A statutory demand is one of the most unsettling letters a company director can receive. It is a formal demand for payment, and the clock starts ticking from the day it is served. Ignore it, and a creditor can ask the court to wind up your company.

The good news is that 21 days is enough time to act, provided you use it well. In this guide, Parker Walsh and Licensed Insolvency Practitioner Molly Monks F.I.P.A. explain what a statutory demand means for your company, the options open to you and the mistakes that make matters worse.

What is a statutory demand?

A statutory demand is a formal written demand for payment of a debt, made under section 123(1)(a) of the Insolvency Act 1986. For a limited company, a creditor can serve one where it is owed more than £750 and the debt is due.

It is not a court order or a County Court Judgment, and it is not recorded on a public register. It does, however, carry real legal weight. If the company does not pay, secure or settle the debt to the creditor's reasonable satisfaction within three weeks of service, the company is treated as unable to pay its debts. That gives the creditor the evidence it needs to present a winding-up petition.

Statutory demands are usually served at the company's registered office. If your registered office is your accountant's address or a virtual office, make sure post is forwarded promptly. Days lost in a mail tray are days you cannot get back.

What happens when the 21 days run out?

If the deadline passes without payment, agreement or a challenge, the creditor can petition the court to wind up the company. Once a petition is presented and advertised, the consequences escalate quickly:

• Banks commonly freeze company accounts once they become aware of the petition, usually after it is advertised in The Gazette.

• Payments made by the company after the petition is presented can be void unless the court validates them.

• Some rescue routes become harder to use. For example, directors cannot appoint an administrator using the out-of-court route while a winding-up petition is outstanding.

• If a winding-up order is made, the company enters compulsory liquidation and the Official Receiver takes control.

The statutory demand stage is where directors have the most choice. Once a petition is advertised, options narrow, costs rise and decisions are made against a timetable set by the court rather than by you.

It is also worth knowing that not every creditor serves a statutory demand first. HMRC and other creditors can present a petition using other evidence that the company cannot pay. If you have received a demand, treat it as an early warning you are fortunate to have had.

Your first steps after receiving a statutory demand

Use the first couple of days to get a clear picture before making any decisions:

• Note the date of service. Work out the 21-day deadline and put it in your diary with reminders.

• Check the details. Confirm who the creditor is, what they say is owed and whether the figure is correct. Check whether any of it has been paid or is disputed.

• Look at the whole picture. One demand is often a sign of wider pressure. Gather your latest accounts, bank balances, a list of creditors and any HMRC correspondence.

• Take advice early. A licensed insolvency practitioner can tell you whether the company is insolvent and which options are realistic. If you dispute the debt, you will also need a solicitor.

If you are unsure whether the company is insolvent, our free Is My Company Insolvent? checker is a useful starting point before you speak to us.

What if you dispute the debt?

If the company genuinely disputes the debt, it should tell the creditor in writing straight away, setting out the reasons. If the creditor still threatens to petition, the company can apply to court for an injunction to restrain the presentation of a winding-up petition. The courts do not allow winding-up proceedings to be used as a debt collection tool for debts that are genuinely disputed on substantial grounds.

The same applies where the company has a genuine counterclaim that would reduce the balance to £750 or less. Either way, you need a solicitor quickly. An injunction application has legal costs, but it can be far cheaper than dealing with an advertised petition.

Your options if the company cannot pay

If the debt is owed and the company cannot pay it in full, you still have several routes. The right one depends on whether the business is viable and how many creditors are pressing.

• Negotiate with the creditor. Many creditors would rather be paid over time than spend money on court action. If you agree a payment plan or a withdrawal, get it in writing.

• Time to Pay with HMRC. If HMRC served the demand, a realistic repayment proposal supported by cash flow forecasts may resolve it. See our guide to HMRC Time to Pay arrangements.

• Company Voluntary Arrangement. If the business is viable but weighed down by debts to several creditors, a Company Voluntary Arrangement (CVA) lets it repay an affordable amount over time whilst continuing to trade.

• Administration. If the company needs protection from creditor action whilst a rescue or business sale is arranged, company administration provides a statutory moratorium. Acting before a petition is presented keeps more appointment routes open.

• Creditors' Voluntary Liquidation. If there is no realistic route back, directors can choose a controlled closure through a Creditors' Voluntary Liquidation (CVL) rather than waiting for a court to impose compulsory liquidation. Eligible directors who were also employees may be able to claim director redundancy.

Be careful about simply paying off the demand if the company is already insolvent. Once a company is insolvent, directors' duties shift towards creditors as a whole, and a liquidator would later review significant payments made in the run-up to insolvency. Take advice before paying one creditor ahead of the rest.

What not to do

The weeks after a statutory demand arrives are when well-meaning directors most often make their position worse. Avoid the following:

• Ignoring it. It will not go away, and silence makes a petition more likely.

• Moving money or assets out of the company. Transferring cash, vehicles or equipment to yourself or a connected business for less than full value can be reversed and will be reported on.

• Paying yourself or favoured creditors first. Repaying a director's loan, a family member or a friendly supplier ahead of others can lead to personal claims against you.

• Taking on new credit to trade through. If there is no reasonable prospect of avoiding insolvent liquidation, continuing to run up debt can expose directors to wrongful trading claims.

• Waiting for a petition before seeking advice. By then, your options are narrower and the timetable belongs to the court.

For more on how director conduct is reviewed, read our article on directors' personal risks in company liquidation.

Statutory demand or winding-up petition: what is the difference?

A statutory demand is a formal warning from a creditor. It is served without going to court and creates a presumption that the company cannot pay its debts if it is ignored. A winding-up petition is a court application to close the company. It is advertised publicly, triggers action by banks and leads to a court hearing.

If a petition has already been presented, read our free Director's Guide to Winding-Up Petitions and find out whether you can still put your company into a CVL after receiving a winding-up petition. Then contact us urgently.

How Parker Walsh can help

Molly Monks F.I.P.A. is our in-house Licensed Insolvency Practitioner, with more than 20 years' experience advising directors under creditor pressure. In a free, confidential consultation, we will review the demand, the company's wider finances and the options that are realistically open to you, with clear costs from the outset.

Call 0161 546 8143, message us on WhatsApp on 07822 012199, or book a free consultation with Molly. The sooner we speak, the more choice you keep.

FAQs

Does a statutory demand affect my company's credit rating?

A statutory demand is not recorded on a public register, so it does not appear in the way a County Court Judgment or an advertised winding-up petition would. Leaving it unresolved, however, can lead to both.

Can HMRC serve a statutory demand?

Yes, HMRC can serve a statutory demand for unpaid tax. It can also present a winding-up petition without one, so silence after missed payments is not a reason to relax.

I have received a statutory demand personally as a guarantor. Is that different?

Yes. A demand served on you as an individual can be challenged by applying to set it aside within 18 days, and a bankruptcy petition requires a debt of at least £5,000. Our article on whether personal guarantees will be enforced explains more, but take advice quickly.

Can I still put my company into liquidation after receiving a statutory demand?

Yes. Placing the company into a Creditors' Voluntary Liquidation before any petition is presented is usually simpler and gives you more control than responding after court action has begun.

Will paying part of the debt stop a winding-up petition?

Not necessarily. Unless the creditor agrees in writing to hold off, or the balance falls to £750 or less, it can still petition, so always put any payment plan in writing.

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