The debt must be undisputed and it must be reasonably believed that the company is unable to pay its debts as they fall due.
Section 123(1) of the Insolvency Act 1986 sets out the circumstances in which the court will deem a company unable to pay its debt as they fall due. A company is deemed unable to pay its debts if:
It is a popular misconception that the creditor is required to serve a statutory demand on a company before it is entitled to present a winding up petition. As section 123 of the Act sets out, serving a statutory demand is only one way that you can evidence a company is unable to pay its debts as they fall due.
A statutory demand is a prescribed form. It must contain content which complies with numerous statutory requirements. This includes, but is not limited to, the name and registered office of the company, the creditors details and details of how the debt which the demand is based on has accrued. The demand needs to be personally served at the registered office of the company where it will come to the attention of the company’s director(s).
The company will then have three weeks from the date of service to make payment of the demand or compound the debt to the creditor’s satisfaction (e.g. by offering security). If the debt which the demand is based on is disputed, the company may apply to the court for an injunction restraining the creditor from presenting a petition.
The benefit of serving a statutory demand is that if the demand is not set aside, it will be difficult to persuade the court that the debt is disputed once a winding-up petition has been issued. Furthermore, if a dispute exists that the creditor is not aware of, the demand will flush out any potential disputes. A company’s failure to respond to a statutory demand will also remove the requirement of the petitioning creditor having to prove to the court that the company is insolvent by any other means set out in Section 123 of the Act.
However, there is a cost associated in having a statutory demand drafted and personally served by a process server. In practice, the use of a statutory demand also allows the company a further three weeks extended credit to pay your debt.
A statutory demand is not necessary to commence winding up proceedings. Other methods to evidence that a company is unable to pay its debts are set out in Section 123 of the Act.
Therefore, provided that your debt is due and is not in any way disputed, you may want to demonstrate the company’s inability to pay its debts by simply demanding payment. This can take the form of a letter whereby the minimum deadline you give the company to pay the debt is three working days. The letter is a lot more commonly used in practice than a statutory demand.
If the company does not abide by the deadline set out in the letter, this can be used to prove to the satisfaction of the court, that the company is unable to pay its debts as they fall due pursuant to Section 123(1)(e) of the Act. This method is very quick and cheap and has advantage of immediately focusing the attention of the debtor company.
For further information relating to the points raised in this article, please contact Daniel Elsworth or any member of the Debt Recovery Team.
 Section 122(1)(f) of the IA 1986
 Form SD1 as required under paragraph 9.1 of PDIP 2018
 Rules 1.9(2) and 7.3 of the IR 2016
 Section 123(1)(a) of the IA 1986
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.