Statutory Demand 101: Everything You Need to Know

When a company is unable to fulfil its monetary obligations, a creditor may choose to serve a statutory demand to wind up a company. A statutory demand is a formal, written warning written from a creditor. It serves to warn the company that if the debt is not paid off, legal proceedings will be commenced to settle a genuine dispute without any further warning. Statutory demands tend to be quite effective as if they are ignored by the debtor, the debtor can risk being bankrupt, therefore incentivising speedy payment.

What is a statutory demand?

As we briefly touched on, a statutory demand is a legal document that the creditor issues to the debtor to demand payment. If the statutory demand expires (Usually 18 or 21 days from the date of the delivery), the creditor may be entitled to file for winding-up or bankruptcy orders. This is how the creditor can effectively ‘threaten’ another company or individual to make payment immediately and clear out the outstanding sum with this formal demand.

What are the essential elements of a statutory demand?

The sum of money owed

The figures should be clearly stated in the document itself. Most jurisdictions do not formally provide a minimum amount for statutory demands. However, since non-compliance with a statutory demand entitles the creditor to apply for a petition to wind up the company, the sum of money owed is usually very significant. Moreover, winding up a company is a serious legal procedure with irreversible consequences. Many jurisdictions, therefore, provide a minimum amount that a person or a company must owe before the creditor can initiate a winding-up order.

The following table shows the minimum amount required to initiate a winding-up order for some of the common law jurisdictions (in 2021) for reference:

The following are the minimum amount required to initiate a winding-up order for some of the common law jurisdictions (in 2021): 

Besides the sum owed to you by the debtor. A creditor will also have to consider the costs of filing winding-up. Here is a table of the costs of petitioning for a winding-up or bankruptcy order (in 2021):

Given these hefty fees, creditors want to consider pursuing other remedies, such as filing a claim under the small claim’s tribunal or enforcing a court judgment.

Description of the sum of money owed

It is not sufficient to provide a mere estimate of the total amount of debt payable to the creditor. The creditor must provide details of each component and the payable amount for each section.

The name of the debtor

Normally, this is very intuitive as it would simply be the person or company that owes you money. It gets slightly more complicated when one’s business structure involves multiple legal identities. Moreover, often, a debtor would have already structured their business in a way to escape as much liability as possible, such as by setting up multiple ‘empty shell companies’. By doing this, they can borrow money under different companies’ names, each of them having a different liability registered with them.

The address of the debtor

For companies, this would be the address that the company is registered with under company registries. For individuals, the address would be the debtor’s residential address or their workplace address. You should serve the statutory demand in person, along with a third party who can provide an affidavit (a testimony) as evidence to prove that a statutory demand has been duly served. However, it is likely that when a person is in debt, they will be out of sight. This might require the creditor to advertise demand through one or more newspapers publicly. There may be a minimum advertising period required to serve a statutory demand in that way. Regardless, you should consult your lawyer on the local requirements for serving a valid statutory demand.

Is a statutory demand compulsory (for winding up a company)?

The main purpose of serving a statutory demand is to initiate a winding-up order. The requirements for statutory demands differ between jurisdictions. As mentioned, a statutory demand is a legal document provided by legislation, which means that there is a specific form and certain requirements that must be adhered to. You should check to see what is needed in your respective jurisdiction.

For some common law jurisdictions, like Hong Kong, a statutory demand is not strictly necessary. As mentioned, the legal consequence of not complying with a statutory demand is that a debtor can petition a winding-up order. In a sense, therefore, a statutory demand is merely a tool provided by the legislation to prove one’s insolvency. It provides the basis and justification for winding up a company. There are several other ways to accomplish the same thing: 

1. Failure in enforcing a court judgment (e.g., a monetary judgement)

2. Failure to deal with your debts under an Individual voluntary arrangement (‘IVA’)’

3. Other instances that prove insolvency of a debtor 

When should you send a statutory demand?

What should you do in the circumstance where a company has not paid a significant sum of money for an extended period?  

Is it always a good idea to send a statutory demand when a person or company owes you money? Not necessarily. There are some factors that you should consider before serving a statutory demand to a debtor; here are some of them:

a) Have you exhausted all other options for getting your money back?

