Demand letters are often issued by lawyers and creditors so regularly that most companies have taken to ignoring demand letters as if to test the seriousness of the author of the demand. For some companies, they prioritize the contents of the demand letter when a litigation suit arising from said demand is instituted.
However, with the coming of the Insolvency Act, once a debtor, be it a company(business) or a person, is served with a statutory demand, the possibility of being declared bankrupt or having your company liquidated is very real should the said debtor ignore the statutory demand.
A statutory demand simply put, is a letter from the creditor demanding that the debt amount be paid within 21 days failure to which the creditor will apply to the court to declare the debtor as unable to pay its debt. So whilst it is like your usual demand letter, it is key to watch out on the paragraphs that threaten that failure to pay the demanded amount, will lead to insolvency proceedings. A statutory demand, issued under section 17 of the Insolvency Act 2015, is what ignites the insolvency process.
Should a debtor receive a valid statutory demand and the debtor fails to set it aside within 21 days after receiving the demand, the creditor is entitled to make an application to court for a bankruptcy/liquidation order against the debtor. A debtor can only set aside the demand by way of an application filed in court. Failure to do so, the creditor will then file an insolvency application by way of a petition and in the absence of any valid response, the court can proceed to declare the debtor as insolvent.
A company that suffered the fate of having its assets liquidated due to ignoring a statutory demand is F. M. Macharia (K) Limited (Reported in 2017 eKLR-Judgement delivered by Hon. Justice Onguto on 11thApril 2017). F. M. Macharia (K) Limited, hereinafter the debtor, was issued with a statutory demand by a creditor to pay up Kshs. 1,467,117 within 21 days failure to which the creditor would file insolvency proceedings against it.
The debtor failed to respond or set aside the demand within 21 days and the creditor carried forth her threat and filed a petition to liquidate the debtor/company.
The petition for liquidation of the company was heard by the court and the creditor produced invoices to demonstrate that the debtor owed the said sums of money. The court found that the creditor had proven that a debt existed from the invoices and that a valid statutory demand had been issued to which the debtor had failed to challenge. The court thereafter ordered that;
- a) F. M. Macharia (K) Ltd (and its assets )be liquidated
- b) The costs of the Petition are to be paid to the creditor out of the assets of the Company.
- c) The Official Receiver is to be constituted as the liquidator of the Company.
This should therefore serve as an example, regardless of whether it’s a company or a natural person, that should you receive a statutory demand that threatens insolvency proceedings, it is best to engage the debtor towards settlement of the debt or seek to set aside the demand.