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The Use (and Abuse) of Statutory Demands

24 Mar 2015

The recent restructuring of Court fees for money claims will result in many creditors paying substantially increased amounts to commence legal proceedings to recover debts owed to them.

Under the new structure, the fee to commence a Court issued claim seeking to recover more than £10,000 is now 5% of the amount claimed up to a maximum fee of £10,000 for issuing a claim of £200,000 or more.

Naturally, creditors will be considering alternatives to starting Court proceedings. Mediation offers an alternative, but this depends upon the willingness of the other side to engage in the process.

A creditor who is faced with a refusal to pay a clearly owed debt may consider issuing a statutory demand requiring payment within 21 days. If a statutory demand is not complied with or challenged, the debtor is deemed unable to pay its debts.  If the debtor is an individual, this gives grounds for the creditor to present a bankruptcy petition. A winding-up petition can be presented to put a debtor company into liquidation.

As a statutory demand is not a Court document, no Court fee is payable for it to be issued. If the debtor complies with the statutory demand by making payment within 21 days, the creditor will have achieved a quick and cheap means of recovering its debt – job done.

But what if the debtor disputes the amount demanded?

A debtor served with a statutory demand who disputes the amount claimed may apply to the Court for it to be set aside (if an individual) or for an injunction to restrain the presentation of a winding-up petition (if a company). In either case, this will involve the issue of Court proceedings that will expose the parties to the risk of paying the other side’s legal costs if they lose.

This is where the statutory demand procedure becomes risky for the creditor. Statutory demands are only appropriate where there is an undisputed debt in excess of £750 (for individuals, that amount will be increased to £5,000 from October 2015). The Courts have repeatedly emphasised that it is not appropriate to issue (or threaten to issue) a winding-up or bankruptcy petition as a means of putting the other side under pressure to pay where there is a substantial dispute raised on bona fide grounds. In such cases the Court will normally order the creditor threatening winding-up or bankruptcy to pay the (alleged) debtor’s costs on an indemnity basis.

If that happens, the creditor is in a worse position than when they started. Not only will they have to pay the other party’s costs (which may be substantial) as well as their own, their only remaining option to recover the debt is to commence Court proceedings – but having lost valuable time compared to had they done so at the outset.

The key lesson is that, whilst a statutory demand is capable of being a valuable weapon to recover a debt which is not genuinely disputed, careful thought must always be given before the statutory demand is issued. Creditors who indiscriminately issue statutory demands for all claimed debts without considering whether there are legitimate reasons for non-payment stand a high chance of getting their fingers burned (and their wallet lightened) if the recipient goes to Court to seek an order that the statutory demand be set aside or an injunction to restrain the presentation of a winding-up petition.

Seeking professional advice at the outset will enable the options available to the creditor to be properly assessed and help to avoid the potential pitfalls.

For further information, please contact Neil Harrold, Partner at Hay & Kilner

Call: 0191 232 8345

Email: Neil Harrold@hay-kilner.co.uk