Receiving a statutory demand can be a daunting experience for any company director. The pressure is intense because statutory demands are a recognised gateway into formal insolvency proceedings. Ignoring one can lead to serious consequences, including a winding-up petition against the company.
Acting quickly is critical. Directors must assess their options without delay—whether that means paying the debt, challenging the demand, or preparing for potential insolvency. Understanding how statutory demands work, and what the deadlines really mean, can make the difference between resolving the issue and facing escalation.
A statutory demand is a formal written demand for payment of a debt used within the UK insolvency framework under the Insolvency Act 1986 and the Insolvency (England and Wales) Rules 2016. It is not a court order, but it is a legally recognised step that creditors can rely on when seeking to prove insolvency.
For companies, a statutory demand can be used to demonstrate that the company is unable to pay its debts if it is not paid, secured, or otherwise dealt with to the creditor’s reasonable satisfaction within the required period. For individuals, it is commonly used as a precursor to bankruptcy proceedings.
Statutory demands are generally used for liquidated debts, meaning debts for a fixed or readily calculable sum. This does not mean the debt is automatically undisputed. Where there is a genuine and substantial dispute, the use of a statutory demand may be inappropriate and open to challenge.
If a statutory demand is not properly dealt with, a creditor may rely on it as evidence to support insolvency proceedings. This makes it a serious legal warning rather than a routine payment reminder.
Ignoring a statutory demand also signals that a company may be approaching insolvency. At that stage, directors must be increasingly mindful of their duties, particularly where creditor interests may become relevant.
Key Deadlines and Thresholds
Understanding the statutory time limits and financial thresholds is essential.
For companies, a creditor may rely on a statutory demand if:
The debt is at least £750
The demand has been properly served
The debt has not been paid, secured, or otherwise dealt with within 21 days (three weeks)
For individuals, the thresholds and deadlines differ:
The debt must be at least £5,000
An application to set aside the demand must usually be made within 18 days
The debt must otherwise be dealt with within 21 days
If a creditor wishes to rely on a statutory demand to present a bankruptcy or winding-up petition, this is generally expected to happen within four months of service. If the creditor applies later than this, they must explain the delay to the court.
Key Time Limits:
18 days – Deadline for individuals to apply to set aside a statutory demand
21 days – Period after which a creditor may rely on non-compliance
4 months – Usual period for presenting a petition, subject to explanation if delayed
Missing these timeframes significantly increases the risk of escalation.
Immediate Risks for Directors If the Demand Is Ignored
Ignoring a statutory demand can lead to rapid escalation. If the debt remains unresolved, a creditor may present a winding-up petition after the relevant period has passed. Once a petition is filed, a company’s bank accounts are typically frozen, severely restricting its ability to trade.
Directors also face personal risks. If they continue trading while the company is insolvent, or when insolvency is unavoidable, they may face claims for wrongful trading under section 214 of the Insolvency Act 1986. Directors with overdrawn loan accounts may be required to repay them in full during liquidation, potentially creating personal financial exposure.
Director disqualification is another possible consequence where conduct falls below the required standard. While the receipt of a statutory demand does not automatically change directors’ duties, it is often a strong warning sign that insolvency may be approaching. Where a company is insolvent or bordering on insolvency, directors must have regard to the interests of creditors.
Failing to act responsibly at this stage can result in serious personal and legal consequences.
How to Respond Within the Relevant Period
Prompt action is essential. The correct response depends on whether the debt is accepted and whether the company or individual is solvent.
Payment or Settlement
Pay in Full: Paying the debt within the relevant period prevents the creditor from relying on the statutory demand.
Negotiate Payment: Creditors may agree to payment plans or settlements. Any agreement should be confirmed in writing.
Dispute and Legal Challenge
Apply to Set Aside (Individuals): Individuals who genuinely dispute the debt can apply to set aside the demand, usually within 18 days.
Seek an Injunction (Companies): Companies may apply to court to restrain the presentation of a winding-up petition where there is a genuine dispute, cross-claim, or other valid reason.
Formal Insolvency Options
Assess Insolvency Early: If the company cannot meet its debts as they fall due, directors should seek advice on options such as administration or liquidation.
Professional Advice: Insolvency practitioners or solicitors can help directors choose the most appropriate route and reduce personal risk.
Doing nothing is rarely a safe option.
Common Mistakes and Misconceptions
A frequent misconception is that a statutory demand is the same as a court order. It is not. However, ignoring it can lead directly to court proceedings.
Another common error is assuming that partial payment automatically prevents further action. Partial payment does not stop a creditor relying on a statutory demand unless the creditor agrees that the demand is satisfied or withdraws it. The remaining balance and the statutory debt thresholds remain crucial.
Some directors believe that ignoring a statutory demand will buy time. In practice, it often has the opposite effect, encouraging creditors to escalate matters more quickly.
Understanding what a statutory demand does—and what it does not do—is essential to making informed decisions.
Illustrative Scenarios for Directors
A director receives a statutory demand from HMRC for unpaid VAT exceeding £750. The director engages with HMRC promptly and seeks a Time to Pay arrangement. If agreed, this can prevent HMRC from relying on the statutory demand and allow the business to continue trading.
In another case, a trade creditor issues a statutory demand for an invoice that is genuinely disputed. The director gathers evidence showing the dispute and applies for an injunction to restrain a winding-up petition. Alternatively, where the debt is undisputed and affordable, paying it within the required period avoids further action.
Both scenarios underline the importance of early, informed intervention.
FAQs
1. Can I ignore a statutory demand if I think the debt is unfair?
No. Even if the debt is disputed, ignoring a statutory demand is risky. Individuals should apply to set it aside, and companies should consider seeking an injunction where appropriate.
2. What happens if I cannot pay within the required period?
A creditor may present a winding-up or bankruptcy petition. Immediate advice should be sought to explore alternatives.
3. Does paying part of the debt stop the process?
Not automatically. Unless the creditor agrees to withdraw the demand, partial payment alone does not prevent further action.
4. What if the creditor refuses to negotiate?
If there is a genuine dispute or other valid grounds, legal remedies may be available. Professional advice is essential.
5. Can I rely on future income to prove solvency?
Solvency is assessed by reference to current liabilities and assets. Future income alone is not decisive.
6. What if I miss the 21-day period?
The creditor may rely on the statutory demand to begin insolvency proceedings. Urgent advice should be sought.
7. Is a statutory demand the same as a CCJ?
No. A statutory demand is an insolvency tool, while a CCJ is a court judgment following litigation.
8. How do I show there is a genuine dispute?
You must provide evidence showing the dispute is real and substantial, such as contracts or correspondence.
9. Can I use personal funds to protect the company?
This is possible but should be carefully documented and professionally advised to avoid personal risk.
10. Do I need professional advice?
Yes. Statutory demands have strict deadlines and serious consequences. Expert advice is strongly recommended.
11. What if the demand was served incorrectly?
Improper service may provide grounds for challenge, but time limits still apply once you become aware of it.
12. Can the court extend the statutory time limits?
Extensions are not automatic. Legal advice should be sought immediately if timing issues arise.
Your Next Step
A statutory demand should never be ignored. Directors must act quickly to understand their company’s financial position, assess whether the debt is valid, and decide on the correct response.
Early professional advice can prevent escalation, reduce personal exposure, and help preserve value where possible. The earlier action is taken, the more options remain available.
