Is your company behind schedule on its payments to creditors? When your company pays its creditors late or fails to pay a debt entirely, it could face legal pressure from a creditor intent on recovering their cash.
This pressure typically begins with the delivery of a statutory demand – an official demand for payment of a debt. Statutory demands provide 21 days for payment of debts, after which a creditor can take action to wind up your company.
Delivering a statutory demand is typically the final step creditors will take in order to recover cash from your company before filing a winding up petition and closing your company.
If your company receives a statutory demand, you need to immediately respond by paying the debt or take action to prevent your company from being subject to more legal pressure using a process such as administration or a CVA.
Receiving a statutory demand is a serious event, but there are options available to protect your company. Read on to learn more about the statutory demand process and how receiving a demand can affect your company.
Quick facts about statutory demands:
- A statutory demand is an official demand for payment of a debt sent by a creditor. Sending a statutory demand is typically the final step in the debt collection process before a creditor attempts to wind up a company.
- When your company receives a statutory demand, it has 21 days to pay its debt or negotiate a payment agreement with the creditor. If a company can’t reach an agreement with its creditors, it could be liquidated.
- Statutory demands need to be served to the individual or company they are addressed to in order to ensure the subject is aware of the demand. You can serve a statutory demand in person or using a process server.
- Some statutory demands are malicious and refer to debts that the debtor does not agree with. As a debtor, it’s possible to challenge the validity of a statutory demand if you don’t agree on the debt.
- A creditor can only pursue a winding up order against a company if its debt has a value of £750 or greater and delivering a statutory demand fails to lead to a payment or agreement.
What is a statutory demand?
When a company fails to pay its creditors, it typically comes under legal pressure to pay its debts. This pressure can begin with warning letters and notifications before developing into a process that could threaten the company’s ability to trade.
A statutory demand is a formal demand from a creditor that a debt needs to be paid immediately. Delivering a statutory demand sends a clear notice to a debtor that the money they owe needs to be paid in order to prevent legal action.
Creditors typically use statutory demands to settle debts after all other means have failed. If your company has defaulted on its debt and hasn’t communicated with its creditor, it could receive a statutory demand for payment.
Receiving a statutory demand is a serious event that your company should respond to. When you receive a statutory demand, you have 21 days to pay the debt or face the prospect of compulsory liquidation.
In the eyes of a court, failing to pay a statutory demand for £750 or greater shows that your company is insolvent. This implication could increase the risk of you and other company directors facing charges during the liquidation process.
It’s important to take action after receiving a statutory demand, as the amount of pressure placed on your company will only increase with time. Ignoring a demand from a creditor could further limit your company’s options to prevent liquidation.
There are several ways to respond to a statutory demand. You can dispute the debt by asking the court to dismiss the demand, raise cash to pay the creditor, enter into administration or propose a Company Voluntary Arrangement.
If your company has received a statutory demand, continue reading. You might be able to prevent the demand from leading to a winding up petition by implementing one of the solutions listed below.
When can a creditor send a statutory demand?
Sending a statutory demand is a relatively simple process that any creditor can initiate. Although only statutory demands for debts of £750 or more can lead to compulsory liquidation, a statutory demand can be delivered for any debt.
Although there are few restrictions on delivering a statutory demand, creditors typically only use statutory demands as a means of ensuring payment after other measures, such as direct reminders to your company, have failed.
What happens if your company ignores a statutory demand?
If your company ignores a statutory demand for a debt worth £750 or more, the creditor that delivered the demand can petition the court to begin compulsory liquidation against your company using a winding up petition.
This is an extremely serious development. When a winding up petition is issued, your company will be listed in The Gazette, typically resulting in the closure of its bank accounts and the loss of its access to credit.
If your company ignores the winding up petition and fails to enter into a formal insolvency procedure such as administration or a CVA, a winding up order can be issued by the court and your company could be closed and liquidated.
The most effective way to avoid this process is to act as quickly as possible when your company receives a statutory demand. Ignoring the demand can result in an incredible amount of legal pressure being placed on your company.
What options are available for companies that receive a statutory demand?
There are several ways your company can respond to a statutory demand. It can raise cash to pay the creditor, use an insolvency solution to protect itself against legal action or, if unviable, begin the liquidation process.
If your company is viable – it can realistically trade once its debts are paid – the following options are available in response to a statutory demand:
If possible, pay the debt immediately
If your company has the cash to pay its debts, pay them immediately. Ignoring a statutory demand can result in your company facing a serious risk of liquidation, making payment a preferable option.
