Setting Aside a Statutory Demand Against a Company

Reviewed by

Christopher Andersen

Reviewed by Christopher Andersen

Chris is an Insolvency Practitioner regulated by the ICAEW since 2014,. He is experienced in contentious insolvency with excellent analytical skills and strong knowledge of both general and technical insolvency matters.

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27th August 2024

A statutory demand, a legal prerequisite for the issuing of a winding-up petition, is a serious warning sign for a business in debt.

If the debtor fails to pay or come to an agreement within 21 days of receipt, the creditor can then proceed to petition the court to wind up the debtor company, potentially leading to the liquidation of the business.

When your company receives a statutory demand, you might assume there’s a straightforward process to challenge it. However, it’s crucial to understand that, unlike individuals, companies don’t have a formal ‘set aside’ procedure.

Instead, you have two main options, which I’ll explain below.

To Set Aside a Statutory Demand, a Company Can:

Resolve the Situation With the Creditor

If time permits, this should be your first course of action. Here’s what you should do:

• Explain to the creditor why you disagree with the debt claim
• Clarify why you believe winding-up proceedings are not the appropriate course of action
• Seek written assurance from the creditor that they will not start or advertise winding-up proceedings without first giving ample written notice

This approach can often resolve the issue without the need for costly court intervention. It allows for negotiation and potentially preserves business relationships.

Apply for an Injunction to Restrain the Creditor from Presenting a Winding up Petition

If negotiation fails or time is short, you can apply to the court for an injunction, but you’ll need specialist legal advice to proceed. An injunction aims to:

• Restrain the creditor from presenting a winding-up petition under r.7.24 of the Insolvency Rules 2016^[1]Trusted Source – GOV.UK – Injunction to restrain presentation or notice of petition.
• Prevent the creditor from advertising any petition they might have already presented.

You’ll need to show the court that there’s a bona fide dispute about the debt. This could be because you believe the amount is incorrect, the goods or services weren’t up to standard, or you have a valid claim against the creditor that offsets the debt. The key is to demonstrate that your dispute is genuine and has substance.

The application should include a witness statement, typically from a director or senior manager. This statement should include details of the dispute, relevant documents, and information about your company’s financial position.

The court prefers to hear both sides, so aim to give the creditor notice of your application. However, if you’re short on time, you can apply without notifying the creditor first.

In the event of a successful application, the court generally awards costs in favour of the applicant company. This means the creditor may be ordered to pay the legal costs incurred by your company in making the application.

Key Case Law: Mann v. Goldstein

The landmark case of Mann v. Goldstein [1968] 1 WLR 1091^[2]Trusted Source – en.wikipedia.org – Mann v. Goldstein [1968] 1 WLR 1091 established that:

1. A winding-up petition is inappropriate when the underlying debt is genuinely disputed.
2. Using winding-up petitions to recover disputed debts is an abuse of process.
3. Companies must demonstrate that their dispute over the debt is substantial and not merely a delaying tactic.