Sometimes, it is unnecessary to send a statutory demand to force the debtor to make a payment. You may want to consider simply negotiating with the debtor before sending a statutory demand as a statutory demand puts the debtor into a distressed position.

b) Do you want to permanently end your partnership or collaboration with this person or company?

Winding up a company is an irreversible process. If you choose to serve a statutory demand to merely incentivise the company to pay, you run the risk of getting less money if the company continues to default after the 18- or 21-day period. If the company is likely to repay in the long term, you should consider negotiating a payment term before serving a statutory demand.

c) Think about the negotiation terms within the 18- or 21-day period:

You should be prepared to negotiate and make demands after you have served a statutory demand. As mentioned, shutting down a company via a winding-up order is the least desirable consequence out of all of them for many creditors, and thus should be avoided at all costs.

d) What are the consequences of winding up a company or petitioning for a bankruptcy order against an individual

During the process of issuing winding-up orders and bankruptcy orders, there may be other creditors who are entitled to claim the debts owed to them and may not necessarily have the priority against these other creditors. It would be best to discuss the strategy you may want to go forward with your lawyer that best serves your company's interest.

How to deal with a statutory demand?

If you have been served with a statutory demand, do not panic. Here are some tips on what you need to do next:

1. Highlight or note down the date of service

The date of service is the date that the document was delivered to you. The 18 or 21-day requirement to comply with the statutory demand will therefore begin on this date. You must keep track of this date as you need to plan out what you will do within this time frame. If you fail to comply with the statutory demand after the 18 or 21 periods, the creditor can apply for a bankruptcy or winding-up order against you or your company.

2. Read the statutory demand carefully. Note down each component of the sum payable to the creditor

Sometimes, there are mistakes on the form, such as the amount claimed. However, usually, minor mistakes in the amount claimed will not make the statutory invalid. Courts do not usually see this as a reason to set aside a statutory demand.

3. Decide on whether you agree with the content of the statutory demand

Many companies file statutory demands to threaten the other party. As mentioned, a statutory demand poses serious consequences. The person who files for a statutory demand often does so knowing its serious psychological effect on the receiver, thereby using it for their benefit. You must check that the sums claimed in the statutory demand are valid.

4. Seek legal advice immediately

After doing your investigation, you should seek help from a lawyer to take appropriate steps to deal with a statutory demand. If you disagree with the statutory demand that has been served to you, you consult your lawyer about how to go about applying to the court to set aside the statutory demand if the creditor should wind up your company.

5. Negotiate with the creditor

Most of the time, it is usually not in the creditor's best interest to wind up a company. You should take advantage of this and utilise the 18- or 21- day window to negotiate and settle with the creditor.

6. Restructuring

If you cannot settle with your creditor, you may want to consider restructuring your company and refinancing your debts. You may want to take steps such as getting a guarantor, taking out loans from a bank, selling your assets, financing your company by selling equities at your company, or arranging for a merger or acquisition. Ideally, you would want to do everything you can to get your level to be below the required amount to initiate a winding-up or bankruptcy order. Once you have managed to repay parts of your debt, your creditor may not be able to wind up your company as the debt level would be below the statutory requirement amount.

How to get a Statutory Demand Template?

Don’t worry, you won’t have to draft one yourself as you can simply download DocPro's Statutory Demand Letter Template. Download and customize the template to suit your requirements.

Summary

Serving a statutory demand is merely one way to show evidentiary evidence that a court should wind up a company. Even if a creditor has validly served a statutory demand, there are certain instances where a court would refuse to wind up a company, for instance, if the court believes that doing so would be inequitable.

Often, however, serving a statutory demand has more merits than demerits. It is a cost-effective solution that pressures a debtor to act quickly. In any case, creditors should still think carefully about whether this is the best business strategy. There may be other viable options that are more suitable than serving a statutory demand. If you are thinking of serving, or have been served a statutory demand, our biggest piece of advice to you is to seek legal advice immediately.

Please note that this is a general summary of the position under common law and does not constitute legal advice. As the laws of each jurisdiction may be different, you may wish to consult your lawyer.