Although service of a statutory demand or winding-up petition on a company is a blunt and unsophisticated debt recovery tool, it will often have the desired effect for a creditor as they are seldom ignored and ignored only at the company's peril. It can often prompt payment of the sum due, or judgment owed, where previously there has been prevarication and empty promises of payment.
Here is a reminder of some important issues a (solvent) company should consider if a statutory demand or petition is served upon it.
Doing nothing is not an option
Ignoring a statutory demand or winding-up petition can have devastating consequences for the alleged debtor company. All companies should have systems in place to ensure that any such documents are dealt with immediately. Time is of the essence. If no response has been received, three weeks after service of the statutory demand, a creditor can issue a winding-up petition and the company can be deemed, by virtue of its failure to comply with the demand, to be unable to pay its debts and can be wound up. If a winding-up petition has been served, whether preceded by a statutory demand or not, seven business days thereafter, it can be advertised in the London Gazette, thereby notifying the company's bank (generally leading to the immediate freezing of the company's bank account) and its other creditors that the petition has been presented. Once advertised, the petition cannot be withdrawn without the court's permission.
For details of the basis upon which a winding-up petition can be presented and the consequences this will have on the company, see part 4 of our litigation survival guide on winding-up a corporate debtor.
Note also that some contracts that the company has entered into may contain termination/default clauses that are activated on the presentation of a petition against it. This of itself can lead to additional commercial pressures.
If the debt or judgment is payable
The debtor company should contact the creditor and agree terms of payment, whether in full, by instalments or for a reduced amount and obtain a written agreement that the creditor will not present and/or advertise a winding-up petition.
If the debt is disputed in full
Although a winding-up order will not be made by the court if the debt is genuinely disputed on substantial grounds, the advertising of the petition itself can do substantial damage to the commercial reputation of the company. So, all necessary steps should be taken to prevent the advertisement going ahead.
To be disputed on "substantial" grounds, the dispute must be "real as opposed to frivolous" and there must be sufficient evidence to persuade a court that, objectively, there is a genuine dispute as to the company's liability to pay the debt. A mere honest belief that the payment is not due is not sufficient. If there is a genuine dispute, the company should:
- provide full details of the dispute to the creditor in writing
- request an undertaking in writing from the creditor that it will not present a winding-up petition (or advertise it if it has already been presented) based upon the disputed debt
- notify the creditor that if no such undertaking is given that it will seek an injunction from the court to restrain the presentation of a winding-up petition (or to restrain the advertisement of it if it has already been presented)
- notify the creditor that should such an application to court be necessary, it will seek the costs of making the application on an indemnity basis, as the winding-up procedure is an abuse of court process if the debt is genuinely disputed
- seek legal advice, be prepared to, and do apply for the injunction if no adequate response is received
If the debt is disputed in part only
Again, the demand or petition must not be ignored. If the correct amount of the debt can be ascertained, the creditor may agree to accept payment of that sum in full.
If agreement cannot be reached, payment of the undisputed sum should still be made and the statutory demand or winding-up petition opposed in relation to the balance. Again, an undertaking or injunction to prevent presentation or advertisement of the petition should be obtained, following the same steps as set out above.
Other reasons to challenge the statutory demand or petition
Challenges can also arise where:
- there is a genuine cross-claim or right of set-off against the creditor which is equal to or exceeds the amount claimed in the demand. The cross-claim must be based on substantial grounds (including, arguably, a valid right of set off)
- the English courts do not have jurisdiction to wind up the company
If an application for an injunction is necessary
- speed is of the essence given the tight timescales within which the application must be made
- evidence (to some reasonable level of detail) will need to be placed before the court in the form of witness statement(s) supporting the grounds on which it is claimed that the petition is an abuse of process or is bound to fail
If the company is insolvent and unable to pay the sum claimed and allows the petition to be heard and a winding-up order made, then, any contracts entered into, any disposition of assets made or any enforcement proceedings completed after the date of the presentation of the petition may be set aside. Additionally, directors may need to be aware of, and take advice upon, the potential personal liability they may face in respect of personal guarantees given, fraudulent trading, wrongful trading, misfeasance or breach of duty and the like - they should of course seek such advice as soon as they are aware the company is in financial difficulties.