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How statutory demands can kick-start payment negotiations

Statutory demands are a cheap and easy way to serve and can kick-start payment or negotiations, but what exactly are they? And what are the consequences of using statutory demands?

The construction industry is increasingly using statutory demands to recover outstanding payments. They are cheap and easy to serve, and can be very effective in prompting payment or kick-starting negotiations.

What exactly is a statutory demand and in what circumstances can it be used? And what should you do if you are on the receiving end of a statutory demand?

What is a statutory demand?

A statutory demand is a written demand for payment of a debt of more than £750. This should be for a liquidated debt (a specific sum of money that has been fully and finally ascertained), such as a fixed payment for goods.

“Statutory demands are cheap and easy to serve and can be very effective in prompting payment”

It is made in a prescribed format set out in the Insolvency Rules 1986. The statutory demand is completed and left at the debtor company’s registered office.

The real bite of a statutory demand is that where the debt is not disputed and payment is not made within 21 days, the debtor company is deemed unable to pay its debts.

Critically, that is a basis for winding up under the Insolvency Act 1986.

Consequences of using statutory demands

If after 21 days payment is not made, the creditor can apply to the court for winding-up proceedings of the debtor company.

In most cases the creditor does not rush off to court as soon as the 21 days are up, but this does not prevent it doing so later – statutory demands do not expire as such, although in practice a court might ask why a statutory demand has not been acted upon earlier.

“Statutory demands do not expire as such, although a court might ask why one has not been acted upon after 21 days”

The debtor company then has to persuade the court not to proceed with winding up – either by getting an injunction (a court order) before winding-up proceedings start or by opposing the proceedings in court.

The possible consequences in terms of time, cost and reputation are obvious.

Unless the debtor pays up within 21 days, there are only three grounds to resist a statutory demand and the assumption of an inability of a company to pay its debts:

  • There is a genuine dispute on substantial grounds;
  • There is a genuine cross-claim or a right of set-off against the creditor that is larger than the debt demanded; or
  • There is a reasonable excuse for non-payment (this sounds promising but in reality it is a very limited exception covering matters such as when it is ‘prohibited under law’ to make payment).

Increasing use for disputed debt

As well as a general increase in their use, statutory demands are being served even where a debt is disputed or is not liquid – for example, in final account negotiations.

Serving statutory demands in such circumstances will not meet the criteria to start winding up, but may be a successful tactic nonetheless.

“Jumping straight into winding-up proceedings on the basis of an unpaid adjudicator’s award is a high-risk strategy”

What about using them to recover unpaid sums awarded by an adjudicator? Although debts based on court judgements are, generally speaking, accepted by a court in winding-up proceedings without further enquiry, adjudication decisions are somewhat different.

A recent case confirmed that adjudications awards may not equate to a ‘judgement debt’ (Towsey v Highgrove 2012).

So jumping straight into winding-up proceedings on the basis of an unpaid adjudicator’s award is a high-risk strategy.  

In any event, the Technology and Construction Court has previously said that using a statutory demand to enforce an adjudicator’s decision should only be done in exceptional circumstances and adjudication enforcement proceedings should be used instead. 

What to do if you’re on the receiving end

If you are on the receiving end of a statutory demand and wish to avoid winding-up proceedings then act quickly:

  • Work out the position in relation to the debt without delay. Is it due or not? Is there a genuine dispute? Gather as much evidence as you can to back this up – relevant records and correspondence will be key.
  • If the sum is due and there is no cross-claim or a right of set-off (or it is less than the sum claimed), consider making payment.
  • Consider making part-payment if you agree some of the debt is due. If part-payment takes the outstanding debt to below £750 then the statutory demand cannot be used to start winding-up proceedings.
  • Respond to the creditor in writing well within the 21 days, setting out your position, and get proof of receipt.

Jane Fender-Allison is an associate at Dundas & Wilson

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