Statutory demand from HMRC or a supplier: what it means

A statutory demand is a formal written demand for a debt of £750 or more. If the company does not pay, secure or compound it within 21 days, the creditor can present a winding-up petition without further notice. It is not itself a court document, but it is the last step before one.

What it is

Section 123(1)(a) of the Insolvency Act 1986 says a company is deemed unable to pay its debts if a creditor owed more than £750 has served a written demand in the prescribed form and the company has, for three weeks, neglected to pay, secure or compound the sum to the creditor’s reasonable satisfaction. The demand creates that presumption. Once it exists, the creditor does not have to prove insolvency any other way; they simply petition.

The demand must be in the statutory form, state the debt and how it arose, and be served at the registered office. Creditors use it because it is cheap, needs no court involvement, and converts an unpaid invoice into grounds for closing the company in three weeks.

Who sends them

HMRC, for unpaid VAT, PAYE or corporation tax, usually after reminders and a phone call have gone unanswered. Trade creditors who have been strung along. Landlords. Occasionally a lender. The common factor is a creditor who has stopped believing they will be paid by asking.

What the 21 days are for

Four things can happen in the window.

Pay. The debt in full, and the creditor’s costs if the demand includes them. The demand lapses.

Secure or compound. Offer security, or a payment arrangement the creditor accepts in writing. “Compound” means reach a compromise. An HMRC Time to Pay arrangement, properly agreed, is compounding; a phone conversation that went well is not.

Dispute. If the debt is genuinely disputed on substantial grounds, say so in writing immediately, with the reasons and the evidence. A petition based on a disputed debt is an abuse of process and the court will dismiss it, but only if the dispute was real and raised before the petition. A dispute invented after the petition arrives carries no weight. For a company (unlike an individual) there is no procedure to set the demand aside; the remedy is to dispute now and, if the creditor persists, apply to restrain the petition.

Do nothing. After 21 days the creditor can petition. The petition is served, then advertised seven working days later, and the bank freezes the account.

What it tells you about the company

A statutory demand is the clearest external signal that the company has failed the cash-flow test for insolvency. If one creditor has reached the point of serving a demand, others are usually close behind. The right response to the demand is rarely just to deal with the demand. It is to ask whether the company can pay its debts as they fall due, and if the answer is no, to take advice while the choice of route is still yours. A creditors’ voluntary liquidation started in these three weeks puts you in control of the process. A petition started by the creditor on day 22 does not.

What not to do

• Do not ignore it because it arrived at the accountant’s office or was addressed to a registered office nobody visits. Service there is good service.
• Do not pay this creditor by not paying another if the company is insolvent. That is a preference and the next creditor serves the next demand.
• Do not rely on a verbal agreement. Get any arrangement in writing before day 21.
• Do not assume the creditor will not follow through. HMRC, in particular, does.

What to do today

1. Note the date of service and count 21 days. That is the deadline.
2. Check the debt against your records. If any of it is disputed, write to the creditor today with the grounds.
3. If the debt is right and the company can pay, pay it or agree a written arrangement before day 21.
4. If the company cannot pay, speak to a licensed insolvency practitioner this week, before the creditor can petition.