Posted by Simran Khakharia
Creditors often seek to issue a statutory demand as a precursor to bankruptcy (against an individual) or winding up petition (against a company), as this is usually a faster and more cost-effective procedure than issuing a Part 7 Claim. This often encourages prompt payment of a debt, without the need for extensive litigation proceedings. However, the statutory demand/petition route is not suitable in every case and using it incorrectly can backfire.
When a Statutory Demand cannot be used
A creditor is not entitled to issue a bankruptcy petition or a winding up petition if the debt is genuinely disputed on substantial grounds. Whilst there are other grounds available under The Insolvency (England and Wales) Rules 2016, this article will focus on debts that are genuinely disputed on substantial grounds.
If any petition is issued in these circumstances, then the debtor is entitled to have the petition set aside (in bankruptcy) or dismissed (in winding up). This would leave a creditor in a position where they have spent a considerable amount of time and money on issuing a statutory demand; issuing a petition; and preparing for a hearing, only for the petition to be set aside or dismissed and for a Part 7 Claim to be issued in the end anyway (the very process that they were trying to avoid). This exposes a creditor to wasted costs, delay and potential adverse costs orders. In serious cases, the court may also criticise the creditor for attempting to use insolvency proceedings as a pressure tactic where a genuine dispute exists.
Understanding “genuinely disputed on substantial grounds”
A dispute is likely to be considered substantial where there are arguable issues of fact or law (e.g. liability, validity etc.); where the debtor has documentary evidence supporting their position; and where disclosure, witness evidence or trial would be required to resolve the dispute.
In the recent case of Re Martin Dawn Plc [2025] EWHC 406 (Ch), ICC Judge Greenwood reviewed authorities on the meaning of “genuine and substantial”, which serves as a reminder that the principles in those authorities are considered by the court.
If the court considers the dispute to be more than frivolous or insubstantial, insolvency action will not be permitted.
When a Statutory Demand is appropriate and when to issue a Part 7 Claim instead
The statutory demand/petition route may be suitable where the debt is undisputed; the debtor has admitted the debt; liability is clear and evidenced; the debtor refuses to pay, despite no valid defence; and/or the debtor is insolvent or likely insolvent. In these cases, a statutory demand can be an effective tool to secure payment quickly or recover the debt via the faster and more cost-effective options of bankruptcy or winding up proceedings.
However, a Part 7 Claim is the correct procedure where the debtor disputes the debt; there are factual or legal disagreements; and/or expert evidence may be required. Part 7 proceedings allow the court to determine the issues through disclosure, evidence and trial. These processes do not exist in insolvency proceedings.
Other factors to consider
It is important to note that there are various other factors to consider when determining which route is appropriate. For example, the minimum debt thresholds to issue a statutory demand is £5,000 for individuals and £750 for companies. In addition, the debt needs to be liquidated (i.e. a specific, fixed sum of money) in the case of a statutory demand against an individual, whereas it does not in the case of a company.
Conclusion
When considering issuing debt recovery proceedings, it is important to understand the details of each case and consider whether (i) the debt is disputed; and (ii) whether the debt is genuinely disputed on substantial grounds; and (iii) any other factors or grounds, so as to ensure that the correct legal recourse has been applied.
The incorrect legal recourse can cause delay, unnecessary costs and tactical disadvantages. Taking early legal advice can avoid these issues.