When pursuing a debt, it’s not always clear whether a letter before action or a statutory demand is appropriate. Here, Hope Wilson (dispute resolution associate) and Gurjeet Kaur Walia (insolvency associate) discuss the key differences between these two options.
Letter before action
A letter before action (“LBA”) is also known as a pre-action letter or a letter of demand. It is a formal letter, usually from a lawyer of a prospective claimant to the prospective defendant setting out a list of demands, such as the payment of a debt, and putting them on notice of legal action if those demands are not satisfied within a reasonable period of time.
An LBA is usually sent when earlier requests for payment have been unsuccessful and it gives the other party a chance to respond and raise a dispute or adhere to the relevant demands (ie. payment of a debt) before matters are escalated. If those demands are not adhered to then legal proceedings can be issued.
Sending an LBA is a requirement of the Civil Procedure Rules and Pre-Action Protocols, which govern the conduct of parties and set out what steps should be taken before issuing a claim against an individual or a company. If a dispute proceeds to litigation, the court will expect the parties to have complied with the relevant Pre-Action Protocol and will take into account non-compliance when giving directions in the case and when making an order for costs.
Whilst each LBA will require different information depending on the nature of the claim and the relevant protocol being followed, as a general guide it should set out:
- the debtors name and address;
- give a summary of the background and relevant facts;
- if seeking to recover a debt it should set out how the debt has been calculated along with any interest;
- give a reasonable time for the defendant to reply i.e. 14 days;
- annex a copy of any relevant documents; and
- make clear that proceedings will be issued if a response is not received within the time given.
An LBA is a useful tool to demand a sum of money or put the other side on notice of their breaches. It allows you to set out in detail the losses you will be claiming, giving them the opportunity to remedy the breach or, if they choose not to, it sets the stage for you to issue court proceedings.
If the debt is undisputed, an alternative approach could be to serve a statutory demand on a debtor (an individual or a company). This is a formal written demand in prescribed form from a creditor to a debtor requesting payment within 21 days.
If the debtor fails to pay the debt, fails to come to an arrangement acceptable to the creditor and/or fails to apply to have the demand set aside (in the case of an individual), the demand can be used to support a bankruptcy or winding petition on the grounds that the debtor is unable to pay its debts. Statutory demands are, therefore, aggressive in nature and should not simply be used as a debt recovery tool. In fact, you can be criticised by a court for misusing the process.
Here are a few key points to bear in mind when considering statutory demands:
- There is no obligation on a creditor who has served a statutory demand to commence insolvency proceedings against the debtor;
- If insolvency proceedings are commenced, bear in mind that other creditors are brought to the forefront and secured creditors will have priority over those with unsecured debts;
- For individual debtors, the debt demanded must be for an undisputed liquidated sum totalling at least £5,000;
- Where the debtor is a company, pre-covid, a winding up petition could only be issued if the outstanding debt was £750 or more. However, post-pandemic, temporary measures have been put in place by the Government to protect viable businesses from being forced into insolvent liquidation due to the restrictions on trading during the coronavirus pandemic. Currently, from 1 October 2021 until 31 March 2022, a statutory demand can be issued and relied on and a winding up petition may be presented only if:
- the debt totals £10,000 or more;
- where the debt concerns rent or any other sum payable by a tenant under a ‘relevant business tenancy’ (1) , it is not unpaid because of the financial effect of coronavirus;
- the creditor has delivered a written notice called a “schedule 10 notice” containing certain prescribed information and giving the debtor 21 days to put forward their proposals for repayment of the debt; and
- the debtor has not made a proposal for payment of the debt that is to the creditor’s satisfaction within 21 days, beginning the day the schedule 10 notice was delivered.
The advantage of using a statutory demand is that it is usually a faster means to recover payment from a debtor than using an LBA and issuing debt recovery proceedings. However, it is an aggressive tool and should not be deployed where the debt is genuinely disputed. If the debt is disputed then the LBA route is the appropriate route.
The facts of your case will determine what action you should take, and Hope and Gurjeet would be happy to advise you in this regard.
Further information on the temporary insolvency restrictions can be found in our article .
For more information please contact our Dispute Resolution and Litigation team.
(1) A ‘relevant business tenancy’ is one that is occupied (at least partly) for business purposes, and a ‘business’ means a ‘trade, profession or employment and includes activity carried on by a body of persons, whether corporate or incorporate’.
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