Payment of an outstanding debt: temporary changes to the use of statutory demands

• United Kingdom

• Construction and engineering
• Litigation and dispute management

10-06-2020

The Government is introducing a temporary restriction on presenting a winding-up petition following service of a statutory demand, together with temporary prohibitions on the issue of a winding up petition against a company (without reliance on non-payment of a statutory demand) unless it is reasonably believed that the company’s inability to pay its debts is not as a result of COVID-19.

The Corporate Insolvency and Governance Bill (the “Bill”) (which, as at the date of this article, is yet to come into effect as an Act of Parliament) provides that from 1 March 2020 until the later of 30 June 2020 or a month after the Bill comes into effect, statutory demands cannot be relied upon to support the issue of a winding-up petition.  This temporary restriction is intended to allow businesses the opportunity to reach agreements with all creditors.

Statutory demands are commonly used in the construction and engineering industry as an inexpensive, efficient means to exert pressure on a company to pay an outstanding debt.

While these temporary restrictions are in place, contractors and sub-contractors who are currently owed money will be left with the more traditional means of recovery: adjudication proceedings; or other contractual dispute resolution mechanisms; as well as meeting the conditions set out in the Bill to issue a winding up petition direct without reliance on a statutory demand as evidence of non-payment.

What is a statutory demand?

A statutory demand is a written demand for payment of a debt served on a debtor company.  If the debtor company fails to comply with the statutory demand by not paying the sum (being a sum which is more than £750) within 21 days of the statutory demand being served, winding-up proceedings can be commenced by the creditor.  A company on the receiving end of a statutory demand will need to take it seriously given the potential ramifications.  In particular, unless the creditor either agrees to withdraw the statutory demand or provides an undertaking not to present a winding up petition, the debtor company will have to commence injunction proceedings to prevent the presentation of a winding up petition. Such an injunction will only be successful if the debtor company can rely on specific grounds (e.g. that the debt in question is genuinely disputed on substantial grounds).

It is therefore not surprising that statutory demands have become an increasingly popular tool, particularly in the supply chain to promote prompt payment of outstanding debts, without the legal cost and time investment of procedures such as adjudication.

An expected increase in adjudications

Pre-COVID-19, the construction industry was rife with ‘smash and grab’ adjudications which can arise out of simple failures by Employers and Project Managers to serve payment notices and/or pay-less notices within the applicable timeframe.

It seems likely that the proposed restrictions on statutory demands will give rise to an increase in adjudications over payment disputes, at least in the short term.  This will be further emphasised by the current economic climate and the increasing importance of cashflow to contractors which was of course at the core of the protections built into the Housing Grants, Construction and Regeneration Act 1996, including the unfettered right for a party to commence adjudication proceedings. 

From an employer perspective, although there may be a temporary reprieve from the threat of statutory demands and the issue of winding up petitions, now more than ever, they will need to ensure that they are complying with the payment notice provision so as  not to find themselves subject to ‘smash and grab’ tactics of contractors and/or sub-contractors. 

Contractual disputes resolution procedures

While the restrictions on statutory demands are in place, contractors may also look to any contractual mechanisms which provide a quick and easy method of putting pressure on employers to pay outstanding debts. 

Construction contracts typically include dispute escalation mechanisms which carry the threat of formal dispute resolution procedures such as arbitration or litigation.

Examples include notices which require parties to hold project level discussions to resolve any disputes.