give the debtor 21 days to pay or secure the debt against property.
If the debtor fails to respond or settle the debt within 21 days, the creditor can then use the unsatisfied statutory demand as grounds to present a bankruptcy petition against an individual or a winding-up petition against a company. It is therefore crucial to obtain advice on your options as soon as you receive a statutory demand.
For creditors, issuing a statutory demand is a powerful tool to obtain payment. However, any creditor serving a statutory demand must ensure the statutory demand has been carefully drafted, is accurate, undisputed, and due, as issuing a statutory demand for a disputed debt can lead to legal consequences. The statutory demand must also be properly served to the debtor, either personally or through a method ensuring that the debtor is aware of the demand.
Common Examples Where a Statutory Demand May be Used
There are several examples where a statutory demand can be properly used to request payment from a debtor, such as:
- Unpaid Invoices
- Personal Loans
- Commercial Rent Arrears
- Guarantees
- Judgment Debts
In each of these cases, the creditor must ensure that the debt is not disputed and is due for payment of a liquidated sum. Incorrectly issued statutory demands can be challenged and set aside by the Court, leading to potential legal and financial consequences for the creditor.
It is also important for debtors to recognise the gravity of a statutory demand and respond appropriately, either by settling the debt, negotiating a settlement or, if the debt is disputed or other valid grounds exist, applying to set the demand aside the statutory demand (see further below).
How to Serve a Statutory Demand?
Serving a statutory demand is a critical step in the debt recovery process, and it must be done correctly to be legally effective.
- Service Methods: For individuals, the statutory demand (Form SD1) must be served personally. This means physically handing the document to the individual or leaving it at their usual or last known residence. In contrast for companies, the statutory demand (Form SD2) can be served at the company’s registered office or, if the company is being wound up, to the liquidator or provisional liquidator.
- Service by Post: While personal service is recommended for its certainty, in some circumstances, statutory demands can be served by post. However, this can lead to disputes regarding receipt, so it is usually not the preferred method.
- Evidence of Service: It is crucial to keep evidence of the service, such as a statement of service or an affidavit, especially if the debtor later disputes receiving the statutory demand.
- Procedural Accuracy: The statutory demand must be accurate and complete, and any errors or omissions can render it defective and at risk of being struck out by the Court. Creditors should ensure that all required information is included and that the demand is clear and understandable.
- Disputed Service: If a debtor disputes receiving the statutory demand or claims that it was not properly served, they may apply to have the demand set aside. The court will then examine the evidence of service and may set aside the demand if service of the statutory demand was not effectively carried out.
Given the importance of correct service in the statutory demand process, creditors are often advised to use professional process servers or legal representatives to ensure that the demand is served properly and that evidence of service is appropriately documented.
How Much Does It Cost to Serve a Statutory Demand?
The costs associated with serving a statutory demand can vary depending on the method of service, whether legal assistance is employed, and other factors but in brief the costs of serving a statutory demand include:
- Drafting the Statutory Demand: Our lawyers can draft the statutory demand often for a fixed fee but it will depend on the complexity of the debt and any negotiations or correspondence involved. Our fees are always reasonable and much lower compared to other law firms, if you wish to obtain a quote, please call us for a Free Consultation.
- Process Server Fees: Personal service is generally recommended, especially for individuals. Process servers typically charge a fixed fee, which might range from £50 to £150, depending on the location and specific circumstances.
- Other Potential Costs: If there are complications in serving the statutory demand, such as the need for multiple attempts or investigative work to locate the debtor, additional costs may be incurred. It is also possible that postage, printing, or other administrative costs could add to the total.
- Potential Recovery of Costs: In some cases, the costs of serving the statutory demand may be recoverable from the debtor, especially if the debt is subsequently paid or recovered following further legal action.
- Cost Considerations for Debtors: Debtors should be aware that if they do not respond to a statutory demand and a bankruptcy or winding-up petition is later issued, they may be liable for additional costs, including the petitioning creditor’s costs.
While the cost of serving a statutory demand is relatively modest compared to other legal actions, it is still important for both creditors and debtors to consider these expenses in the context of the overall debt recovery or dispute resolution process.
What Grounds Can a Statutory Demand be Set Aside?
The grounds and procedure for applying to set aside a statutory demand differ depending on whether the debtor is an individual or a company.
