Statutory Demand: How to Respond and How to Set One Aside

A statutory demand is a formal written demand for payment of a debt. It is not a court document and no judge has looked at it, which surprises many people who receive one. Anyone can serve a statutory demand claiming a debt is owed.

What makes it serious is what it unlocks. If the demand is not paid, secured or set aside within 21 days, the creditor can use it as evidence of inability to pay and present a bankruptcy petition against an individual, or a winding up petition against a company.

The Thresholds and the Deadlines

For an individual, the debt must be at least 5,000 pounds before a bankruptcy petition can be presented on the back of the demand. For a company, the current threshold for a winding up petition is 750 pounds.

Two periods matter and they are easily confused.

The 21 day period is the time the debtor has to comply with the demand by paying or securing the debt. Only once it expires can a petition follow.

The 18 day period is the time an individual has to apply to set the demand aside, running from the date of service. That is the shorter and more important deadline, because a set aside application made in time stops the 21 day period running until the application is dealt with.

Companies cannot apply to set aside a statutory demand. A company that disputes the debt has to seek an injunction restraining presentation or advertisement of a petition instead, which is explained in our guide to stopping a winding up petition.

Grounds for Setting Aside a Statutory Demand

The Insolvency Rules give the court a discretion to set aside a demand on four broad grounds.

The debt is genuinely disputed on substantial grounds. This is the most common ground. It requires more than a bare denial. The court looks for evidence that there is a real dispute worth trying, such as a contract that does not say what the creditor claims, work that was not performed or invoices that were never agreed.

The debtor has a counterclaim, set off or cross demand that equals or exceeds the demand. If you have a claim back against the creditor for the same or a greater sum, the demand should not stand.

The creditor holds security worth at least the amount of the debt. A secured creditor cannot use the bankruptcy process for a debt already covered by its security.

Some other ground on which the court is satisfied the demand ought to be set aside. This catch all covers procedural defects and abuses, including demands used as a debt collection threat where the creditor knows the sum is contested.

Technical defects in the form alone will not usually be enough unless they cause real prejudice or confusion about what is owed.

How to Apply

An individual applies to the appropriate court using the prescribed application form, supported by a witness statement exhibiting the demand and the evidence of the dispute. There is no court fee for an application to set aside a statutory demand.

The witness statement is the case. It should state when the demand was served, identify the debt, explain the dispute with reference to documents, and quantify any cross claim. A statement that reads as a complaint rather than as evidence tends to fail.

If the application is made in time, the court will consider it and may dismiss it without a hearing if it discloses no sufficient cause, so the quality of the first document matters more here than in most civil applications.

Service and Whether It Was Valid

Service is frequently the battleground. For an individual, the creditor is expected to take reasonable steps to bring the demand to the debtor's attention, and personal service is the norm. Where a demand is left at an old address or emailed without agreement, the date of service, and therefore the running of the 18 day period, may be open to challenge.

Keep the envelope, note the date and method of delivery, and do not assume that poor service cures the problem on its own. It usually affects timing rather than the underlying debt.

What Happens If You Do Nothing

For an individual, the creditor can present a bankruptcy petition after 21 days. Bankruptcy affects credit, property, certain professions and directorships, and the trustee takes control of your assets.

For a company, a winding up petition can follow, which will be advertised and will normally result in the bank freezing the account. At that point the company is fighting to survive rather than arguing about an invoice.

Ignoring a statutory demand because you believe the debt is nonsense is the single most expensive mistake in this area.

If You Are the Creditor

A statutory demand is a legitimate and cheap step where the debt is clear and undisputed. It is not appropriate where you know the sum is contested, and using it in that situation can result in an injunction and an adverse costs order. Where the debt is disputed, ordinary civil proceedings are the correct route, which we cover on the debt recovery claims page.

Instructing a Barrister Directly

You can instruct a barrister without a solicitor to advise on whether a demand can be set aside, to draft the application and witness statement, and to appear at the hearing. Panel members with a litigation extension can also conduct the application from start to finish.

Send the demand and the underlying paperwork through the insolvency disputes page, or read more about our counsel on the insolvency barristers page.

Related reading: how to stop a winding up petition and compulsory liquidation explained.