STATUTORY DEMANDS

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"USARY, TOO OFFENDS THE GOODNESS DIVINE AND THEREFORE SHE TAKES HER OWN PLACE IN THE LAST ROUND OF THE SEVENTH CIRCLE" OF HELL'S INFERNO

Our quote above is taken from Dante's Inferno to explain the eternal condemnation of the most detestable of sinners conceivable. Those whose sins run so far contrary to law, nature and the will of all that is good and holy that the only place fit for their irredeemable souls is the 7th layer of the abyss. We talk of course about unrepentant debtors.

Regretfully, the epic poem Dante's Inferno is not recognised by the courts of England & Wales as an authority to either bankrupt a hopeless debtor or liquidate a hapless company nor does the church in general support the notion that all debtors are thrown into the abyss for eternity. Due to these disappointing matters aforesaid, we are pleased to provide this comprehensive overview of a precursor to insolvency being the fabled Statutory Demand.

This article begins with a synopsis of the key information in the form of a Question & Answer. The content is then expanded upon in chapters which includes the relevant cases filling the gaps in the Insolvency Rules. It is specifically written from the perspective of the creditor and thus does not touch on defences to potential insolvency proceedings. As usual nothing in this article constitutes legal advice and you are referred to the terms of use of our site accordingly.

SYNOPSIS Q&A

WHAT IS A STATUTORY DEMAND?

A statutory demand is a written ultimatum for payment of a debt served against either:

An Individual, pursuant to section 268(1)(a) Insolvency Act 1986. Or;
A Registered Company, pursuant to section 123(1)(a) Insolvency Act 1986. Or;
An Unregistered Company pursuant to s.222(1) Insolvency Act 1986.

The legal distinctions are important as failure to comply with the requirements of the Insolvency Act 1986 will invalidate the statutory demand i.e. its consequences in the event of a default will not bite. As explained below, a standard document of a statutory demand against an individual cannot be used against a company.

In practice, statutory demands are used as a precursor to insolvency proceedings..

WHAT IS A DEBT?

The definition of a 'debt' varies depending on whether the debtor in question is an individual or a corporate entity. In both cases, the definition of 'a debt' is derived from whether the subsequent insolvency action would result in either a bankruptcy or a winding up petition. For the avoidance of doubt, 'corporate entity' includes 'unregistered companies' that are discussed further below.

Individuals: Pursuant to s.267(2)(b) Insolvency Act 1986 a bankruptcy petition my be presented only on the basis of a debt for a liquidated sum. The debt must be for a specific amount which has been fully and finally ascertained. Consequently, it appears that the meaning of 'a debt for a liquidated sum' would not extended to a claim for damages in tort but may include a claim for liquidated damages or similar in contract.
Companies: Pursuant to rule 14.1(3) Insolvency Rules 2016: (3) "Debt" in relation to winding up an administration, means (subject to the next paragraph) any of the following: - (a) any debt or liability to which the company is subject at the relevant date; (b) any debt or liability to which the company may become subject after the relevant date by reason of any obligation incurred before that date; (c) any interest provable as mentioned in rule 14.23.

What all that means; is a 'debt' is a specific figure e.g. £751 as opposed to 'owes me money' and it needs a recognisable basis e.g. work undertaken pursuant to a contract.

WHAT ABOUT JUDGEMENT DEBTS?

Should the court have ordered the vanquished Judgement Debtor to pay a sum of money to a victorious Judgement Creditor then there is no need to serve a statutory demand prior to commencing either a bankruptcy or a winding up petition.

WHAT IS THE MINIMUM DEBT THAT A STATUTORY DEMAND SHOULD BE USED FOR?

For a statutory demand to have any teeth and in relation to company, the minimum debt is any sum in excess of £750 i.e. £750.01 or above. For an individual, it is any sum in excess of £5000 i.e. £5000.01 or over. To expand:

An individual whom fails within 21 days, to comply with a statutory demand for a debt of £5000 or more is treated as being unable to pay the debt and is at risk of bankruptcy proceedings. Pursuant to section 267(4) Insolvency Act 1986, the Secretary of State may set "The bankruptcy level" from £750 by statutory instrument. The Insolvency Act 1986 (Amendment) Order 2015 (SI 2015/922) sets the bankruptcy level at £5000.
A Registered Company that fails within 21 days to comply with a statutory demand for a debt exceeding £750 is deemed to be unable to pay its debts and is at risk of winding-up. This is pursuant to section 123(1)(a) Insolvency Act 1986.

