Statutory demands (debts from companies)
If a company neglects to comply with a statutory demand for a sum exceeding £750, 3 weeks after service of the demand, the creditor will be entitled to present a petition to wind up the company. The company will be deemed, by virtue of its failure to comply with the demand, to be unable to pay its debts under the Insolvency Act 1986.
There is no formal procedure for applying to set aside a statutory demand that has been served on a company.
A company wishing to challenge a statutory demand can only do so either:
- By applying for an injunction to restrain presentation or advertisement of a winding up petition on the basis of the demand.
- By opposing the creditor’s application for a winding up order against the company, if the creditor presents a winding up petition on the basis of the demand.
The court will not ordinarily allow a winding up petition to proceed against a company based on a statutory demand where:
- The debt alleged in the demand to be owing is genuinely disputed on substantial grounds by the company.
- The company has a genuine cross-claim or right of set-off against the creditor which exceeds the amount claimed in the demand.
- The company has a reasonable excuse for not paying the debt claimed in the demand, such as where the company is prohibited by law from paying the sum due.
- The English court has no jurisdiction.
Statutory demands (debts by individuals)
A statutory demand is a formal demand made by a creditor for payment of a debt of more than £750 from an individual debtor. The debtor has up to 18 or 21 days to reply to the statutory demand, depending on what he wants to do.
If the debtor does not deal with a statutory demand within 21 days of receiving it, the creditor will take this as proof that the debtor is unable to pay the debt and can then make him bankrupt.
If there is a dispute, the debtor can apply to the court to set aside the statutory demand
County court claims: summary judgment
If a debt is undisputed or there is no real prospect of the debtor sensibly disputing it, an application for summary judgment might be considered by the creditor.
This if successful might allow judgment to be obtained against the debtor in a matter of weeks rather than months.
The application is on paper only. Oral evidence is not considered.
Any judgment obtained could then be enforced against the assets of the debtor in the usual way (including potentially through the commencement of formal insolvency proceedings).
Fixed costs may also be recoverable.
Retention of title claims (‘Romalpa clauses’)
A retention of title clause is a provision in a contract for the sale of goods which provides that title, or legal ownership of the goods, does not pass to the buyer until they have been paid for in full. Where the clause is legally effective this allows the unpaid seller to go in and repossess the goods even where the buyer has subsequently become insolvent and other creditors are competing for the proceeds of that buyer’s assets.
Where such a clause is in place then this is an option worth considering for an unpaid creditor who could recover and then resell the goods at a profit. Although conceptually simple however, retention of title clauses are not always legally effective.
Expert advice should be sought on the viability of enforcing such a clause. If a creditor suspects that insolvency proceedings against the debtor are imminent, the prudent course is always to move as quickly as possible.
Late Payment of Commercial Debts (Interest) Act 1998
The United Kingdom has implemented late payment legislation designed to encourage prompt payment of commercial debts. In all contracts between businesses and public authorities made after 7 August 2002 (and in some contracts made since 1 November 1998), in which both parties were acting in the course of business, and which meet the requirements of the Act, there is an automatic right to interest where the debt is unpaid.
If a creditor is unpaid on a relevant business contract, interest at 8% over the Bank of England base rate starts to accrue on the debt from the day after the final day for payment. If no day has been specified for payment, that interest will start to accrue after 30 days.
This is by virtue of the Late Payment of Commercial Debts (Interest) Act 1998 which applies in default of any express contractual term in the contract or other statutory provision allowing for interest. It is not necessary for the contract to refer expressly to the Act, though it is possible for parties to agree to an alternative method of compensation. The interest can be pursued in its own right as a separate debt.
Winding up petitions
“It is a matter for the discretion of the judge whether a winding up order should be made on a disputed debt, and it is also a matter of discretion whether he decides the substantive question of debt or no debt.” Brinds Ltd v Offshore Oil NL [1986]
“….If a petitioner’s debt is bona fide disputed on substantial grounds, the normal practice is for the court to dismiss the petition and leave the creditor first to establish his claim in an action. The main reason for this practice is the danger of abuse of the winding-up procedure. A party to a dispute should not be allowed to use the threat of a winding-up petition as a means of forcing the company to pay a bona fide disputed debt. This is a result of practice rather than law and there is no doubt that the court retains a discretion to make a winding-up order even though there is a dispute: see, for example, [Brinds]. But the board does not find it necessary to examine the limits of the discretion because they consider that there is no substantial dispute.” Parmalat Capital Finance Ltd v Food Holdings Ltd [2008]
