Application for an injunction to restrain the presentation of a winding up petition – Statutory Demand

A statutory demand serves as a critical precursor in insolvency proceedings. If validly served, it empowers a creditor, especially in the case of a company debtor to apply to the Court for a winding up petition seeking to wind-up the company debtor. Given the potential consequences, it is not something that should be ignored or delayed.

Timing is crucial. Under section 123(1)(a) of the Insolvency Act 1986, a creditor is entitled to present a winding up petition if the debt remains unpaid three weeks after proper service of a statutory demand. This means that any debtor wishing to prevent further action must act without delay and within the strict timeframe (3 weeks/21 days). That is full days (not business days). If you intend to instruct legal representatives, you should do so immediately to ensure they have sufficient time and capacity to take any necessary steps on your behalf.

The implications of a winding up petition for a company are severe. While not always fatal, the mere presentation of a petition can be commercially devastating. Banks frequently freeze company accounts, credit ratings can be irreparably damaged, and the reputational fallout can be extensive. The practical impact on day-to-day trading is often immediate and severe.

If the company disputes the alleged debt, urgent action needs to be taken.

Contrary to common misconception, a statutory demand issued under section 123 of the Insolvency Act 1986 cannot be set aside in the same way as one served on an individual. The appropriate course of action for a company is to apply for an injunction to restrain the presentation or advertisement of a winding up petition.

Step 1: Instruct a Solicitor without delay

Upon receipt of the statutory demand, legal advice should be sought immediately, ideally on the same day. If you have grounds to dispute the debt, a solicitor will write to the creditor setting out the grounds on which the debt is disputed. The letter will request a written undertaking that no winding up petition will be presented. This serves two important functions:

1. It may prevent the need for costly and urgent court proceedings.
2. It helps protect the company’s position on legal costs if an injunction application becomes necessary.

The letter includes a firm but reasonable deadline for a response, depending on how long the company has to take action in order to apply to Court. If the creditor refuses to give the undertaking, or fails to respond, then the company must act swiftly in making it’s application to Court.

Step 2: Apply for an Injunction

If no satisfactory response is received, the company should urgently apply to the Court for an injunction under Rule 7.24 of the Insolvency (England and Wales) Rules 2016, seeking to restrain the presentation of a winding up petition.

The standard test for such an injunction is that the debt is disputed on “substantial grounds.” In simple terms, if there is a real argument that the debt is not owed—one that is more than merely fanciful, then the creditor should pursue their claim through ordinary court proceedings, not by issuing a winding up petition.

As Etherton LJ explained in Tallington Lakes Ltd v South Kesteven District Council [2012] EWCA Civ 443:

“… it is well established that the threshold for establishing that a debt is disputed on substantial grounds in the context of a winding up petition is not a high one for restraining the presentation of the winding up petition, and may be reached even if, on an application for summary judgment, the defence could be regarded ‘shadowy’.”

This is not an especially high hurdle. However, timing is everything. Delay in making the application can complicate matters, especially where the Court is asked to deal with the issue on a ‘without notice’ or urgent basis because time has simply run out.

In short, the statutory demand must be treated with urgency. If the debt is disputed, proactive steps must be taken immediately to protect the company from the serious consequences of a winding up petition.

At Whiterose Blackmans, we’re specialists in dealing with these types of applications and giving legal advice in this area. If you would like to discuss your matter, contact us on 0113 216 5507 or email info@whiteroseblackmans.co.uk.