What is a Statutory Demand?

There are two ways you can respond to a Statutory Demand. You can either:

• Comply with the demand and pay what you owe within 21 days (or some of what you owe if you can reach an agreement with the creditor); or  
• Apply to have the demand set aside, which means having it cancelled by the court. You must challenge the demand within 18 days of it being served. 

You may be tempted to ignore the demand, particularly if you think it has been sent to you in error or the amount is incorrect. However, you must respond one way or another within the appropriate timeframe or the creditor will be able to take further action against you which will be increasingly difficult to stop. 

If you do not pay the amount you owe or apply to set the demand aside, the creditor can take escalatory action. That’s not to say they will. Some creditors issue Statutory Demands to convince you to pay what you owe without wanting to take things further. However, with other creditors, such as HMRC, things can escalate very quickly. 

This is the likely course of events if you ignore a Statutory Demand in Scotland:

• The creditor can petition the court to wind up your company, using the unpaid Statutory Demand as proof that the business is insolvent.
• The creditor can issue a Winding Up Petition against you. It will be sent to your registered business address by recorded delivery or issued in person by sheriff officers.
• The petition will be advertised in the Edinburgh Gazette and become public knowledge. 
• Your bank will freeze your business’s bank accounts, making it very difficult to pay what you owe. Other creditors may also take legal action against you.  
• You have eight days to ‘lodge answers’ to the petition. The court will call a hearing to determine whether to grant a Winding Up Order.
• If a Winding Up Order is made by the Court of Session in Edinburgh, it sets in motion the Compulsory Liquidation of your company. Once the company has been liquidated, it will cease to exist.  

The speed of the process in Scotland means you must act quickly to save your company. Once a Winding Up Order has been made, there are limited grounds to cancel or rescind it.  

If you intend to challenge a Statutory Demand, you must do so within 18 days of the date it was served. You can apply in writing to the court named on the demand. You must have a genuine reason for your challenge or you could be held in contempt of court. 

There are several valid grounds for challenging a Statutory Demand, including:

• The debt amount is less than £750
• You dispute the debt amount (creditors may have applied charges you did not agree to or inflated the cost of their labour or time)
• The creditor may already hold security that exceeds the value of the debt
• You already have a repayment agreement in place with the creditor and have not missed any payments
• The creditor also owes you money
• The demand contains errors, the creditor used the wrong forms or served it incorrectly 

If the court accepts your challenge, it will arrange a hearing to discuss the debt in more detail. If the court sides with you during the hearing, it will set the demand aside and your creditor will be liable for the court costs.

Check the demand is valid

The first step is to check that the details on the demand are accurate and that it has been served correctly. In Scotland, creditors must use Form 5 to make a Statutory Demand. A sheriff officer must serve it at your registered office or your main place of business.

Negotiate a repayment plan

If you do not have genuine grounds to challenge the demand, the easiest way to resolve it is to pay the debt in full. If you cannot afford to do so, you may be able to negotiate with the creditor to pay in instalments. Your creditor may accept a sensible offer as it’s usually preferable to forcing you into liquidation.

Consider a Company Voluntary Arrangement (CVA)

If you cannot negotiate a payment plan and your business has other unsecured creditors, you may be able to enter into a Company Voluntary Arrangement (CVA). A CVA is a legally binding repayment plan. You will need the help of a licensed Insolvency Practitioner to draw up proposals and put the CVA in place. If your creditors accept your proposals, all legal action against you will cease and you can pay your debts via monthly instalments while continuing to trade.   

Enter into voluntary liquidation

If your company is no longer viable and has no realistic prospect of making a recovery, it’s in everyone’s best interests to close it voluntarily. Entering into a Creditors’ Voluntary Liquidation (CVL) helps you meet your legal duty as the director of an insolvent company to protect your creditors’ interests. You will appoint a licensed Insolvency Practitioner to act as the liquidator. They will repay your creditors as much as possible, wind your business down and any remaining debts will be written off.

Entering insolvent liquidation voluntarily is usually preferable to being forced into Compulsory Liquidation by a creditor. It gives you more control over the process, helps mitigate further losses and protects the directors from personal liability and wrongful trading accusations.  

You must act quickly if you have received or been threatened with a Statutory Demand. At Scotland Liquidators, our team of licensed Insolvency Practitioners will discuss your options and guide you on the best course of action. Get in touch for a free, same-day consultation or arrange a meeting at one of our offices in Scotland.