Statutory demands: a reminder of the risks

by Edward Farren, Partner

In the current financial climate, getting paid can be increasingly difficult, to say the least. Consequently, parties sometimes resort to serving statutory demands, or winding-up petitions as a means of debt recovery, seeking to put pressure on those who do not pay. This is a strategy that should only be embarked upon with care and caution. Partner Edward Farren has for many years regularly advised clients faced with statutory demands and/or petitions, or those who might be looking for ways to bring about swift payment of debts, and details such an instance from July 2023.

The draconian result of advertising the existence of a winding-up petition, which will lead to the freezing of bank account and more, means that, when challenged, the courts will not allow petitions to proceed where there is a genuine bona fide dispute. In these cases, the courts are swift to award indemnity costs against those who threaten and/or issue the petition. Conversely, the courts are alive to those seeking to avoid having to pay raising smokescreens or clouds of objections designed to wrongly suggest that a dispute exists.

Given the seriousness of any such action, company directors should always take prompt action when faced with threats of statutory demands or winding-up petitions. In July, he successfully acted for a company faced with a situation where although a statutory demand had been served, the party behind the demand refused to withdraw it. As Edward explains further, this left our client with no alternative but to take action to restrain that party from taking any further steps by way of injunctive proceedings.

The case, which is reported as A Company v Respondent (Re Injunction to Restrain Presentation of a Petition and Insolvency Act 1986)1 came before ICC Judge Barber.

We were asked to represent our client who provided electrical services (“C”) and in doing so, sought an injunction restraining a labour agency (“R”) from presenting a winding-up petition against them, based on sums claimed in their statutory demand.

The parties had been working on projects and R agreed to provide a number of labour operatives. There was a dispute as to the terms of that agreement. C said that R agreed to:

(i) source labour from their database of electrically qualified persons;

(ii) provide defined categories of operative with specific minimum qualifications for each category; and

(iii) verify and validate qualifications held by each operative put forward.

The projects did not run smoothly and disputes arose, with R demanding payment of sums invoiced. R served a statutory demand and refused to withdraw it and in doing so, confirmed their intention to present a winding-up petition unless the sums demanded were paid. C said that there appeared to be discrepancies between the hours claimed, plus concerns over the qualifications of R’s operatives. The main contractor had suggested that adjustments in respect of 180-days of snagging works might be needed. C said they would carry out an audit. C wrote saying that:

“If you do pursue your submission of a statutory demand, we will instruct our solicitors to submit to the court an injunction against [the Respondent] in the matter, as we have identified the monies to be in dispute given the difference in value of our accounts directly which may be considered fraudulent. We note and identify that due to the values being deducted from our account being a direct relation to the personnel provided by [R] we will be suspending any payments owed to [R] until this matter can be resolved and a true value of the account be identified”.

R did not reply, and the dispute remained. In February 2023, R served a statutory demand.

A statutory demand is a formal written demand for payment of a debt within 21 days. If payment is not made, or if a company fails to apply to restrain the creditor from presenting a winding-up petition the creditor can use the statutory demand as grounds to present a petition to the court for a winding-up order. The failure to respond to the demand is evidence that there is both a genuine debt and that the company does not have means to pay.

The following day, C wrote saying that the entire sum had been in dispute for over six months and warned that if R sought to act on the statutory demand, C would have no option but to seek an injunction restraining presentation. The letter required confirmation within seven days that R would not act on the statutory demand and that it would be withdrawn. There was no reply; four days later, C sent a further letter setting out its position in detail. The letter addressed material discrepancies in hours claimed and concerns regarding the qualifications of the operatives supplied, which may have led to defective works.

R again failed to reply. C wrote again seeking urgent confirmation within 24 hours that the statutory demand would be withdrawn and warning that, in the absence of such confirmation, an application for an injunction restraining presentation would be made. As there was no reply, we sent a further letter to R explaining that the presentation of a winding-up petition in relation to a debt that was the subject of a bona fide dispute was an abuse of process.

There was still no reply and C also tried to speak at a director level to R. As there was no response, C sought and obtained an interim injunction restraining R from presenting a winding-up petition against C in respect of the debts claimed in the statutory demand until further order.