Provided your company can manage its cash flow effectively, paying a debt that’s started to create pressure for your company is almost always the best option for your company, provided it is capable of continuing to trade effectively.
Loans and Financing
If your company doesn’t have the cash to pay its debts but would like to avoid the liquidation process or the use of an insolvency solution, it may be able to generate cash using a loan or financing agreement.
Loans are an ideal solution for companies that are facing pressure from creditors due to a short-term cash flow problem. If your business has a good credit score, it may be able to secure cash from a lender.
If your company is under serious financial distress, it may have fewer options for borrowing money than other businesses. Despite this, there are likely borrowing options available to help your company overcome its current issues.
Borrowing money to pay a creditor is only suitable for companies that can recover from their current cash flow issues. Lenders are unlikely to provide a loan if your company has little or no prospect of recovering from its cash flow problems.
Company Voluntary Arrangement
Is your company insolvent? If your company doesn’t have enough cash to pay its creditor upon receiving a statutory demand or has more liabilities than assets, it’s insolvent and restricted in its ability to trade.
When your company becomes insolvent, you need to ensure that all of your actions are made with the interests of your creditors in mind. This means stopping trading and considering an insolvency solution such as a CVA.
A CVA, or Company Voluntary Arrangement, is an insolvency procedure that shields your company from legal action from creditors and allows you to negotiate a long-term payment plan with creditors.
Like borrowing money to pay a creditor, a CVA is only suitable for companies that have a viable prospect of recovery. While proposing a CVA, you will need to show creditors that your company can recover and pay its debts successfully.
Provided your company can turn its financial affairs around and start trading as a successful business again, proposing a CVA after receiving a statutory demand is a good way to relieve pressure and start the road to recovery for your company.
If your company is insolvent and under pressure from its creditors after receiving a statutory demand, entering into administration is a powerful way to protect it from further action, such as a winding up petition.
Like a CVA, administration protects your company from being pursued by a creditor through the courts. Unlike a CVA, administration requires you to give control of your company to an administrator, who will then manage the company.
The administrator will attempt to pay creditors, often by leveraging the company’s existing cash flow and assets. Administration may result in the sale of some assets, as part of an effort to create liquidity and repay creditors.
Successful administration can result in the payment of creditors and an end to legal pressure. In some cases, the administrator may decide to implement a CVA or other insolvency procedure while the company is in administration.
Finally, administration can lead to a pre-pack administration sale, in which some of the company’s assets are pre-packaged and sold, often to the company’s directors via a new company, to raise cash that is used to pay creditors.
Once a creditor petitions the court to wind up your company, starting the voluntary liquidation process is no longer possible. If you believe your company has no future and would like to liquidate it, it’s important that you take action very quickly.
Upon receipt of a statutory demand, you have 21 days to decide the best course of action for your company before the creditors can receive a winding up petition and take control of the company’s future.
Entering into voluntary liquidation allows your company to generate cash to pay its creditors through the sale of its assets. It will result in the closure of your company and the end of its trading, although with fewer issues than compulsory liquidation.
A CVL, or creditor’s voluntary liquidation, is the most effective way to liquidate your company’s assets and close the business. Your company can enter into a CVL after it has received a statutory demand from a creditor and found out it is insolvent.
Finally, your company can ignore a statutory demand and face the prospect of being wound up by a court. Compulsory liquidation is a process that will result in the end of your company and, in some cases, create risks of wrongful trading charges.
In compulsory liquidation, a creditor is granted a winding up order against your company. This is a type of court order that results in the closure of your company and the sale of its assets to create liquidity and pay creditors.
Although the outcome of compulsory liquidation isn’t dissimilar to a CVL, it is a far riskier process. You could face charges of wrongful trading if you have not followed your duties as company director after receiving a statutory demand.
Get expert financial help
Has your company received a statutory payment demand from a creditor? Are you concerned about an outstanding debt affecting your company’s relationship with a creditor?
If your company is unable to pay its debts or has received a statutory demand from a creditor, taking immediate action can prevent the creditor from winding up your company and ending its ability to trade.
From proposing a CVA or entering into administration to raising cash using a loan to pay the creditor and end legal pressure, there are options available that can ensure your company recovers.
Contact us to speak to an insolvency expert and learn more about the options that are available to protect your company from legal action. We can provide help and assistance to ensure your company achieves the best financial and legal outcome.