If your business is having cash flow problems, it is also quite likely that you are behind with payments to some of your creditors.  One action your creditors may take to recover the money they are owed, is to issue a statutory demand.  A statutory demand is a formal document requesting payment within 21 days.  It is a sign that the creditor is taking legal action to recover their debt.  As such, they should be taken very seriously and you should take immediate action.

Short terms cash flow problems won’t necessarily result in a statutory demand.

Every business will experience some form of financial difficulty along the way, usually as a result of something unforeseen and out of its control.  A few late paying customers for example.

If your debts are relatively small and have been overdue for a short period of time, you can often negotiate with your creditors to extend the payment terms until you get up to date.  You may investigate alternative forms of finance in order to bridge the gap before the cash flow issues are resolved.

The ability to catch up with your arrears gets more problematic when the cash flow issues are not resolved and too much time has elapsed without agreeing extended payment terms or clearing the debt owed.  When your creditors patience runs out, they may issue you with a statutory demand.

Before we warn you of three common mistakes you must avoid when a statutory demand has been issued, let us explain exactly what a statutory demand is.

What is a statutory demand?

A statutory demand is a legal document, usually sent via a legal representative, requesting immediate payment of outstanding debt to the creditor.  It’s often the last resort of a creditor, where previous demands for payment (letters, emails, phone calls) have failed.  They may cost the creditor several hundreds of pounds to issue, so aren’t sent without serious intent to reclaim the debt.

If you do not respond to the statutory demand or have no defence then a winding up petition can be issued just 21 days after the service of a statutory demand.  Or if this was a personal debt, a bankruptcy petition may be issued if all conditions below are met and the debt is not paid:

• The debt must not be in dispute.
• If you’re a sole trader, then the debt owed must be more than £5,000.
• If you represent a limited company or LLP, then the debt owed must be more than £750.
• The debt must not be subject to a voluntary arrangement or is being paid off instalments under a debt relief order (for individuals).
• The notice must be served on the company’s registered address.
• The creditor must not owe money to the debtor as otherwise there will may well be a case for a counterclaim or what is known as set off
• The creditor must not have security over assets, that are valued at more than the debt.

Three mistakes you MUST avoid if you’ve received a statutory demand

If you have received a statutory demand from one of your creditors, then it’s really time to face the music.

1. Do not ignore it!

A statutory demand is not a phone call to avoid, an email to delete or a letter to bin.  It is a legal document which, if ignored, could mean the end of your business and livelihood.  If you do not respond to it, your creditor can start bankruptcy proceedings or issue a winding-up petition to close your company.

Whether you have the funds available to pay them or not, a response is required.  Obviously if you can pay the creditor in full, you should do so.  If you are unable to pay, you need to be honest with your creditor about your situation.  You may be able to negotiate repaying them over a prearranged time period though an informal arrangement or where you have more than one creditor, through a formal arrangement.  To seek a formal arrangement, known as a company voluntary arrangement (CVA) you will need to seek advice from a licenced insolvency practitioner.

2. Do not respond too late!

If you receive a statutory demand, you have just 21 days to respond.  This is a rigid timeframe, so be sure to consider your response promptly.  Leaving discussions in your business too close to the response deadline could put you in a very difficult position.

If you fail to respond within the 21 days allowed, the creditor can immediately start bankruptcy proceedings or file a winding-up petition against your business.  

To keep your options open, act promptly and respond to the demand within 21 days.

3. Do not continue to build up debt!

If any of your creditors have issued you with a statutory demand, which you are unable to pay due to cash flow problems, you should not continue to take credit elsewhere.

If you end up paying one creditor in preference to another this could have serious consequences for you, such as disqualification as a company director or leaving you personally liable to repay.  All creditors have the right to be treated fairly.

If a creditor is taking that last resort to get paid, it would be extremely unwise to continue accruing further debt elsewhere and risk further demands being issued.

If you are unable to come to an informal arrangement and resolve your cash flow issue quickly, then it’s time to speak with a licenced professional to look at your options and promptly take action.

Our insolvency practitioners are just a call away – call 0808 196 8676 or visit our contact page for details of our local offices.

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