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Debt Recovery: Focus on Statutory Demands

Business

Businesses, when owed money, have a range of recovery options at their disposal. One often used and one suggested even more often by non-lawyers, is that of a statutory demand.

A statutory demand is the first step in saying to the court that a person, or business, cannot pay its debts as they fall due and as such they should be ordered to be adjudged bankrupt (if an individual) or insolvent (if a company). These demands are often used as warning shots, being relatively inexpensive to send, but care should be used, they are not intended to be used where a debt is disputed.
In a recent case (Re A Company [2016]), the Court dismissed the petitioning creditor’s request for the winding up of a company because the company provided evidence that the debt was disputed on substantial grounds.
The creditor had presented a “winding-up petition” stating that the company owed them approximately £270,000 in relation to a number of agreements. The petition stated that the debtor company was insolvent because a statutory demand had been issued, 21 days had passed and the company had failed to make payment. However, prior to the presentation of the petition the company had asked the petitioning creditor to clarify the basis for the sum claimed but received no response.
Part of the process to make a company insolvent involves a formal public notice, called ‘advertising,’ being placed in a publication.
The debtor company obtained an injunction from the court preventing the advertising of the winding-up petition on the grounds that the debt in question was disputed. The petitioning creditors accepted that there was a dispute over some of the debt but argued that the winding-up petition should be allowed on the basis that approximately £100,000 was outstanding.
During the course of the hearing both parties produced documentary evidence to support their arguments.
The Judge had to decide if the debtor company was justified in disputing the winding-up petition and if so it would be struck out or dismissed. The Judge decided that an application hearing was not the venue in which to hold a ‘mini-trial’ and accordingly the petition was struck out.
Once there is a serious clash of evidence it is most likely that a winding-up petition will be struck out. A challenge to the credibility of a debtor’s evidence will not be enough to pursue a winding-up petition.
If a creditor wishes to proceed with a winding-up petition, the debts must be clearly established, as it is unlikely that the court will give the petitioning creditor extra time to try to establish its case and in the event that the petition is dismissed, the court may order the petitioning creditor to pay the debtor’s costs.
Petitions are not meant to be used as a simple debt-collection tool for individual creditors. They are meant to be a mechanism for putting a debtor who is insolvent into a form of insolvency proceedings for the benefit of all its creditors, and creditors need to take care in how they pursue their unpaid debts, and to spot the difference between a disputed debt and one that is simply not being paid. There are several debt recovery options that can be deployed, and choosing the right one is key to both maximize the chance of recovery, and limit the exposure to risk along the way.
For further advice please contact David Farmer.