Scots Law and the Short Form Demand

English lawyers are often puzzled by Scots lawyers’ reluctance to demand undisputed corporate debts using the formal statutory demand procedure contained in the Insolvency Act 1986. As legally qualified readers will know, a company may be wound up in terms of Section 123 of the 1986 Act if it is “unable to pay its debts.” It is deemed to be unable to pay its debts if a statutory demand in the prescribed form has been served on the company, and payment is not made within three weeks of service of that demand. In short, that means that if demand is served, the creditor needs to wait to for three weeks before petitioning the court to wind up the debtor on the ground that the company cannot pay its debts. That is a significant period if there is fraudulent activity and/or the risk of dissipation of assets!

In terms of Section 123 (1) (e), however, a company may also be deemed unable to pay its debts “if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due.” That is where the short form demand comes in.

The Scottish Courts have decided that if a clear demand for payment in terms of the Section 123 (e) of the Insolvency Act 1986, is served upon a company, and there is no genuine, good faith dispute raised (and those terms are key because if there is, a winding up petition cannot be allowed to advance and should be dismissed- probably with expenses/costs being awarded against the petitioner- but a spurious dispute being raised will not prevent winding up petition) the court may decide that in the absence of payment within Seventy two hours of the demand, that this is evidence the company is unable to pay its debts as they fall due.

There will be questions of fact and degree and so the court will want to be satisfied about the background to the debt, and email or other correspondence showing difficulty paying the debt will assist creditors. The Court will also want to be satisfied about service of the short form demand and therefore service by sheriff officers is a preferred approach. The reality is though that in many cases where creditors are dealing with an undisputed debt that they could be in Court petitioning for a winding up much quicker than 21 days using this method. Indeed, if the evidence already exists that the company in distress cannot pay the debt, it may not be necessary to serve any further demand but simply proceed with the petition.

It is worth noting that the Scottish courts seem much more ready than the English courts to appoint provisional liquidators if there is a risk that assets will be dissipated. Scottish Insolvency Practitioners seem more ready to accept such appointments but petitioners always need to be aware if the petition is found to be wrongful then there is a risk that the petition is dismissed and that not only expenses may be awarded against the petitioner, but also potentially , in extreme cases, damages.

BBM specialise in advising on insolvency law issues and they are happy to discuss with creditors, and indeed companies in distress.