“To stat demand or not stat demand, that is the question”

Lovers of Shakespeare will no doubt recognise the aforesaid phrase.  As this is Shakespeare’s 400th birthday year, I thought it apt to borrow one of his most famous phrases.

The use of Shakespeare in a legal article may appear to many readers misplaced.  However, the expression does, in my view, capture a serious dilemma facing creditors when trying to invoke what appears to be a cost-effective and quick way of recovering money.

The statutory demand procedure was created by the Insolvency Act 1986.  Under this Act, a creditor who was owed money could complete a statutory demand form (not a complex form), serve it on an individual or a limited company, wait for the twenty-one-day period to expire and thereafter immediately issue a bankruptcy petition (in the case of an individual) or a winding-up petition in the case of a limited company.

Most creditors would consider the prospect of bankruptcy and/or liquidation an incredible incentive for a debtor to “pay up”.

An individual or company faced with a statutory demand can, however, take steps to “defend it”.  An individual can make an application to the court within eighteen days of receipt for an Order that the statutory demand be set aside.  A limited company can apply to the Court for an injunction preventing a winding up petition being issued against it.

The problem for a creditor (and this is the sting in the tail) is that if an individual succeeds in having a statutory demand set aside and/or a limited company obtains an injunction, the likelihood is that the creditor will be paying the debtors’ costs.  Those costs can be substantial.  As regards an individual, a creditor could be facing costs in the region of £6,000 plus VAT or more and in the case of a limited company, costs in the region of £20,000 were in one case ordered as against the creditor.

Thus, although the statutory demand process may appear to be an efficient and quick way of recouping a debt, the reality is quite different.

The statutory demand process should only be used where there is no defence to the debt.  For example, where there is a written admission that the debt is owed or a dishonoured cheque or judgement from a court or tribunal.

The above is not intended to be an exhaustive list but the point hopefully is there for all to see, namely that the statutory demand procedure should only be used where there is little or no doubt that the debt is in fact owed.

The reason for this is quite straightforward.  If a debtor can show that there is a “dispute” with regard to the debt, then the statutory demand will be set aside.

A debtor does not have to prove his case save to show that there is an argument against payment.  The burden of proof is very low indeed. If a debtor can succeed in this, the statutory demand will most probably be set aside, (if an individual and an Injunction granted if a limited company) and orders for costs made as against the creditor.

Consequently, any creditor who is considering invoking the statutory demand procedure must be acutely aware of the potential problems and should approach such an application with caution.

The statutory demand procedure although extremely helpful should only be used in cases where there appears to be no defence to the debt.

So, to all creditors, “beware the Ides of March”.

* Disclaimer: The information on the Anthony Gold website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. It is provided without any representations or warranties, express or implied.*