Insolvency procedures: winding up part 9, Compulsory winding up

Last week we looked at service of statutory demands as a means of proving the insolvency of a company. This week we look at what the form has to contain, and the consequence of errors.

The demand has to be dated and must be signed by the creditor or a person stating that he or she is authorised to make the demand on behalf of the creditor. Similarly the signature must be of the person signing or a person authorised by them. The actual form to be used is form 4.1 in schedule 4 to the Insolvency Rules 1986 to be used with such variations (if any) as the circumstances may require. Particular requirements are specified in Insolvency Rules 4.5 and 4.6. (The actual form will in practice guide inclusion of such information). The demand has to state the amount of the debt and either the consideration for it or the way in which the debt arises. Consideration is a topic from the law of contract and consists of that thing which the payment arises in respect of. So if one party says that they will pay £2000 for a car, the consideration on one side is payment of the money and consideration on the other payment of the car. Consideration can consist of money, goods, or a promise to do something. (The purpose of consideration is that in general the court enforces mutual obligations but not voluntary ones, so that in general if you say you will do something without receiving a promise back from someone or in circumstances where it would not be wrong for you to go back on that promise the court will not normally force you to make the gift if you change your mind before giving it, and consideration helps demonstrate the difference between a pure gift and commercial situations). Other amounts such as interest or charges if included in the statutory demand must be identified together with the grounds on which they are claimed. The demand also has to explain various things associated with the demand such as: what the purpose of the demand is together with the consequence of failure to comply namely winding up proceedings; the time within which the demand must be complied with to avoid those consequences; the ways in which the company can comply with the demand; how the company can communicate with the creditor with a view to securing or compound into the debt to the creditor's satisfaction (an alternative to actual payment).

If the form is defective then that will not normally cause a problem about the creditor relying upon the statutory demand. It all depends upon the nature of the error. The test is, is the company receiving the statutory demand prejudiced by the error? For example, since the test is whether the company has neglected to comply with the demand, a failing in the notice can make it reasonable for the company not to have dealt with it. Let us say that the wrong contact details are given for communication with the creditor, and the company is trying to get in touch but is able to make no progress. That could be said to be prejudice. A frequent issue on notice defects arises from errors in the demand about the amount claimed. Even if the amount is overstated, if the debtor can readily ascertain that which it accepts is payable than a failure to pay that will demonstrate an ability to pay debts. However if the mistake is to reduce the amount of the debt then if that reduced debt is paid the statutory demand cannot be relied upon to suggest that there was a neglect to pay in respect of the true higher amount. A further demand for the balance would have to be served.