Individual
Under Rule 10.5 (and Rule 10.4) of the Insolvency (England and Wales) Rules 2016, an individual debtor can apply to the court to set aside a statutory demand on the following grounds:
- Substantial Dispute (Rule 10.5(5)(a)): The debtor can apply to set aside the statutory demand if there is a substantial dispute regarding the debt claimed. This means there must be a genuine dispute over the existence or amount of debt, not just a minor disagreement or delay.
- Counterclaim, Set-off, or Cross-demand (Rule 10.5(5)(b)): If the debtor has a counterclaim, set-off, or cross-demand that equals or exceeds the amount of the debt stated in the statutory demand, they can seek to set it aside. This essentially means that if the debtor has a legitimate claim against the creditor that reduces or nullifies the debt, it can be grounds for dismissal.
- Security Held Over Debt (Rule 10.5(5)(c)): The statutory demand can be set aside if the debtor can demonstrate that the debt is secured to the value of the claim. If the creditor holds security over the property or assets of the debtor that cover the debt amount, the demand may not be justifiable.
- Creditor Holds Security (Rule 10.5(5)(d)): If the creditor has not disclosed in the statutory demand that they hold some security over the debt, the debtor might use this lack of disclosure as grounds to set aside the demand.
- Injustice and Other Grounds (Rule 10.5(4)): The court may also set aside a statutory demand if it would cause injustice to the debtor or for other reasons. This is a broader category that might include procedural errors, abuse of process, or other substantial reasons not covered in the specific grounds mentioned above.
Company
If the debtor is a company there is no procedure by which the debtor company can apply to set aside the statutory demand. Instead, if the debtor company believes the creditor may proceed to a winding-up petition and there are substantial grounds to dispute the statutory demand or the debt itself, the company can apply to the court for an injunction to restrain the creditor from presenting a winding-up petition against the debtor company.
The application for an injunction will need to be supported by witness statement evidence, including details of the statutory demand, the grounds for disputing the demand or the debt, and any relevant correspondence or agreements.
The company must demonstrate that there is a substantial dispute or other valid reason why the winding-up petition should not be presented or would be an abuse of process.
Debtors must act promptly upon receiving a statutory demand. The Insolvency (England and Wales) Rules 2016 require the debtor to apply to set aside the statutory demand within 18 days after service of the demand (Rule 10.5(1)). During any proceedings, the debtor should provide detailed evidence and legal arguments supporting their application based on the above grounds usually in the form of witness statement evidence.
A successful application not only cancels the statutory demand but also protects the debtor from potential bankruptcy or winding-up based on the disputed demand.
Who Bears the Costs of an Application to Set Aside Statutory Demand or Injunction to Restrain Presentation?
When an application is made to set aside a statutory demand or an application is issued for an injunction to restrain presentation of a winding-up petition in the case of a company, the question of who bears the legal costs is an important consideration.
Typically, the unsuccessful party in the application to set aside the statutory demand will be ordered to pay the costs of the successful party. This means if the debtor successfully sets aside the statutory demand, the creditor might be liable for the costs incurred in the application. Conversely, if the application is unsuccessful, the debtor might have to bear the costs of both parties.
Warner J in Re Cannon Screen Entertainment Ltd [1989] BCLC 660 – sets out the leading principle as follows:
“… there is nothing improper in a creditor who has no notice of a substantial defence to his claim serving a statutory demand, but to my mind he does that at his own risk, before the normal course for a creditor to adopt, if he wants to enforce a debt by proceedings, is to issue a writ, and of course, if he issues a writ and is sufficiently confident that there is no defence to his claim, the procedure under RSC Ord. 14 is available to him. If instead of adopting that course the creditor takes the shortcut of serving a statutory demand with a view to presenting a winding up petition without having obtained a judgment, in my opinion he does so at his risk as to costs. If it should turn out that there is a defence to his claim he must pay the costs of the company against whom he has chosen to take such proceedings.”
The Court nevertheless has discretion in awarding costs and will consider the conduct of both parties, the reasonableness of the grounds for setting aside the statutory demand, and any other relevant factors.
Expert Insolvency Solicitors in London
If you receive a statutory demand, it is essential to act promptly. The time frame to challenge a demand is limited, usually 18 days for individuals, and the consequences of inaction can be severe.
We provide flexible funding options including fixed fees and ‘no win no fee’ arrangements. If you have received a statutory demand or thinking about serving a demand, please do not hesitate to contact our expert insolvency lawyers today for a Free Consultation on 0207 459 4037.
