The rise of rogue statutory demands: “Give me your lunch money or else!”

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A statutory demand is a formal legal demand against an individual or company setting out the details and amount of a debt that is owed. Statutory demands set a timeframe of 21 days for the debtor to pay, failing which there are significant consequences.

If the debtor fails to pay within that time, the creditor can bring an insolvency petition against them. The implications are that from the moment the petition is issued in court (even prior to the hearing), the debtor will find it very difficult to get credit and face other issues such as being unable to enter new contracts, without a validation order. Therefore, debtors are typically very keen to avoid such a petition –  by paying the debt.

Commercially, if the petition is presented against a company, as soon as the petition is advertised, the company’s bank account will be frozen pending a final order.

Criteria of statutory demands and abuse of process

There are two key criteria for satisfying the use of a statutory demand. The first is that the debt must be a for a liquidated sum, i.e. a fixed amount (Section 267(2), Insolvency Act 1986). This is usually easy to satisfy.

The second criterion is more contentious in that the debt must be undisputed. Several issues can arise here:

  1. It is not for the creditor to decide what is a genuine dispute and often a creditor may discount what could be a genuine dispute.
  2. To use or continue with the statutory demand process when a genuine dispute has arisen can an amount to an abuse of process. This puts the creditor at risk of being on the receiving end of an injunction to prevent presentation of a petition and associated costs order.

Rising misuse of statutory demands

Against a backdrop of a politically changing landscape and increasing volatility in the marketplace due to the unresolved issues surrounding Brexit, managing cash-flow has become even more important to businesses. At IBB, we have seen a sharp increase in the number of creditors trying to recover funds that are overdue as quickly as possible.

One of the methods that we have seen is an increasing use of the statutory demand.

Unfortunately, many companies or individuals are relying on unregulated or uninformed “debt collectors” who promise the world without any consideration of the legality of their actions. Typically, they will operate on a ‘no-win no fee’ arrangement and so it is in their interests to recover funds or else they will not be paid.

This leads them to operating methods such as producing a statutory demand alongside adopting hostile tactics, harassment, threats and aggressive behaviour in their efforts to recover the alleged debt. Due to such aggressive tactics, many people/companies are coerced into paying or are too frightened not to pay.

Examples that we are aware of include “bailiffs” and “debt collectors” issuing statutory demands and then turning up at properties, without any court order, demanding immediate payment and threatening to take goods – despite no legal right to do so.

Additionally, there are many cases of harassment and persistent calling to try and get an alleged debtor to pay –  through pure persistence and wearing them down.

A good analogy would be that of the playground bully demanding lunch money from those that are frightened or just want to get on with their lives.

However, a significant number of those who pay the alleged “debts” claimed in statutory demands are unlikely to have been legally required to do so. Had they taken legal advice, they could have avoided being bullied into paying money that there was no legal obligation to pay.

How can I stand up to the ’bullies’?

 It is possible for a statutory demand to be set aside either in an agreement between the parties themselves or via the Courts. Likewise, if a statutory demand has been used improperly, it may be possible to obtain an injunction to prevent the presentation of a winding-up petition (for a company) or bankruptcy petition (for an individual).

If you are making a statutory demand or have received one, it is important that you seek legal advice on your position. Once a solicitor is involved and sets out the law and the grounds for disputing a statutory demand, often the other side will agree to set the demand aside.

If the matter ends up in court, which it can do within a matter of days, it can prove very costly to the losing party, if not both parties.

Typically, when bringing an action in court for the statutory demand to be set aside, the losing party pays the successful party’s legal costs on the indemnity basis. This is a higher level of costs award than is standard in court proceedings.

Therefore, if you are on the receiving end of one of these rogue demands, there are a number of steps you can take.

For more information on statutory demands or resolving a commercial or business dispute issue, please contact our experienced dispute resolution lawyers on 01895 207954 or email commercialdisputes@ibblaw.co.uk.