Liquidation

Liquidation Introduction:

In this article we will look at the way to liquidate a debtor company via the statutory demand and winding-up petition process with the view to bringing you a brief summarisation of and the key information to be aware of. For the purposes of this article, we will be focusing solely on the process for a debtor company and not a debtor individual.

What is a Statutory Demand?

A statutory demand is a written demand for the payment of a debt and is served on a company by virtue of the Insolvency Act 1986 (“the Act”). Where a debtor company has failed for a period of three weeks to comply with a statutory demand for a debt of more than £750.00, it is at risk of the creditor instigating winding-up proceedings against it on the grounds that the company is unable to pay its debts as they fall due wherein a presumption of insolvency arises.

Statutory Demands and Winding-up Proceedings:

Section 123 of the Act sets out the circumstances when a company is deemed to be unable to pay its debts:

1.     Section 123(1)(a) – If a company owes a creditor a sum exceeding £750.00 and that creditor has served on the company by leaving at its registered office a statutory demand and the company has for three weeks neglected to pay the sum owed or to secure or compound it for reasonable satisfaction of the creditor;

2.     Section 123(1)(b) – If the execution or other process issued on judgment, decree or order of any court in favour of a creditor is returned unsatisfied in whole or in part in England and Wales;

3.     Section 123(1)(e) – If it is proved to the satisfaction of the Court that the company is unable to pay its debts as they fall due; or

4.     Section 123(2) - If on a balance sheet basis it is proved to the satisfaction of the Court that the company is insolvent.

It is therefore not expressly necessary for a creditor to serve a statutory demand (although it is often advisable) on a company before presenting a winding-up petition to the Court as it may rely on the statutory framework under paragraphs 2, 3 and 4 above.

Statutory demands have specific rules relating to them in the context of corporate insolvency and these are set out in rules 7.2 and 7.3 the Insolvency Rules 2016 (“IR 2016”). Prior to the 6th April 2017, which was when the IR 2016 came into force replacing the Insolvency Rules 1986, there was a prescribed form of statutory demand. However, this form is no longer in use following the IR 2016 coming into force.

There are a number of pieces of information that need to be contained in a statutory demand for it to be deemed valid and it is therefore extremely important that the form and content of the statutory demand is correct. Furthermore, there are specific requirements for the service of a statutory demand for it to be valid. Mistakes in statutory demands should be avoided at all costs as they can cause delay and costs. We at T G Baynes produce correct and valid statutory demands for our clients’ on a regular basis and are happy to assist you in this regard.

What Corporate Entities Can a Statutory Demand be Served On?

A statutory demand can be served on a company within the winding up jurisdiction of the courts of England and Wales. This jurisdiction extends to any company registered in England and Wales including Limited Liability Partnerships, a company whose centre of main interests is situated in England and Wales or an unregistered company.

Where the company is a foreign company, the Court of Appeal in Stocznia Gdanska Sa v Latreefers Inc [2000] EWCA Civ 36, developed a three part test for determining whether the Court should exercise its discretion concerning the winding up of foreign companies.

A statutory demand may be served on a foreign debtor over whom the English Courts would have insolvency jurisdiction as set out above. As the statutory demand is not a document issued by the Court, it is not necessary to obtain its permission to serve it outside of the jurisdiction. Where a statutory demand is served outside of the jurisdiction, there is an extension to the deadlines for the presentation of a petition.

Type of Debts a Statutory Demand May be Applied to?

For debts that are unliquidated, a statutory demand cannot be served for money that is not “then due” at the date of the service of the statutory demand. A winding-up petition may however be based upon an unliquidated debt.

For debts that are secured, a creditor is not precluded from petitioning to wind up a debtor company. Rule 7.3 of the IR 2016 does not require the detail of any security to be stated.

For guarantors and sureties, a creditor may be entitled to serve a statutory demand on a surety, even though the creditor holds security over the assets of the principal debtor. In White v Davenham Trust Ltd [2011] EWCA Civ 747, the Court of Appeal held that allowing a creditor to make a statutory demand because the liability under the guarantee was undisputable and unaffected by the security of the principal’s assets. Where however the principal debtor genuinely disputes the debt, serving a statutory demand may be inappropriate.

For debts that have been assigned in law, the assignee may serve a statutory demand on the debtor. However, where there has been an equitable assignment, the assignment does not have an entitlement to sue for the debt unless the original creditor is joined to the proceedings. The assignee would not therefore have standing to serve a statutory demand. As a party’s right to petition for a company’s winding up is separate from its entitlement to sue for the debt, an equitable assignee can present a winding-up petition in their own name without joining the assignor to the petition.

Debts that are statute barred cannot form the basis of a statutory demand and would be dismissed. The six year limitation period set out in section 24(1) of the Limitation Act 1980 does not have an impact on the right of a judgment creditor to present a winding-up petition as demonstrated here.

What Happens Once the Statutory Demand has been Served?

A petition must not be presented until three weeks has elapsed after the statutory demand was served. Once this period has elapsed, there is not a requirement for the petition to be served immediately but it is prudent for a creditor to decide quickly whether or not to present a petition.

If the debtor pays the debt in full or discharges part of the debt so that the amount outstanding is reduced to less than £750.00, the creditor cannot rely on the statutory demand as the basis for the presentation of a winding-up petition.

A winding-up petition should not be presented if the debt is genuinely disputed or the debtor has a counterclaim that reduces the amount owed to the creditor to below the £750.00 threshold. A valid reason for a company not paying a debt may be that the debt is genuinely disputed on substantial grounds and/or that the company has a genuine cross-claim against the creditor.

Application to Prevent Winding-Up Proceedings:

For a company served with a statutory demand, there is not a procedure for the company to apply to set the statutory demand aside. A company can however apply to restrain the presentation of the petition and this application should be made promptly.

An injunction preventing the presentation of a winding-up petition may be made if any of the following grounds apply:

1.     If it appears that the debtor company is solvent;

2.     The debt is genuinely disputed on substantial grounds;

3.     The company has a cross-claim or a right of set off against the creditor that exceeds the amount claimed in the statutory demand; or

4.     The Company has a reasonable excuse for not paying the debt claimed.

Advantages and disadvantages of Statutory Demands:

There are both advantages and disadvantages to Statutory Demands and we have summarised these below.

Advantages:

1.     The procedure does not involve the Court from the outset;

2.     The preparation and serving of a statutory demand is quick and inexpensive;

3.     A low threshold of £750.00 to serve a statutory demand will cover the majority of debts;

4.     The severity of the company being wound up unless full payment is made usually elicits a response from the debtor; and

5.     It can either result in a quick payment of a debt or can elicit the details of any dispute or cross claim.

Disadvantages:

1.     It can have a negative impact upon an ongoing trading relationship;

2.     It can be viewed as an aggressive step; and

3.     It can lead to court proceedings if a dispute or cross-claim arises.

How we can help:

T G Baynes have an experienced debt recovery department and civil litigation department that have dealt with a number of cases that have concerned statutory demands and the winding-up of companies. As a result of this, T G Baynes is able to advise you appropriately regarding statutory demands and the winding up of companies as well as alert you to any of the risks and problems you may face.

If you are a debtor that has received a statutory demand or are a creditor with a corporate debtor who owes you more than £750.00 and are thinking about issuing a statutory demand, please do not hesitate to contact us.