Technically, a Statutory Demand can be used for any sum as the figures setout above are in respect of bankruptcy and winding-up petitions respectively but for any sums below the bankruptcy levels, they would be without legal consequence.

WHAT ARE THE 'PRESCRIBED FORMS' OR 'STANDARD DOCUMENTS' FOR A STATUTORY DEMAND?

Prior to the introduction of the Insolvency Rules 2016 on the 6th April 2017, there were 'Prescribed Forms' i.e. specific documents that had to be used and are still referred to in the Insolvency Act 1986. These are no longer used and have been replaced with non-obligatory 'Standard Documents.' These are:

Standard Demand From 1 - Debt owed by a company (SD1).
Standard Demand Form 2 - Debt owed by an individual payable immediately (SD2).
Standard Demand Form 3 - Debt payable at a future date (SD3). And;
Standard Demand Form 4 - A Judgement Debt (SD4).

His Majesty's Government Courts & Tribunal Services (HMCTS) provides the recommended Standard Documents that include the mandatory information prescribed by the Insolvency Act 1986 free of charge via the UK.gov website. These Standard Dorms can be accessed by clicking here.

In relation to companies, pursuant to para. 9.1 Practice Direction Insolvency Proceedings, statutory demands on which a winding-up petition is then based must now “as far as possible, follow” the HMCTs Form SD1. This is a more prescriptive formal requirement than in the Insolvency Rules 2016, which instead simply prescribe the content of a statutory demand in these circumstances pursuant to rules 1.9(2) and 7.3, Insolvency Rules 2016.

HOW IS A STATUTORY DEMAND SERVED?

'Service' can be described as officially delivering a document to the intended recipient. In the context of a statutory against:

An Individual: Pursuant to r.10.2 Insolvency Rules 2016, when serving a statutory demand, the creditor 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." The rules of service under CPR Part 6 do not apply. Where personal service is not practicable, it may be appropriate to send the demand by e-mail, first class post or delivering it to the person’s residence.
A Company: Pursuant to section 436B Insolvency Act 1986 a statutory demand must be served as a hard copy. Pursuant to s.123(1)(a) Insolvency Act 1986, a statutory demand should be served on a company by leaving it at the company's registered office. In the event that the company’s registered office has closed, leaving it at the Directors’ residences has been deemed adequate (re Fortune Copper Mining Company (1870) L.R. 10 Eq. 390).

In practice, a process server should be used failing which; recorded delivery or personal service should be sufficient. What the court needs to be satisfied of when considering any type of insolvency petition is evidence of service. This can take the form of a Certificate of Service by a solicitor, a witness statement from the server e.g. the process server or proof of recorded delivery. The 21 days starts from day after service.

WHAT IF THE DEBTOR IS OUTSIDE OF ENGLAND & WALES i.e. THE JURISDICTION?

A statutory demand is not considered a court document and so the creditor does not require the court's permission to extend time for service accordingly. But, what is altered are the time limits debtors have to challenge the statutory demand which vary depending on whether the debtor is an individual or corporate entity.

Individuals: Pursuant to rule 10.1(10) Insolvency Rules 2016 the time limits of 18 and 21 days referred to in sub- paragraph 10.1(1)(m) and (n) Insolvency Rules 2016 must be amended as follows:
(a) Any reference to 18 days there must be substituted by the number of days which is the appropriate number of days set out in the table accompanying the Practice Direction supplementing Section IV CPR Part 6 plus 4 days; AND;
(b) Any reference to 21 days there must be substituted by the number of days which is the appropriate number of days set out in the table accompanying the Practice Direction supplementing Section IV CPR Part 6 plus 7 days.
An overseas company is included within the definition of an unregistered company. In accordance with the table of requirements for service in Schedule 4 Insolvency Regulations 2016, service should be effected in accordance with section 222(1)(a) Insolvency Act 1986.

HOW LONG DOES A DEBTOR HAVE TO PAY A STATUTORY DEMAND AFTER SERVICE?

A debtor whether any type company or an individual has 21 days from service of a statutory demand to settle the debt or face insolvency proceedings. Against an individual that would take the form of bankruptcy, while a company should face winding-up proceedings and thereafter, liquidation.

WHAT ARE THE CONSEQUENCES OF FAILING TO SATISFY A STATUTORY DEMAND?

