One of the most common grounds for entering into an insolvency process is that an individual, partnership, or company cannot pay their debts as they fall due. One way to evidence that debts cannot be paid as they fall due is an expired statutory demand in circumstances where the debt has not been disputed and/or a denial slip has not been provided.
The use of statutory demands can be an expeditious way of establishing a debt to then allow an insolvency procedure to follow without first requiring to obtain a court decree, however, it must be used appropriately due to, amongst other things, the courts being critical of their misuse. Commonly the courts will criticise the use of a statutory demand where the creditor is aware that the debt is disputed and is seeking to use it as a debt recovery tool.
Statutory demands in corporate insolvency
If a creditor is seeking to prove that a company is insolvent and should be wound up, a statutory demand can be served on a company for any debt outstanding. If winding up proceedings are to follow and the creditor wished to rely upon the statutory demand for insolvency purposes, the debt should be over £750.
The statutory demand requires to be served by sheriff officers at the company’s registered office, with the date of service being the date after posting/delivery by sheriff officers. The company then has 21 days to negotiate and satisfy the claim by making payment of it (or the agreed amount) or to dispute/deny the debt. The company does this by writing to the creditor setting out the basis upon which the debt is disputed.
If the company disputes the debt within the 21 days, it is still possible for a winding up petition to be presented to the court however the court will likely take a dim view of this and are likely to not only refuse to wind up the company but may find the creditor liable to pay the company’s expenses.
Previously, statutory demands had to be completed in a prescribed form whereby creditors simply required to fill in the blanks. The Insolvency (Scotland) (Receivership and Winding up) Rules 2018 changed this, removing the prescribed form. The position since the coming into force of these rules on April 6 2019 is that the demand must include certain prescribed content.
The 2018 rules make it clear that the prescribed form is no longer required. Whilst in practice it is easy to copy across the prescribed form with additional information, care needs to be taken to ensure that the prescribed information is included. If it is not, the demand may be open to challenge.
Statutory demands in personal insolvency
In personal insolvency cases, if a creditor wishes to petition the court for sequestration (bankruptcy), the use of a statutory demand can form the basis for establishing ‘apparent insolvency’. The creditor must be owed a debt of at least £1,500 to serve a demand.
The statutory demand should be served on the individual personally by sheriff officers (which can include post box service by them, by their confirming that inquiries have been made and that they are satisfied that the debtor lives at that address). The individual then has a 21-day period to deal with the demand. If the debt is disputed, the individual must return the denial slip, which forms part of the statutory demand form to the creditor.
The statutory demand in personal insolvency cases is a prescribed form known as Form 5 (provided for by section 16 (1) (i) of the Bankruptcy (Scotland) Act 2016.
If the debtor does return a denial slip and denies/disputes the debt, the creditor cannot then proceed to petition for sequestration on the basis of the Demand.
What else should you be aware of?
There is an alternative demand to the traditional statutory demand in cases where a company is being pursued known as a ‘short form demand’. If correctly prepared and used appropriately, the creditor can use an unchallenged demand in this form as a basis for seeking to wind up a company. Generally, only 48 hours are given for a response by the company.
What to do if you are served with a statutory demand
If you are served with a statutory demand it is important that you seek legal assistance as a matter of urgency. Failure to respond to the demand within the specified period can potentially result in very damaging consequences.
For information and help on any of the matters raised in this article please speak to a member of the Blackadders Dispute Resolution Team. Thanks to Susan Currie, dispute resolution solicitor, for input into this article.