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Statutory Demands: Quick recovery and a plea for the Scottish Judgments Centre

27 April 2017 Written by Yuill & Kyle Solicitors Category: Blog

A relatively quick and inexpensive way of recovering cash from a slow paying limited company is the use of the statutory demand for payment.  Many creditors prefer this to taking court action which is perceived as being both slow and costly.

What is a statutory demand?

The starting point is the Insolvency Act 1986.    In terms of Section 122 of the legislation a company may be wound up if it is unable to pay its debts.  The definition of “inability to pay debts” is contained in section 123 (1)(a) of the Act.  This states that “a company is deemed unable to pay its debts if a creditor to whom the company is indebted in a sum exceeding £750.00 has served on the company, by way of leaving it at the company’s registered office, a written demand (in the prescribed form) requiring the company to pay the sum due and the company has for three weeks thereafter neglected to pay the sum …”

What happens if the debtor disputes the Demand?

Failure to respond to the Demand can have draconian consequences leading to the creditor petitioning to have the debtor company wound up.  Accordingly the Demand does give the debtor company the option to dispute the debt by completing an appropriate section detailing why the sums claimed are not due.  This should be returned by the debtor to the creditor or creditor’s solicitor that prepared it.

What sometimes happens is that the debtor company details a dispute which the creditor states is not genuine.  In those circumstances can the creditor simply go ahead and petition for liquidation?  There have been a number of cases which have focussed of whether this is possible.  The issue debated before  the Court is whether or not the dispute is genuine.  If it is then it is highly unlikely that the Court will allow the Petition to proceed.  Often the matter is aired before the Court with affidavit evidence being led as to the nature of the dispute.

In those circumstances it is probably better to abandon the liquidation petition and to proceed with a court action in the knowledge that it is likely to be defended.  It is submitted that this should not be seen as a failure.  After all what does the creditor want to achieve by serving a Demand?  The answer of course is to get paid by the debtor company.  If that company simply ignores the Demand and is prepared to take the consequences of going into liquidation then it is unlikely that the creditor will achieve little more than a few pence in the pound by way of a dividend payment.

However, if there is a genuine dispute then the Demand process really should not have been used in the first place and it is entirely reasonable to expect the debtor company to respond by denying that the sums due under it are due.

Of course the creditor may say that the dispute is not genuine.  However, this really has to be up to the Court to decide.  In any event the “enemy” of a successful recovery is not necessarily denying the debt is due.  The real danger is being ignored.  A debtor company that reacts to the Demand by submitting a denial cares about being wound up and it may well be that the company will have assets to satisfy the creditor after court action has been raised which could well settle shortly after it has been raised.

Is there a difference between Scotland and England?

The insolvency Act including statutory demands applies throughout both jurisdictions.  Invariably, however, the Demand is served by Sheriff Officers at the debtor company’s registered office.  This is perhaps different from England where postal service at the debtor company’s business address often suffices.

If there has been no response to the demand and the creditor then wants to proceed with a liquidation petition then whilst Scottish procedure mirrors that in England, the actual liquidation process is different although the same results are achieved.

Can the Scottish Judgment Centre help?

At Yuill + Kyle we recognise that before taking any sort of action it is excellent practice to establish whether the debtor company can satisfy a debt before action is taken.  This will result in saving expense and time.  That is why Yuill + Kyle, along with trusted partners have developed the “Scottish Judgment Centre”.

The philosophy and business case for the centre is that action should only be taken against a debtor if it is likely to produce a financially successful outcome.

How will the centre enhance your recoveries?

 YUILL + KYLE’S DATABASE

As one of Scotland’s leading debt recovery lawyers, we have an extensive database of debtors and slow payers.  These debtors will be profiled through the Centre’s database so that the appropriate action will be tailored to the debtor’s ability to satisfy the judgment

SHERIFF OFFICER EXPERIENCE

Certain information can be accessed by asking our Sheriff Officers if they have had any prior experience of dealing with the debtor.  Again profiling the debtor will be paramount.

INSOLVENCY LIAISON

Our insolvency practitioners have working relationships with a number of debt factoring companies.  These factors often have information about a particular debtor who will be on their “watch list”.  Once again, debtor profiling will be at the forefront of the decision making process.

 ACCOUNT EVALUATION

Evaluation of accounting information will include the following:

  • What is the bank’s or any other lender’s, including invoice factors, position re security - bond & floating charges or standard securities / mortgages, etc.?
  • Is there evidence of property? If so, a property search will be undertaken for further information
  • What is the non-property tangible fixed assets position – do the accounts show a historical trend of the company holding a reasonable level of such assets?
  • What is the book debts / stock / WiP position – again do the past accounts indicate reasonably consistent levels of such assets?  However, if the accounts are long out of date, we would not place much reliance on levels still being the same
  • Review notes to the accounts looking for evidence of other assets e.g. director loan accounts which may lead to searches on the directors and whether they might have assets (e.g. the area they live in / property searches etc.)

Conclusion

The Statutory Demand process can be of great use in the right context.  That environment is that there is an undisputed debt which can be settled by slow paying companies.  It should not be used if the debt is genuinely disputed.

Also it is probably a waste of time and expense using the Demand if the debtor company simply does not have the wherewithal to settle the creditor’s invoices.  And to evaluate the debtor company’s financial status using the “Scottish Judgment Centre” may well be the right call.

Questions?

For more information please email Stephen Cowan on This email address is being protected from spambots. You need JavaScript enabled to view it.  or call him on 0141 572 4251 and he'll be happy to help

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