For a commercial debtor i.e. a company, the creditors may proceed with a winding-up petition that if granted would put the company into liquidation. This is because the company is automatically deemed unable to pay its debts. For an individual, the creditors my proceed with bankruptcy petition as the individual is automatically deemed unable to pay or to have no reasonable prospect of being able to pay their debts. To expand upon this with the law:

For an Individual: Pursuant to section 267(1) & (2)(c) Insolvency Act 1986; a creditor can proceed with an bankruptcy petition if the debt, or each of the debts, is a debt which the debtor appears either to be unable to pay or to have no reasonable prospect of being able to pay. Pursuant to section 268(2)(a) Insolvency Act 1986, the debtor appears to have no reasonable prospect of being able to pay a debt if, but only if, the debt is not immediately payable and

For a Company: Pursuant to section 122(1)(f) Insolvency ACT 1986, the circumstances that a company may be wound up by the court includes when the company is unable to pay its debts. Pursuant to section 123(1) Insolvency Act 1986 a company is deemed unable to pay its debts when a creditor (by assignment or otherwise) to whom the company is indebted to in a sum exceeding £750 has served on the company, by leaving at the company's registered office a written demand (in the prescribed form) requiring the company to pay the sum so due and the company has from 3 weeks thereafter neglected to pay the sum or to secure or compound for it to be reasonable satisfaction of the creditor.

What all that means is your creditors will put notice in the gazette that they are making you insolvent and thereafter, a court will likely liquidate you.

WHAT HAPPENS IF THE DEBTOR SETTLES THE CLAIM I.E. FINALLY PAYS UP?

Pursuant to section 123(1) & 267(2) Insolvency Act 1986, the creditor is not entitled to rely on a statutory demand as the basis for the presentation of a bankruptcy or winding-up petition if the debtor either:

Pays the debt in full.
Discharges part of the debt owing to the creditor, so the amount of the outstanding debt is reduced to below £750 for companies or £5,000 for individuals i.e. reduces it below the minimum.

In either case, the debtor may require the creditor to withdraw the statutory demand. There is no formal procedure for withdrawing a demand. In practice, the creditor may simply confirm in writing that the statutory demand is withdrawn should they so wish and/or the creditor may also give an undertaking not to present a petition on the basis of the demand.

WHAT ARE THE COSTS?

There is no cost for downloading a statutory demand from the HMCTS website. The price of service depends on whether you wish to use a process server or the other methods described above. These fluctuate rapidly and you should contact the relevant the vendor directly.

Should you wish a solicitor-advocate to review, advise and/or draft the papers then we direct you to the contact form below.

WHAT IF MY DEBT IS STAUTE-BARRED?

You are negligent.

AGAINST INDIVIDUAL DEBTORS

The rules relating to statutory demands in the context of personal insolvency are in rules 10.1-10.5 of The Insolvency (England and Wales) Rules 2016 (SI 2016/1024) (IR 2016) and paragraphs 11 Practice Direction on Insolvency Proceedings (PDIP).

Prior to 6 April 2017, and the Insolvency Rules 2016 replacing the Insolvency Rules 1986, there were 'the Prescribed Forms' of statutory demands for service on an individual. These forms are no longer used.

Instead, the HMCTS has published 'the Standard Demand Forms' which can be accessed by clicking here.

SD1 debt owed by a company
SD2 (debt payable immediately),
SD3 (debt payable at a future date) and
SD4 (judgment debt).

A statutory demand must name one or more individuals with whom the debtor may communicate with a view to securing or compounding the debt, or establishing to the creditor’s satisfaction that there is a reasonable prospect that the debt will be paid when it falls due rule 10.1(3), Insolvency Rules 2016. The individual's postal address, electronic address and telephone number (if any) must be given.

A statutory demand must be dated and authenticated either by the creditor or by a person who is authorised to make the demand on the creditor’s behalf rule 10.1(5), Insolvency Rules 2016. In relation to authentication, see rule 1.5 Insolvency Rules 2016.

Further, a statutory demand which is authenticated by a person other than the creditor must state that the person is authorised to make the demand on the creditor’s behalf and state the person’s relationship to the creditor. For an explanation of the term "authenticated."

Interest

Should the demand sum claimed include interest or any other charge accruing from time to time, then the amount or rate of the charge must be separately identified, and the grounds on which payment of it is claimed must be stated. The amount claimed for such charges must be limited to that which has accrued at the date of the demand rule 10.1(7)-(8), Insolvency Rules 2016.

