Risky business? Take care when serving a statutory demand

If an individual or a business owes you money, there are two ways to start court proceedings; you can issue a claim, or you can issue a petition for the winding-up of a company or bankruptcy of an individual. While there are advantages and disadvantages to both, the insolvency route may be preferred as it tends to be cheaper (for the more significant debts) and is often a quicker process. Serving a statutory demand for the debt is a preliminary step towards issuing a petition at the court.

This can be relatively cheap to do, and can often result in previously reluctant debtors making payment. However, it is important that you (the creditor) are aware of the risks involved in following this route. Having received a statutory demand, the debtor will have the option to apply to the court for an injunction to restrain you from presenting a petition. The debtor may apply to restrain the process on the basis that the debt demanded is the subject of a ‘genuine dispute on substantial grounds’ or if there is a ‘serious and genuine cross claim’.

Before taking this route, it is therefore sensible to consider whether the debtor could raise such arguments, even if you think their grounds are weak. If the debtor can do so, they will no doubt allege that the case is highly fact-sensitive, requires an evaluation of the evidence and issues at trial, and that the action you are taking in the insolvency courts is an abuse of process. If the debtor applies for an injunction to prevent you from continuing, and the court finds in their favour, then you would normally have to pay the debtor’s costs in the application.

This scenario can be very tough on creditors, particularly as they may well have a strong case and would otherwise recover the debt if they were to have followed an alternative route, i.e. by issuing a claim. You should therefore treat any response about the appropriateness of the insolvency process very seriously, and think about the costs risk that such a challenge might bring. In that event, it may be better to pursue the debt by issuing a claim through the courts. Contact us for tailored, expert advice if this affects you.

Partner Paul Gordon joined Willans from a City law firm in 2005. Specialising in dispute resolution, he has experience in handling a broad range of commercial matters, including intellectual property, director and shareholder disputes, and engineering and construction cases.