A statutory demand is a formal written demand for payment of a debt made under the Insolvency Act 1986.

For a Scottish registered company, the statutory demand procedure is governed by section 123(1)(a) of the Insolvency Act 1986 together with the Insolvency (Scotland) (Receivership and Winding up) Rules 2018.

The purpose of the demand is significant. If the company fails for three weeks after service to pay the sum due, secure it or reach a settlement satisfactory to the creditor, the company can be deemed unable to pay its debts for the purpose of winding-up proceedings.

It is therefore more serious than an ordinary invoice, reminder or solicitor’s demand letter.

A Scottish company statutory demand must comply with specific requirements contained in the Scottish insolvency rules.

For a registered company it should be headed:

Statutory Demand under section 123(1)(a) of the Insolvency Act 1986

It should identify matters including:

• The company
• The company’s registered office
• The creditor
• The amount claimed
• The basis on which the debt is said to arise
• Relevant court decree or order details where applicable
• Information required by the Scottish insolvency rules concerning the demand and how it can be dealt with

If you are uncertain whether a document received by the company is a statutory demand, have it checked promptly. Do not assume that it is merely another debt collection letter because it has arrived alongside previous correspondence.

The critical period is 21 days from service of the statutory demand.

Within that period, the company needs to consider how the debt will be dealt with.

Depending on the circumstances, that might involve:

• Paying the debt
• Providing acceptable security for it
• Agreeing a satisfactory settlement or payment arrangement with the creditor
• Challenging the creditor’s underlying position where the debt is genuinely disputed
• Considering a restructuring or formal insolvency process where the company cannot pay its debts generally

The 21 days should not be treated as extra time simply to continue trading and see what happens.

Use the period to establish whether the company has a viable solution before the creditor gains a stronger basis for presenting a winding-up petition.

If a qualifying demand is not dealt with within the statutory period, the creditor can potentially rely on it to demonstrate that the company is unable to pay its debts.

The creditor may then present a winding-up petition asking the Scottish court to place the company into compulsory liquidation.

That represents a significant escalation because a petition can lead to:

• Formal court proceedings
• Advertisement in the Edinburgh Gazette
• Other creditors becoming involved
• Potential problems with the company’s bank account
• Restrictions and risks surrounding post-petition transactions
• Ultimately, a compulsory winding-up order

If the creditor intends to rely specifically on the statutory-demand route under section 123(1)(a), the three-week period is important.

However, an unpaid statutory demand is not the only way in which a creditor can seek to establish that a company is unable to pay its debts.

The Insolvency Act contains other tests for inability to pay.

Directors should therefore not assume that a creditor can never present a winding-up petition unless a statutory demand has first been served.

For the statutory-demand route used to establish inability to pay under section 123(1)(a), the qualifying debt must exceed £750.

This is the statutory company winding-up threshold.

Do not confuse this with the substantially different thresholds and procedures applying to personal bankruptcy or sequestration.

This page concerns statutory demands served on a limited company registered in Scotland.

If the debt is genuinely due, establish whether the company can afford to deal with it.

There are two very different situations.

The company can pay

If the company is otherwise solvent and has sufficient funds, payment or an acceptable settlement may resolve the immediate statutory demand.

The company cannot pay

If there is no money to pay the demand and other creditors are also overdue, the statutory demand may be evidence of a wider company insolvency problem.

At that point, directors should consider the company’s complete financial position rather than concentrating solely on the creditor who has served the demand.

Paying one creditor is of limited benefit if the company remains unable to pay HMRC, wages, suppliers or its other liabilities immediately afterwards.

Potentially.

The statutory test allows the company to deal with the demand not only by paying the debt in full, but potentially by providing security or reaching an arrangement acceptable to the creditor.

A creditor might, for example, agree to:

• A short repayment schedule
• Immediate part payment with the balance paid by an agreed date
• Another commercially acceptable settlement
• Security for the outstanding amount in an appropriate case

Any agreement should be recorded clearly in writing.

In particular, establish whether the creditor has agreed not to present a winding-up petition while the arrangement is being complied with.

The statutory 21-day period itself is not automatically extended simply because the company needs more time.

However, the creditor may agree a longer payment arrangement.

If it does, obtain written confirmation of the agreed terms and what the creditor intends to do about possible winding-up proceedings while those terms are being met.

If the company needs many months to clear the debt, you should also ask whether it can realistically afford the instalments while keeping all new liabilities up to date.

Do not ignore the demand.

A statutory demand and winding-up petition should not normally be used to determine an ordinary commercial debt that is genuinely disputed on substantial grounds.

However, there is an important difference between a genuine dispute and simply saying that the company disagrees with paying.

A genuine dispute might involve issues such as:

• The goods or services were not supplied as alleged
• The amount claimed has been calculated incorrectly
• The creditor has already been paid
• The company has a substantial counterclaim or set-off that affects the debt
• The contractual basis for the claim is genuinely disputed
• The debt is not presently due

The company should gather the contract, invoices, correspondence, payment records and other evidence supporting its position.

If a material statutory demand is based on a genuinely disputed debt, obtain Scottish legal advice promptly rather than allowing the 21-day period to expire without taking action.

The procedure is different from a statutory demand served on an individual.

The familiar application to “set aside” a statutory demand is not the normal company procedure.

Where a Scottish company says the demand is improper or the debt is genuinely disputed, the appropriate response may require urgent Scottish court action to prevent the creditor proceeding with a winding-up petition.

The precise remedy depends on the circumstances and is a matter for a Scottish solicitor.

Do not therefore use online guidance written for individuals facing personal bankruptcy or English court forms without checking that the procedure actually applies to a Scottish company.