Security

Should the creditor hold any security in respect of the debt, the full amount of the debt must be specified but the Statutory Demand must:

Specify the nature of the Security and the value which the creditor puts upon it at the date of the demand.
Claim payment of the full amount of the debt only, less the specified value of the security.

AGAINST CORPORATE DEBTORS

The rules relating to statutory demands in the context of corporate insolvency are contained in rules 7.2 & 7.3 Insolvency Regulations 2016.

As stated above, there are no longer any prescribed forms. However, pursuant to para. 9.1 Practice Direction Insolvency Proceedings, statutory demands on which a winding-up petition is then based must now “as far as possible, follow” the HMCTs Form SD1. This is a more prescriptive formal requirement than in the Insolvency Rules 2016, which instead simply prescribe the content of a statutory demand in these circumstances be in accordance with rules 1.9(2) and 7.3, Insolvency Rules 2016.

Pursuant to rule 7.3(1) Insolvency Regulations 2016, a statutory demand must be headed either:

"Statutory Demand under section 123(1)(a) of the Insolvency Act 1986: if it is to be served on a registered company.
"Statutory Demand under section 222(1)(a) of the Insolvency Act 1986", if it is to be served on a unregistered company

Rule 7.3(1) Insolvency Regulations 2016 provides a full list of of the mandatory information that a statutory demand must also contain.

Why Serve a Statutory Demand?

The principle reason a creditor serves a statutory demand is to provide evidence of a debtor’s inability to pay their debts in support of a subsequent winding-up petition (aka liquidation proceedings) pursuant to sections 122(1)(f) & 123(1) Insolvency Act 1986.

The circumstances in which a company is deemed to be unable to pay its debts are defined in section 123 Insolvency Act 1986. These are:

Section 123(1)(a) Insolvency Act 1986: Should a creditor to whom the company is indebted in a sum exceeding £750 then due has served on the company, by leaving it at the company's registered office, a statutory demand and the company has, for three weeks, neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditors.
Section 123(1)(b)-(c) Insolvency Act 1986: Execution or other process issued on a judgment, decree or order of any court in favour of a creditor is returned unsatisfied in whole or in part in England and Wales
Section 123(1)(e) Insolvency Act 1986: it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due.
Section 123(2) Insolvency Act 1986: it is proved to the satisfaction of the court that the company is insolvent on a balance sheet basis as per BNY Corporate Trustee Services Ltd v Eurosail-UK 2007-3BL Plc [2013] UKSC 28 (09 May 2013)

Consequently, in the compulsory liquidation regime, serving a statutory demand provides one way of establishing a company’s inability to pay its debt but it is not necessary for creditor to have to serve a statutory demand on a debtor before presenting a winding-up petition to the court. Pursuant to s.122(1)(f) Insolvency Act 1986, the creditor may be able to establish that a company is unable to pay its debt by relying upon such evidence as:

The company's accounts or statements made by officers or employees of the company.
Pursuant to s.123(1)(e) Insolvency Act 1986, the failure by the company to pay a debt that is due and undisputed.

That being said when considering the winding up of a company, case law strongly suggests that the courts favor a measured approach:

Re a Company (No 006798 of 1995) [1996] 1 WLR 491: save for in exceptional circumstances, the creditor should first demand the sum due and give the debtor an opportunity to pay.

Petitioner v Company [2021] EWHC 2905 (Ch): The above principle was reinforced.

Cornhill Insurance Plc v Improvement Services Ltd [1986] 1 WLR 114: However, a creditor may rely on the non-payment of one debt owed to it to prove the company’s general inability to pay its debts without having served a statutory demand.

AGAINST UNREGISTERED COMPANIES

An 'Unregistered Company' is an umbrella term that includes any corporate body, incorporated in and carrying out business in England & Wales. The principal place business should be located in the jurisdiction. In general, it refers to any corporate or business entity that does not fit the definition of 'a company' within the meaning of the Company Act 2006, Company Act 2009.

For the purposes of the Unregistered Companies Regulations 2009 (SI 2009/2436), an Unregistered Company is any body corporate incorporated in and having a place of business in the UK other than:

A body incorporated by, or registered under a public general enactment.
A body not formed for the purpose of carrying on business that has for its object the acquisition of gain by the body or its individual members.
An open-ended investment company.

A protected cell company registered under Part 4 of the Risk Transformation Regulations (SI 2017/1212).

