A statutory demand landing at the registered office tends to get a director’s attention.
And it should!
For a company, it is a formal demand for payment. If the debt is left unpaid, unsecured and uncompounded for three weeks, it can provide evidence that the company is unable to pay its debts and support a winding-up petition.
Take advantage of the time you have, do not delay dealing with it – the first few days after receipt can be the most valuable.
First off, establish whether the debt is actually due
Who is the creditor? What invoices make up the balance? Has anything been paid? Are any credit notes owed? Is there a genuine dispute? Does the company have a cross-claim? Has the demand been properly served?
Get the underlying paperwork together immediately.
If the debt is genuinely disputed on substantial grounds, take urgent legal advice – you may need to seek an injunction restraining the presentation of any subsequent winding-up petition.
If the debt is due, don’t look at it in isolation
If the demand is for £25,000 and the company can just about find that sort of money, still ask yourself should it pay it? What happens next week?
If paying this particular creditor means wages go unpaid and essential suppliers stop delivering, the company hasn’t solved its core problem.
You need to see the whole position:
- cash available now;
- a 13-week cashflow;
- HMRC arrears;
- aged creditors and debtors;
- wages and pension liabilities;
- secured lending and asset finance;
- other threatened legal action;
- assets that could realistically be sold;
- refinancing possibilities.
The statutory demand may be the immediate problem, but it could also be the first visible symptom of a much bigger issue.
What does the 21-day period actually mean?
Section 123 of the Insolvency Act 1986 provides one of the statutory tests for inability to pay debts. Broadly, where a creditor owed more than £750 serves the prescribed demand and the company neglects for three weeks to pay, ‘secure’ or ‘compound’ the debt to the creditor’s reasonable satisfaction, the company is deemed unable to pay its debts.
It does not mean the company automatically goes into liquidation on day 22, it means the creditor may have established a basis upon which to issue a petition for the company’s winding up.
Speak to the creditor properly
If the debt is due but cannot be paid immediately, there may be scope for agreement.
But ensure that the proposal is credible – don’t offer £5,000 a month if the cashflow forecasts show the company can afford £1,500.
Explain what has caused the problem, what is being done about it, what can genuinely be paid and when.
If the creditor accepts an arrangement, get it documented clearly (email is great!).
Use the 21 days to decide whether the company is viable
This is where an insolvency practitioner should be useful.
The question isn’t simply, “How do we stop this creditor?”
It is:
“Is there a business here worth saving, and can it realistically be saved?”
The answer might involve refinancing, shareholder funding, a HMRC Time to Pay arragement, selling surplus assets, reducing costs, collecting debtors more aggressively, a business sale or a formal restructuring such as a CVA or administration.
Or the figures may show that continuing simply makes creditors worse off.
If so, an orderly closure may be the better decision.
Don’t start moving assets or favouring people
A statutory demand often causes panic – directors repay themselves, money gets moved to another company, assets are sold cheaply to connected parties, the creditor shouting loudest gets paid while everybody else is ignored.
That is exactly when directors need to slow down and take advice.
Transactions carried out when insolvency is looming will later be examined closely by the appointed insolvency practitioner. There may be perfectly good commercial reasons for paying a particular creditor or selling an asset, but the reason should be defensible and properly recorded.
Day 18, 19 or 20 is too late for a proper plan
A statutory demand gives a company a short window to act.
Use it.
If you call me on day two, we can look at the business, the cashflow, the creditor position and the realistic options.
If you call on day 18+ with no forecast, no creditor list and no funding plan, many of the options that may have existed are now impossible to implement in time.
Takeaway checklist
- Record the date the statutory demand was received.
- Check who served it and how much is claimed.
- Reconcile the debt against the company’s records.
- Identify any genuine dispute or cross-claim.
- Take urgent legal advice if the debt is disputed.
- Prepare a current bank and cash position.
- Produce or update the 13-week cashflow.
- Review HMRC and all other creditor arrears.
- Identify any other threatened court or enforcement action.
- Decide whether the underlying business is viable.
- Consider refinance, funding, asset sales and restructuring.
- Put any proposal to the creditor on a realistic basis.
- Record important board decisions.
- Don’t make unusual payments or connected-party transactions without advice.
- Don’t wait until the 21 days are nearly over.
Final thought
A statutory demand is a warning. Sometimes it is a creditor using serious leverage to collect one overdue debt. Sometimes it is the document that finally exposes a company that has been insolvent for months.
Either way, the response shouldn’t be panic and it shouldn’t be silence.
Use the 21 days to establish the truth about the company.
If the business can be rescued, act quickly enough to give the rescue a chance.
If it can’t, recognise that early enough to stop the position getting worse.
Meta description: A statutory demand has been served on your company. Paul Brindley explains what directors should do during the 21-day period, how to assess the debt and what rescue or insolvency options may remain.
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