A winding up petition and a statutory demand are two different processes faced by businesses in liquidation, yet they are both serious actions that pose a threat to the future of your business. In this article, our Business Recovery and Restructuring experts explain the difference between the two and what it means for you and your company.
What is a statutory demand?
A statutory demand is a formal request/written warning from a creditor requesting payment of any outstanding debts to an individual or company. It usually comes before any legal action which could see a company liquidated if the statutory demand is not responded too.
A statutory demand is usually served after a creditor has exhausted all other options for recovering the debts owed to them. Once a statutory demand is served, a response must be sent within 21 days, in which the full amount of what is owed can be paid or a mutually agreed plan on how the debt will be cleared is made.
It is often viewed by creditors that a statutory demand is sent before a winding up petition, and it is highly likely that if a payment is not made, the creditor will not hesitate to go on to issue a winding up petition.
What is a winding up petition?
Often the step taken after issuing a statutory demand, a winding up petition is a legal document filed by a creditor seeking to force a company into compulsory liquidation. It is the most serious action a creditor can take against a company in order to recover the money that is owed to them. A liquidator is appointed to realise the company’s assets and after taking into account the costs of the liquidation process, to distribute any surplus to the creditors in the statutory order set out in insolvency legislation.
The key to preventing a winding up petition from being followed through is acting quickly and seeking advice from a recovery professional, as it is vital to begin negotiations with creditors as early as possible in order to prevent serious legal proceedings. A winding up petition can be withdrawn if the debt is repaid or if the creditor decides against the petition as the company is unlikely to pay.
It also may be possible to negotiate a Company Voluntary Arrangement (CVA) to restructure the company’s liabilities, as well as a company administration, if the winding up petition is handled quickly.
How do they differentiate?
Recovery of a company is much more likely after a statutory demand debt is settled than after a winding up petition has been issued, as the latter is advertised, the company’s bankers will see the advert and likely freeze the bank account, and it is challenging to recover from the negativity of this process. In most cases, once a winding up petition is issued, it signifies the end of a business’s operations.
The response to both is also different, with the process of working through a winding up petition more complex and involving legal action, where the ability to repay the outstanding debts is scrutinised. A petitioning creditor will often require a validation order from the Court before agreeing to withdraw the petition.
Can you issue a winding up petition without a statutory demand?
It is not advisable to issue a winding up petition without a statutory demand and there is a significant case law which suggests a petitioning creditor could be subject to adverse costs if they begin a process and the outstanding debt it disputed.
It is much safer to either issue a statutory demand or, in the case of a disputed debt, to issue a CPR Part 8 claim form. This gives a creditor the opportunity to defend itself and submit any evidence as to why the debt is disputed.
What can you do if your business is facing outstanding debts?
Dealing with statutory demands or winding up petitions can be complex but can also be made easier with quick action and expert advice. Get in touch with a member of our knowledgeable Business Recovery and Restructuring team to see how we can help you.