A body exempted from section 1043 of the Company Act 2006 by a direction of the Secretary of State under subsection (1)(c) of that section.

Examples include general partnerships such as small consultancies or dentists, sole traders and voluntary organisations.

That being said, Schedule 4 Insolvency Regulations 2016 includes an overseas company within the definition of an unregistered company. In accordance with section 222(1)(a) Insolvency Act 1986.

In consideration of winding up an overseases company, the court established a 3-Part test in Stocznia Gdanska SA -v- Latreefers Inc. [2000] EWCA Civ 36:

WHAT DEBTS CAN A STATUTORY DEMAND BE USED FOR?

The definition of 'a Debt' in the context of personal insolvency can be found under s.267(2)(b) Insolvency Act 1986 while for corporate entities both registered and unregistered it is found in rule 14.1 Insolvency Rules 2016. In both cases, it refers to a liquidated sum with a clear legal basis.

Individuals: Pursuant to s.267(2)(b) Insolvency Act 1986 a bankruptcy petition may be presented only on the basis for a liquidated sum. The debt must be for a specific amount which has been fully and finally ascertained. Consequently, it appears that the meaning of 'a debt for a liquidated sum' would not cover a claim for damages under tort but would a specified sum owed pursuant to contract.
Companies: Pursuant to rule 14.1(3) Insolvency Rules 2016: Debt in relation to winding up an administration, means any of the following: - (a) any debt or liability to which the company is subject to at the relevant date; (b) any debt or liability to which the company may be become subject after the relevant date by reason of any obligation incurred before that date; (c) any interest provable as mentioned in rule 14.23 Insolvency Rules 2016.

That being said and in relation to individual insolvency only:

McGuiness -v- Norwich and Peterborough building Society [2011] EWCA Civ 1286: Pattern LJ held obiter (paras 36 & 51) that: "

A liquidated sum [could include] a contractual formula or contractual machinery which, when operated would produce a figure."

Assigned Debts

Pursuant to s.123(1)(a) Insolvency Acts 1986, where there has been a legal assignment of the debt the assignee (but not the assignor) may serve a statutory demand on the debtor. Where the debt has been assigned, the creditor must provide details in the statutory demand as per for:

Individuals: Rule 10.1(g) Insolvency Rule 2016. And;
Companies: Rule 7.3(g) Insolvency Rules 2016.

Foreign Currency

Yes, pursuant top rule 14.21 Insolvency Rules 2016 it is possible to serve a statutory demand in respect of a foreign currency. There is no requirement for the amounts to be converted into GBP but, the court will thank you to do so.

Secured Debts

When serving a statutory demand on an a debtor whom is an Individual rule 10.1(9) Insolvency Rules 2016 requires the creditor to state whether a security is held and if so provide the details of that security. This is found near the end of all Standard From Documents for individuals. BUT BE WARNED, a secured creditor whom makes his hopeless debtor bankrupt generally loses their security under s.269 Insolvency Act 1986.

Should there be any doubt as to what would constitute a secured debt this can be resolved by referring to s.383(2) Insolvency Act 1986 and for the avoidance of such doubt, a secured debt includes a mortgage, charge, lien or other security over any property of the hopeless debtor. What should also be noted is that secured debt does not include that held by a third party.

As for companies, the fact that a creditor holds a security does not in itself prevent a petitioning creditor from winding up a company and there is nothing under rule 7.3 Insolvency Rules 2016 requiring the security to be stated.

Guarantors & Sureties

A guarantor is a surety. The term is general refers to a person whom undertakes to satisfy a payment or performance obligation owed by another person to a third party.

White -v- Daveham Trust Ltd [2011] EWCA Civ 747: The Court of Appeal held there was no injustice to a surety by the making of a satutory demand due to the underlying and undisputed liability secured by guarantee.

By contrast, the court shall likely find it to be inappropriate where the debt is genuinely disputed. pursuant to Remblance -v- Octagon Assets Ltd [2009] EWCA Civ 581:

HOW WE CAN HELP

To be accurate when referring to our opening quote, Dante also threw the bankers, fraudster, accountants, bookkeepers and just about everyone involved in the financial system into the 7th layer of hell's inferno which he himself walks through guided by Vergil. Should you be in receipt of a statutory demand, require a guide to get you out of debt or need to liquidate such sinners as described herein we have experience in both divining, securing and taking possession of their assets whether they be individuals or corporate debtors.