Increase in Threshold for Statutory Demands against Individuals

On 1 October 2015 the minimum debt for serving statutory demands against individuals, including sole traders or members of a partnership, rose from £750 to £5,000. The minimum threshold for company debtors remains at £750.

A statutory demand is a formal written request by a creditor for payment of monies owed. There can be no contention that the debt is due and payable, and no security for it can have already been given. Costs and statutory interest cannot be added to a debt demanded this way. Statutory demands are effective in recovering debt, as even the threat of being served can be alarming. Statutory demands are not court-issued documents, so creditors can serve them without court permission.

The £750 limit was set in 1986 and inflation has rendered the amount so low that ruthless creditors have used statutory demands to threaten individuals over low value debts, with no intention of making them bankrupt. The new threshold will make it more difficult for creditors to recover low level debts and small businesses will be the worst affected. There will be an inevitable increase in bad debt write offs, but serving statutory demands will continue to be a quick, cheap and effective method of recovering debts over £5,000.

When an individual is served with a statutory demand, he has 21 days to settle the debt or 18 days to ask the court to dismiss the demand. The creditor may present a petition to court for a bankruptcy order if a statutory demand is not:

1. paid;
2. secured (an agreement reached for payment); or
3. set aside or an injunction is granted.

There is no expiry period for a statutory demand but a bankruptcy petition should be issued within four months or a fresh statutory demand served. Under the Limitation Act 1980, a debt cannot be more than six years old. This period can start again from any date the debtor agrees the debt exists and may be extended more than once.

Alternatives to issuing statutory demands include:

Mediation

When an impartial party facilitates discussion between landlord and tenant. The fee payable to the mediator is based on the size of the debt, but is often cheaper than taking legal action.

Small Claims Court

Suing in the County Court can be expensive and time-consuming.

Commercial Rent Arrears Recovery (CRAR)

CRAR replaced Distress for Rent and is only available for recovery of rent, VAT and interest. It does not cover service charges or other charges under leases and only applies to purely commercial lettings.

When granting new leases to individual tenants, landlords should consider insisting on a rent deposit of £5,000 or more, so that debts below the new limit can be recovered by drawing down on the deposit. Landlords could also insist on a rent deposit, or other form of security, as a condition for giving consent to assigning leases. If there is no security vacating tenants may simply ignore outstanding rent liabilities, assuming landlords will not want the expense and inconvenience of bringing a claim. It is important for landlords to maintain accurate records of addresses for individual tenants and assignees as it is more difficult to pursue a claim of any type without a current address.

For further information regarding this topic or any other property matter, please contact Ian Gilmour – Partner, or a member of the Property team at Edwin Coe.

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