What is a statutory demand?A statutory demand is a formal demand for payment and, if a client doesn?t pay, it can be used as evidence that they?re insolvent. If a client is insolvent, the next step is to wind them up (if they?re a company) or make them bankrupt (if they?re an individual or sole trader.) If a client is running a profitable business, they won?t allow this to happen over an invoice and will usually pay up in under 21 days. The great thing is, businesses can start this process quickly and easily with only one form and, unlike the courts, there are no fees to pay. The downside is that the issuing of a statutory demand can only be made in certain, specific circumstances, which I?ll explain below. Issuing a statutory demand can also be seen as an aggressive move, so a relationship with a client is likely to be damaged as a result. However, if a company gets to the stage where it needs to take this action, a client will have already seriously compromised the relationship, so this shouldn?t put anyone off.
How to issue a statutory demandSo, what?s the procedure for issuing a statutory demand? The first stage in this process is to check whether a debt qualifies, because a company cannot issue a statutory demand in all circumstances. To qualify, the debt must be over ?750 if a limited company owes money, and over ?5,000 if an individual owes money. In both cases, the debt must be undisputed. If a business is owed less than these amounts, or the debt is disputed for any reason, then a statutory demand shouldn?t be issued. Instead, the aggrieved party should pursue a claim through the courts. __________________________________________________________________________________
How to win a court case without a lawyer You don?t need a rock solid case to win in court case ? to win, your case only needs to be slightly better than average. __________________________________________________________________________________ If a debt does qualify, the next stage is to complete a statutory demand form.
Statutory demand formsThere are four different statutory demand forms to choose from. If the debtor (the client) is a limited company, an SD1 form is most likely needed. If they?re an individual, it?s an SD2 form. The forms are available for free online, but please note that there are other versions of the forms for use in specific circumstances, so check that you have the right one. The form should be self-explanatory to complete as it has guidance notes on it. Businesses will need to complete details of the debtor, the creditor (the company, whoever is owed the money) and details of the debt. When it?s complete, the form will need to be served to the client. The Insolvency Rules say that when you?re serving a statutory demand on an individual, you must:
?Do all that is reasonable to bring the statutory demand to the debtor?s attention and, if practicable in the particular circumstances, serve the demand personally.?In reality, this means that ideally it should be served personally but, if this isn?t possible, email it, post it or deliver it to their home address. If the statutory demand is being served to a limited company, it is ideally left at the company?s registered office. If this is not possible, it should be sent by registered post to the registered office. Being able to prove the statutory demand was properly served on a client is essential if the issuer wants to rely on it as proof that a client is insolvent. So, if a business is in any doubt about how to serve it properly it may be worth hiring a process server (a professional whose job it is to serve legal documents) to serve it on behalf.
What happens next?After the statutory demand has been served, your client then has three weeks to settle their debt or reach an agreement for its payment that you are happy with. In the vast majority of cases, where your client is running a profitable business, everything will be paid in under 21 days. If it is, you will need to withdraw the statutory demand. There are no official forms to do this, you simply write to your client confirming that it has been withdrawn. If, after three weeks, the debt hasn?t been paid you can use the statutory demand as evidence that your client is insolvent. This means you have grounds to issue a winding up petition against a company or bankruptcy petition against an individual.
Winding up and bankruptcy proceedingsStarting winding up or bankruptcy proceedings involves the courts and there are fees to pay. So, before taking this step a business must find more about the client?s financial position. If the client is willing to risk this step taking place, chances are they are in real financial trouble. If this is the case, and the unpaid party is an unsecured creditor, there?s unlikely to be anything to recover after the client has been wound up or made bankrupt. The company must therefore think carefully about whether this is a step its willing to take. Also, it?s important to be sure that another creditor hasn?t already started the process. The rules say that a second petition shouldn?t be presented while another is pending. There are a number of ways to do this. If the debtor is a company, it is key to check Companies House and the Central Registry of winding up petitions help by the court. If the debtor is an individual, a search with the Chief Land Registrar will have to be carried out. This doesn?t mean that the unpaid party will miss out because insolvency proceedings will treat all creditors in the same class equally. If insolvency proceedings have already been started, the liquidator should be contacted to check inclusion on the creditors? list. Because there is so much more involved, if it gets to the stage where insolvency proceedings are a serious consideration, it?s probably worth taking professional advice. If you have any questions about issuing a statutory demand or would like to know what options are available to you if you?re owed money by a client, please feel free to email me at email@example.com. Catch up on some of David’s recent Business Advice articles:
- The dangers of doing business with zombie companies
- Why writing off unpaid invoices is worse than you think for your business
Sign up to our newsletter to get the latest from Business Advice.