Have you received a statutory demand and wish to dispute the debt? Statutory demands are a common first step to having a company wound up, or an individual declared bankrupt.
The risk of ignoring or not responding to a statutory demand for more than £750 where your company is solvent (or for over £5,000 in the case of a sole trader or individual debtor) is that the creditor may present a petition to wind up your company (or a bankruptcy petition in the case of individuals). Statutory demands give the debtor 21 days to pay the debt.
In this article, we have collated some valuable tips to ensure your business interests are protected when disputing a debt.
How do I dispute a debt?
If you receive a statutory demand and genuinely dispute part or all of the debt on substantial grounds, your company is not required to comply with the demand.
Instead, you would challenge the claim and apply for an injunction to restrain the presentation of the petition (in the case of a company) or apply to have the statutory demand set aside (in the case of an individual). You must make this challenge within 18 days if you were in the UK when you received the statutory demand or 21-34 days if you were abroad when you received it.
Furthermore, the creditor cannot issue a winding-up petition; if they do, the court will not issue a winding-up order.
What happens when you dispute a debt?
The consequences for a company of ignoring a statutory demand and allowing the creditor to file a winding-up petition can be severe, including concerning its reputation and ancillary matters such as the company’s bank often freezing its bank accounts.
If you disagree with the claim, you must show that there are substantial grounds for disputing the debt referenced in the statutory demand (which means the dispute must be “real as opposed to frivolous”).
For example, the courts have held that if the creditor has previously acknowledged payment of the debt, this may qualify as substantial grounds. If that is accepted by the court, the dispute will be resolved outside the scope of insolvency proceedings (possibly via arbitration).
How to write a letter to dispute a debt
If you’re disputing the whole debt, you should:
- Seek legal advice immediately
- Promptly write a letter to the creditor
The letter should set out the grounds on which the debt is disputed and request a written undertaking that the creditor will not petition for your company to be wound-up.
You should also explain that if such an undertaking is not provided and a winding-up petition is lodged, you will go to court to seek an injunction and/or oppose the petition. If this is necessary, you will seek costs from the creditor.
Things are more complicated if only part of the debt is disputed. This is because the court has the discretion to allow a winding-up petition to proceed on the basis that the failure of the company to settle the undisputed part of the debt is evidence that the company is unable to pay its debts. You should therefore seek legal advice as quickly as possible.
Can I issue a WUP if the debt is disputed?
A Winding-up Petition (WUP) should only be commenced if the debt can be proven and there is no dispute as to the amount owing and whether it’s due (and after the creditor has tried to recover the debt following unsuccessful reminder letters and possibly negotiations).
If the debt is genuinely disputed, or the debtor company has a genuine cross-claim or right of set-off, winding up proceedings will fail, and legal action will not be appropriate. A costs order may even be made against the creditor.
Does disputing a debt restart the statute of limitations?
Disputing the debt means that you acknowledge you owe money to someone but claim that it is inaccurate for one reason or another. You can restart the statute of limitations when you acknowledge the debt.
What to do if a debt is not yours?
Sometimes you may be contacted by a creditor or debt collection agency about a debt you don’t recognise. If this is the case, you should consider the following:
Is it an old debt you’ve forgotten about?
If you’re unsure, contact your creditors and ask them to let you know when and at what address it was first registered. In some cases, if a debt is very old (generally over six years), it could be statute barred, and the creditor may be out of time to collect it.
Is it a debt you know about which has been transferred to another company?
Check the letter to see if it shows a creditor name or account number that matches a debt you have or if the balance owed is the same. If you’re sure the debt is nothing to do with you, contact the creditor and tell them. If the creditor continues to contact you about the debt after you’ve explained it isn’t yours, the next step is to make a complaint.
Do you have a CCJ in your credit file that isn't yours?
You may be able to apply to have the CCJ set aside. To get a CCJ set aside, you’ll need to fill in an application notice (N244) and send it to the court. It’s best to seek legal advice before you start this process.
How to counterclaim
It’s also worth considering whether there is a counterclaim or right of set-off you can make against the debtor, which is equal to or exceeds the amount claimed in the demand. This means you believe the demand you have against you is wrong (in which case you’ll need to defend the claim), plus you believe the debtor actually owes you money.
A typical scenario for this could be the build of a software project, where a developer believes money is owed to them for the delivery of a project. Still, the client believes the project was not created to the agreed deliverables.
A statutory demand could then be issued on behalf of the developer demanding payment from the client. The client could then defend the claim and create a counterclaim (which it should do without delay) that accounts for losses they may have incurred from not receiving the agreed project and any legal fees.
The courts may set aside an enforced statutory demand if the debt is genuinely disputed. You may, however, have to pay a court fee to make a counterclaim. Court fees are based on the amount you’re claiming plus any interest.
Can a solicitor deal with finding out debts before a dispute?
Yes, a solicitor can assist with finding out debts before a dispute. They can help you understand and review the legal documents associated with the debt, advise you on your rights and obligations under the law, and represent you in negotiations or litigation if necessary.
They can also help you negotiate with creditors on payment plans or settlements, plan a credit agreement and provide advice on how to manage your finances to avoid similar situations in the future, so you can continue trading with confidence.
Get legal assistance from LawBite
The consequences of not complying with a statutory demand can be catastrophic; therefore, it’s essential that if you dispute the debt referenced in the document, you contact an experienced solicitor or an insolvency practitioner as soon as possible.
We know that dealing with debts and business disputes can be stressful. Our expert lawyers will help you try and resolve the matter through negotiation or business mediation or appear on your behalf in court. To find out more, book a free 15 minute consultation or call us on 020 3808 8314.
Please note: For litigation, we charge £255 (+VAT) per hour with a minimum of 7 hours per matter and a minimum claim value of £10K. You can find out more about how our rates work here.