By the time of the hearing before ICC Judge Barber, although the positions had narrowed, R said that even if everything C had said was true, R was still owed some £17,000. C had also raised a cross-claim “for the losses and damages associated with [R’s] operatives' under-qualification”.

The judge noted the following legal principles:

(i) The court will grant an injunction to restrain presentation of a winding-up petition where it considers that the petition would be an abuse of process and/or that the petition is bound to fail.

(ii) The court will restrain a company from presenting a winding-up petition if the company disputes, on substantial grounds, the existence of the debts on which the petition is based.

(iii) The court will also restrain a company from presenting a winding-up petition in circumstances where there is a genuine and substantial cross-claim such that the petition is bound to fail and is an abuse of process: Even if not qualifying as a set off, a genuine and substantial cross-claim exceeding the would-be petitioner's claim will also result in the petition being dismissed in exceptional circumstances (as a discretionary matter).

(iv) Further, it is an abuse of process to present a winding up petition against a company as a means of putting pressure on it to pay a debt where there is a bona fide dispute as to whether that money is owed.

(v) However, this does not mean that the mere assertion in good faith of a dispute or cross-claim in excess of any undisputed amount will suffice to warrant the matter proceeding by way of ordinary litigation. The court must be persuaded that there is substance in the dispute.

The judge referred to the case of LDX International Group LLP v Misra Ventures Ltd [2018] EWCA Civ 3030 where the judge said:

“It is incumbent on the recipient of the statutory demand to demonstrate, with evidence, that the cross-claim is genuine and serious… Bare assertions will not suffice: there is a minimum evidential threshold”.

The judge allowed the cross-claim to be considered. R had had the opportunity to file evidence in reply and it was not the case there that the cross-claim was put forward in bad faith, as a pretext to stave off winding up proceedings. Whilst initially, the evidence in support of the application to restrain presentation focused on the issue of overcharging, it was not the case that the first time that any cross-claim was intimated was by C’s reply evidence and it was only on the filing and service of R's first witness statement in March that the requested evidence of the qualifications held by R’s operatives was provided.

The judge was of the view that the facts and matters now relied upon by C in support of its cross-claim did clear the minimum evidential threshold. There was a genuine, strongly arguable cross-claim in contract/misrepresentation which had real prospects of success.

The evidence established a strongly arguable case that approximately 40% of the operatives supplied were materially underqualified and the electrical works undertaken were “peppered with defects which then had to be corrected”. The judge also took into account the long-standing reluctance of R to disclose evidence of the qualifications held by the operatives notwithstanding repeated requests. That conduct strongly suggested that R was aware that these qualifications mattered, in context.

As to quantum of the cross-claim, R were able to link the contra charges for each defective element of work to a room in which an operative from R was responsible. This led the judge to conclude that all but £17,000 of the sum claimed by the statutory demand was the subject of a bona fide dispute on substantial grounds; and that C had demonstrated a genuine, strongly arguable cross-claim in contract/misrepresentation comfortably exceeding £17,000 with real prospects of success.

Conclusions

Where there is a genuine dispute about all the sums claimed in the statutory demand or winding-up petition, the court will not hesitate to restrain the claiming party from taking any further steps. The court is also likely to order that indemnity costs are payable. In Re a Company [1992] 1 W.L.R. 351, the judge said:

“I think that it should be made clear that abuse of the petition procedure in these circumstances is a high risk strategy, and consequently I think the appropriate order is that the petitioner should pay the company's costs on an indemnity basis.”

If a party is refusing to pay, before considering winding-up or similar routes to recovery, be certain that the debt is not disputed and always be ready to consider alternative approaches. Positions change, and during insolvency proceedings they can change rapidly. If a statutory demand is served on you, make clear immediately the grounds on which it is disputed, include documentary evidence if you can. If part of the debt claimed is truly owing, try and pay. And whatever your position, do something, take advice, reply to any correspondence you may receive as promptly as you can, as silence and/or long delays in responding are only likely to exacerbate the situation.

Previous article | Next article

• 1. [2023] EWHC 1779 (Ch). Given the potential consequences of these claims, where a party succeeds in preventing the presentation of a petition, the names of the companies involved are typically anonymised.