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Why (and when) do you need a statutory demand?

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A statutory demand is a formal legal demand against an individual or company outlining the debt owed - in size and detail.

A statutory demand gives the debtor 21 days to pay.

If the debtor does not pay the debt within the 21 days, then the creditor can bring an insolvency petition against them. A winding up petition will be used against a company and a bankruptcy petition will be used against an individual.

The two key criteria for satisfying the need to use a statutory demand are as follows:

  1. The debt must be for a liquidated sum (a fixed amount); and
  2. The debt must be undisputed.

If the above criteria have been met and the liquidated debt is undisputed then a statutory demand may be the best course of action to use as a creditor, however, it does not come without risks.

The first of these is usually easy to satisfy but the second is more difficult. It is arguable that it is problematic for the creditor to be objective about what may or may not be a genuine dispute to the debt.

If a statutory demand is used when there is a genuine dispute, it is an abuse of process and engaging in this action will put the creditor at risk of paying the debtors legal costs on an indemnity basis (increased level of costs).

If an insolvency petition is brought against a debtor, it will have immediate effects on them financially and commercially (if the debtor is a company). When the insolvency petition is issued in court it will be difficult for the debtor to get credit and enter into new contracts. Further, once the insolvency petition is issued in court, a company's bank account will be frozen.

Given the serious consequences outlined above, if the debt is disputed and the debtor wishes to resist an insolvency petition, the debtor will apply for an injunction against the creditor to prevent presentation of a petition.

A statutory demand can be set aside either by an agreement between the parties (if this is possible) or with the involvement of the court.

If it can be proved that a statutory demand has been used inappropriately, it may be possible to obtain an injunction from the courts to prevent the creditor who has used the statutory demand from presenting a winding up petition or bankruptcy petition.

If the matter ends up in court, the losing party will pay the winning party's legal costs on an indemnity basis (usually if the losing party is the creditor). As a result, the losing party will suffer financially, and the creditor may end up having to pay the debtor before the alleged debt has been repaid to them.

So, whether you are an 'alleged' debtor and you receive a statutory demand that you believe has been used inappropriately or you are chasing debt and would like to consider the use of a statutory demand then you should seek legal advice. The use of a statutory demand is often contentious and not just a simple answer to a creditor's problem. Our experienced dispute resolution solicitors can assist you with this process and we would invite you to get in touch should you require assistance.

Our experienced dispute resolution solicitors can assist you with this process and we would invite you to get in touch should you require assistance.

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