Are statutory demands the solution to non-payment?
The collapse of Carillion has highlighted the problem of late payment in the supply chain
For contractors struggling to get paid, statutory demands are a common resort – but are they the best route to securing payment? James Sargeant explains.
“Cash flow is the lifeblood of the building industry”. Lord Denning made this remark in a series of Court of Appeal decisions in 1971 and his statement remains as true today as it was then.
In recent months we have seen a steady increase in subcontractor clients coming to us because they haven’t been paid by a main contractor or an employer. These outstanding payments can accumulate to strangle firms and threaten their very existence.
As a result, we are drafting, serving and defending against an ever-increasing number of statutory demands for non- payment. But what is a statutory demand and how do they work?
In simple terms, if a company owes you more than £750, then you can serve it with a statutory demand, giving it 21 days to pay the debt. If it fails to pay the debt within 21 days, then the statutory demand can be used to support a winding up petition against it.
If used correctly, statutory demands can be a simple and cost-efficient way of “suggestively prompting” a company to pay you the money that it owes, through fear of being wound up. But if you do decide to go down this route there are several factors you should first consider.
First, if you intend to rely on the statutory demand in winding up proceedings you must be able to demonstrate to the court that the statutory demand was served correctly. This can only be done by leaving the statutory demand at the company’s registered office or by personally delivering it to a company director.
But the real difficulty is in deciding whether a statutory demand is the appropriate vehicle for the recovery of debt.
When to use a statutory demand
In simple terms you should only seek to use a statutory demand if you are absolutely certain of the following: that you are owed the debt; exactly how much is owed (including any interest pursuant to Late Payment of Commercial Debts (Interest) Act 1998); and that the company which owes you money will pay rather than run the risk of a winding up petition being presented.
The key risk with a statutory demand is that if payment is not made you are left deciding between either commencing winding up proceedings and potentially only receiving a proportion of what is owed under the insolvency process, or doing nothing and having the threat be shown to be empty.
Another important consideration, which is often overlooked, is that you will not be able to enforce a statutory demand if the other party disputes the debt or has a genuine cross-claim or right of set-off. This was held by the court in the case of Wilson and Sharp Investments v Harbour View Developments .
In this same case, the court also held that a statutory demand should not be issued when a party is claiming sums owed by virtue of either a missing payment notice or pay less notice. These disputes should be referred to adjudication.
Finally, it is also worth considering how serving a statutory demand may affect your relationship with the company in question, as it may destroy any relationship between the parties. They should arguably only be used as a final resort so as to avoid gaining a reputation as a serial “statutory demander”.
In conclusion, statutory demands are indeed simple, effective and cost-efficient and can be an invaluable tool in the never-ending fight to get paid. However, they are more complex than they first appear. Before you consider serving a statutory demand, you should identify whether it is the correct vehicle for recovery and should ensure that you follow the necessary rules for drafting and serving, particularly if you later intend to rely on the statutory demand in winding up proceedings.
And, of course, if you have been served with a statutory demand, it would be highly advisable to contact a suitable legal professional as soon as possible to reduce the risk to your company.
James Sargeant is an associate at Quigg Golden