A statutory demand is a written demand for payment of a debt served on either an individual or a company. A statutory demand is not to be mistaken for a formal court document; it does not need to be issued at the court, nor does it initiate court proceedings. It does however express a clear intention to present a petition for bankruptcy (if the debtor is an individual) or winding up (if the debtor is a company) in the event the demand is ignored and the debt remains unpaid. If after three weeks from the date the statutory demand is served the debtor fails to make payment, the creditor then has grounds, under insolvency laws, to make an application for the debtor’s bankruptcy or winding up.
There are a number of rules which creditors must obey in both issuing a statutory demand and serving it on the debtor. Failure to serve a statutory demand in compliance with these rules can render the statutory demand ineffective, allowing the debtor to either set aside the statutory demand or, in the event the debtor has been made bankrupt or wound up, they can make an application to annul the order, irrespective of whether the debt is legitimate or not.
A creditor can only serve a statutory demand on a debtor where the debt is undisputed and equals or exceeds £750.00. If the statutory demand is served on a limited company, it should be served at the registered office of the company. If the statutory demand is served on an unregistered company, it should be served by leaving the statutory demand at the company’s main place of business or delivering the statutory demand to a director/officer of the business. Upon service, the debtor has 21 days in which to apply to set aside the demand.
A creditor can only serve a statutory demand on a debtor where the debt is undisputed and equals or exceeds £5000.00. In serving a statutory demand the creditor ‘must take all steps to make sure that the statutory demand comes to the attention of the individual’. Upon service, the debtor has 18 days in which to apply to set aside the demand.
What constitutes taking all steps?
Usually a process server will be instructed to attend the debtors address to hand deliver the statutory demand upon the debtor. This is referred to as ‘personal service’. In the event this is not possible, substituted service may be effected by other means, such as first class post or insertion through a letterbox.
If the creditor is aware the debtor either resides or has links to more than one address, under insolvency rules they are obliged to make attendances at all addresses before making substituted service. Similarly, if the creditor has a telephone number or email address for the debtor and they have made no attempt to bring the statutory demand to the attention of the debtor, under insolvency rules they cannot be deemed to have made ‘every attempt’.
Set aside and annulment proceedings can be very costly for both the creditor and the debtor. If a Judge rules that a statutory demand has been improperly served on a debtor, the creditor can be ordered to pay the debtors legal costs in bringing the application. Dependent on the value and complexity of the case, these costs can easily mount up. If the creditor is an individual or a small business, bearing the burden of paying such costs can be severely detrimental and in some circumstances drive them into insolvency.
We recently acted for an individual debtor in their application to annul a Bankruptcy order made against them by their local Council, with respect to outstanding Council tax. In this case, the Council petitioned for the debtors bankruptcy off the back of an unsatisfied statutory demand.
It was the case that the debtor was abroad when the demand was served on his address and, as such, was unaware of proceedings. Usually, it does not matter whether the debtor is abroad or not when a statutory demand is served, as long as substituted service has properly taken place where personal service is not possible.
The liability orders held by the Council linked the debtor to at least three different addresses. In addition to this, the Council had both a telephone number and email address for the debtor. Despite having these various methods of contact, the Council only instructed their process server to attempt service of the statutory demand at one of the addresses listed on their records. A couple of attempts were made to personally serve the demand at that address before substituted service was effected.
The Judge held that the Council had not, under insolvency rules, made every attempt to serve the statutory demand on the debtor and, as such, annulled the Bankruptcy order on a point of improper procedure. The annulment was granted despite there being no dispute that the Council tax was owed by the debtor.
The Judge ordered the Council to pay two thirds of the debtor’s legal costs in bringing the application to the court.
This case demonstrates the importance of following the correct procedures in serving a statutory demand on a debtor. Whether they are an individual or company, the cost implications on the creditor can be significant. Taking a more diligent approach can save unnecessary costs and time.