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16-09-2019

Debtors are frequently aware that they can bring an application to set aside a statutory demand, pursuant to Insolvency Rule 10.4(1) 2016.

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The principles to be applied are set out in IR 10.5(5) 2016. 

 

  1. The debtor appears to have a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt specified in the statutory demand;
  1. The debt is disputed on grounds which appear to the Court to be substantial;
  1. It appears that the creditor holds some security in relation to the debt claimed by the demand, and either rule 10.1(9) is not complied with in relation to it, or the Court is satisfied that the value of the security equals or exceeds the full amount of the debt;
  1. The Court is satisfied, on other grounds, that the demand ought to be set aside.

 

However, the Court will not exercise its discretion unless there is a ‘genuine triable issue.’  This has been equated to the test of whether there is a ‘real prospect of success’ for the purpose of resisting an application for summary judgment.  (See Ashworth v Newnote Ltd [2007] EWCA Civ 793; Collier v P&MJ Wright (Holdings) Ltd [2007] EWCA Civ 1329.) The debtor must show that there is more than an arguable dispute.

 

What is sometimes overlooked however, is that the creditor’s purpose in serving the statutory demand is to establish that the debtor is unable to pay the debt or has no reasonable prospect of doing so, so that a bankruptcy petition can be presented. This is in accordance with Section 267(2) (c) Insolvency Act 1986. 

 

The definition of ‘inability to pay’ is found in Section 268 (1) IA 1986.

 

For the purposes of Section 267(2) (c), the debtor appears to be unable to pay a debt if, but only if, the debt is payable immediately and either the petitioning creditor has served on the debtor a demand in the prescribed form requiring him to pay the debt or to secure it, at least three weeks have elapsed and the demand has not been complied with, or execution or other process in respect of the debt has been returned unsatisfied.  (Emphasis added.)

 

Martin v McLaren Construction Limited [2019] EWHC 2059, a decision of Judge Barber handed down on 29 July 2019, is a case in point.  The creditor sought to recover £7 million under a personal guarantee.  The debtor/guarantor applied to Court to have the statutory demand set aside.  The guarantee contained a clause that the guarantor was only liable to make payment when he had been served with a written demand for payment, in accordance with the terms of the guarantee.  There had been no written demand.  Accordingly, there was no cause of action and nothing was due to the creditor until such a demand was made.  There are a number of authorities on this point.   

 

The Court was not persuaded that the statutory demand constituted the written demand of itself, as a demand under the guarantee.  An argument that a previous statutory demand (that had been withdrawn) amounted to a written demand was rejected.  The statutory demand was not intended as a means of fulfilling a contractual precondition to make a debt immediately payable.  Similarly, an alternative argument that a demand made by email was sufficient to render the debt enforceable failed because this did not comply with the provisions of the guarantee.  The statutory demand was set aside.  It fell foul of both Section 267 (2) (c) and Section 268(1) Insolvency Act 1986 (and Section 267(2) (b)).

 

Ultimately, the creditor failed to establish the statutory presumption of insolvency which is the pre-condition to presenting a bankruptcy petition.  As a creditor, if you elect to use Section 268(1) as your gateway, you need to ensure that the debt is payable immediately and that any pre-condition arising from a guarantee has been met. 

 

An unusual aspect of the McLaren Construction case is that at any time the creditor could have sought to remedy its deficiency by sending the debtor a written demand for payment, thus giving rise to the cause of action on which it sought to rely.  Similarly, the creditor could have conceded the set aside application, sent a written demand and then served a fresh statutory demand. 

 

For advice on serving/defending statutory demands please contact Simon Duncan (sduncan@moonbeever.com) or Robert Paterson (rpaterson@moonbeever.com).

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