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How to deal with demands for payment

Suppliers and subcontractors are employing increasingly aggressive strategies to ensure they get paid.

These include the service of “statutory demands” (formal demands for payment) threatening the presentation of a “winding-up petition” (applications to the Court for the winding-up or “liquidation” of a company on the basis of an unpaid debt).

A petition can mean a firm’s bank accounts may be frozen and its reputation in the market damaged if it is advertised. It may have little choice other than to pay the sum demanded, even though it disputes it.

An internal procedure should be put in place to reduce the possibility of a creditor serving a petition in respect of a disputed debt.

This should ensure that:

  • Any withholding notices under the Construction Act are served on time.
  • Evidence of defects (photographs, notes of site visits  and meetings, correspondence) is retained.
  • A member of the legal/management team (and a deputy) is nominated as the person to whom any statutory demands, petitions and correspondence which demands payment or threatens proceedings should be sent immediately
  • Employees are told that they must immediately forward all demands to the nominated person. If you receive a statutory demand:
  • Look at it immediately A petition can be presented 21 days after the statutory demand is served and the period for letters of demand may be much shorter
  • Identify any reasons why the debt demanded should not be paid (eg withholding notice served or other valid set-off or cross-claim). Pay any part of the debt which you don’t dispute
  • If you dispute the debt, write to the creditor explaining why, stating that the threat of winding-up proceedings is inappropriate and that they would constitute an “abuse of process”. Ask the creditor to undertake that a petition will not be presented
  • If the creditor does not give the undertaking (and the matter cannot be resolved), apply to the court for an order preventing presentation of a petition. If a petition is served and you dispute the debt claimed in good faith and on substantial grounds:
  • Immediately write to the creditor explaining why, stating that winding-up proceedings are inappropriate and constitute an abuse of process. Ask the creditor to undertake that the petition will not be advertised and will be withdrawn
  • Again, if you don’t receive the undertaking (and the matter cannot be resolved), apply to the court for an order restraining advertisement of the petition.

Alexandra Wood is a senior associate in Mayer Brown’s restructuring, bankruptcy and insolvency group