A statutory demand obviates the need for any court proceedings, let alone a judgment.

Failure to comply with a demand for three weeks can become the basis of a bankruptcy petition.

As such, it is a potent weapon in a creditor's armoury.Get the formalities rightThe Insolvency Act 1986 and the Insolvency Rules 1986 (the rules) govern the position.

Creditors must comply with the detailed rules 6.1 and 6.2 and use the prescribed forms (6.1, 6.2 or 6.3), as appropriate.Because a demand is not a court document, it is down to the creditor to serve it and to prove service.Rule 6.3 sets out the requirements as to service.

The creditor is under an obligation to do all that is reasonable for the purpose of bringing the demand to the debtor's attention and, if practicable in the particular circumstances, to effect personal service (rule 6.3(2)).

If, however, the sum owing is due under a judgment and the debtor has absconded or is keeping out of the way to avoid service and there is no real prospect of the sum being recovered through execution or other process, the demand may instead be advertised.

In that case the time for compliance runs from the date of the advertisement (rule 6.3(3)).But, a creditor will need to turn to rule 6.11 to find out how service is to be proved.

An affidavit of service exhibiting the demand must be filed at court at the same time as filing the petition itself.

Unless the demand has been personally served or acknowledged by the debtor or someone on his behalf, the affidavit must:-- Give particulars of the steps taken to serve the demand; and,-- State the means whereby (those steps having been ineffective) it was sought to bring the demand to the debtor's attention; and,-- Specify a date by which, to the best of the knowledge, information and belief of the person making the affidavit, the demand will have come to the debtor's attention.For this purpose 'steps' must be such as would have been enough to justify an order for substituted service of a petition.Essentially, if the court is satisfied the debtor is keeping out of the way to avoid service, it may order alternative service to be effected in such manner as it thinks fit.Setting aside -- procedureA debtor may apply to set aside a statutory demand.

Application must be made to the 'appropriate court' -- generally, his local one -- (rule 6.4) within 18 days (rule 6.4(1)).Turner v Royal Bank of Scotland Plc [2000] BPIR 683 makes it clear that if a debtor wishes to dispute a debt or raise a cross-claim, he should do so by applying to set aside the demand and only where there has been a subsequent a nd real change of circumstances could a debtor reargue on the hearing of the petition issues which had been determined on the application to set aside the demand.The application must be supported by an affidavit exhibiting a copy of the demand, specifying the date when it came into his hands and stating the grounds on which he claims it should be set aside.If the application to set aside is not lodged by the 18th day the debtor must:-- In addition to his originating application file with the court an affidavit explaining why he is late and needs the permission of the court to apply out of time to set aside the demand, giving the basic grounds of his application to set aside; and,-- State in his affidavit that, to the best of his knowledge and belief, the creditor has not presented a petition against him.If the application is granted, the district judge will usually require an undertaking from the debtor to apply that day to set aside the demand and the order will extend his time for doing so until that day.Setting aside -- groundsRule 6.5(4) provides that the court may grant the application if:-- The debtor appears to have a counterclaim, set-off or cross-demand which equals or exceeds the amount of the debt(s) specified in the demand; or,-- The debt is disputed on grounds which appear to be substantial; or,-- It appears the creditor holds some security in respect of the debt; or,-- The court is satisfied, on other grounds, that the demand ought to be set aside.If clear that the application will fail, the district judge has power to dismiss it without a hearing.

On the other hand, if the application cannot be dealt with in, say, 15-20 minutes, the demand will probably be set aside; the process is not intended to be a mini-trial.CapacityIn Hurst v Bennett [2001] BPIR 287, a case involving former partners in a firm of solicitors, the Court of Appeal said that a counterclaim or cross-demand could not be relied on when the person pursuing it was doing so in a different capacity to that in which he was the subject of the demand.

So, whereas, in this case, the other partners were claiming a share of the rent from H as trustees of the firm, H's claim (in respect of his share of a tax repayment, etcetera) was against his former partners jointly in their capacity as such.Provable debtsCosts orders in family proceedings are non-provable debts for bankruptcy purposes.

Levy v Legal Services Commission [2001] 1 All ER 895 involved non-payment of taxed costs in ancillary relief proceedings.

There was nothing exceptional here to justify removing the case from the usual provisions of rule 12.3(2) and the demand was, accordingly, set aside.Certificate/adjudicationIn Re A Company (No.

1299 of 2001) CILL 2001, June, 1745-1748 a demand served by a sub-contractor in respect of certified works was not set aside even though the main contractor complained of defective works.

The judge appears to have been influenced by the fact that there had been a reasonable opportunity to litigate the cross-claim which had not been taken up by the main contractor.

But contrast George Parke v The Fenton Gretton Partnership CILL 2001, March, 1712-1714 (a demand based on an adjudication decision), following Seawind Tankers Corporation v Bayoil SA [1999] 1 WLR 147 (a case involving a 'genuine and serious cross-claim of substance').Setting aside judgmentsIf there has been a default judgment, the district judge will consider whether there is a real prospect of successfully defending the claim or some other good reason why the judgme nt should be set aside (as in Civil Procedure Rules 1998, rule 13.3).

In such a case the court will not set aside at that stage but rather adjourn the application pending the debtor's application to set aside judgment.

The debtor will be put on strict terms as to getting on with such an application.

If, however, the judgment was not obtained by default, the court is unlikely to go behind it.And what if the creditor gets the statutory demand wrong?This is unlikely to be fatal.

The test (as laid down in re a debtor (No.490/SD/91) [1992] 2 All ER 664) appears to be whether there is any injustice to the debtor.

If so, set it aside.

If not, let it stand.

Certainly, the mere overstatement of a debt is not, by itself and without more, a ground to set aside.Creditors must be astute to comply with the not inconsiderable requirements of the rules and the prescribed forms.

These provide the debtor with his protective shield.

However, having pierced the shield the statutory demand procedure wins for a creditor at least the first battle.