Insolvency procedures: winding up part 8, Compulsory winding up

When a company is insolvent and cannot pay its debts then the court has power to wind it up and put it into liquidation. If a person is in the same position then the process is bankruptcy. Statutory demands are used in both situations but their nature and importance it is different depending on which the scenario is. It is important to remember that when looking at comments about statutory demands in bankruptcy on the one hand and in company winding up in the other. They are very different creatures.

With a company the statutory demand is served with a view to that being one of the ways (others being considered in subsequent articles) that one shows that a company is unable to pay its debts as they fall due. By contrast the importance of the statutory demand in proposed bankruptcy is crucial. Any creditor can petition to wind up the company. A statutory demand is merely one way of demonstrating the relevant insolvency. However if you want to make a person bankrupt then just being a creditor of that person alone gives you no right to issue a bankruptcy petition. The effect of sections 267 and 268 of the Insolvency Act 1986 is that there are two ways in which a creditor can issue a bankruptcy petition. One is if the creditor has a judgment for the debt and execution or other process to enforce the judgement has been returned partially or wholly unsatisfied. What that means is for example steps have been taken to enforce the judgement (for example sending in the bailiffs) and either there is nothing or not enough to satisfy the judgment. To pursue that route of course one has to have both the judgment and the attempt to execute being unsatisfied in whole or in part. Unless you have that then you have to serve a statutory demand in order to be in a position to petition for bankruptcy. Moreover the effect of failure is different. Under section 123 if there is a neglect to pay then (of course there is no neglect if there is valid or genuine defence put forward by the company as to why it should not have to pay) the company is deemed unable to pay its debts. The individual who neglects to comply with the statutory demand is not deemed to be unable to pay. The effect of failure means that the individual "appears to be unable to pay" the debt.

This also means that there are different procedures to deal with statutory demands. If a company receives a statutory demand there is no procedure for "setting aside" a statutory demand, in other words having it treated as not having been served. There are various steps that can be taken in respect of any petition based on that statutory demand (which will be dealt with in later articles in this series) but you cannot do something about the statutory demand itself. With an individual there is a specific procedure under the 1986 Insolvency Rules, rule 6.4 allowing an individual to apply to set the demand aside. Rule 6.5 sets out the circumstances in which the court can grant such an application. This can be because the debtor has a counterclaim set off or cross demand equalling or exceeding the statutory demand debt or debts. It can be because the debt is disputed on grounds which appear to the court to be substantial. It can be because the creditor has sufficient security, or because the court is satisfied on other grounds that the demand ought to be set aside. Therefore if you see reference to setting aside a statutory demand this is in relation to potential bankruptcy of individuals. It is not relevant to a statutory demand served on the company.