Setting aside a statutory demand—a question of jurisdiction

What does a debtor need to show in order to set aside a statutory demand on the basis that the creditor is fully secured? And does the court's power in insolvency proceedings to review an order extend to appellate decisions? Susannah Markandya of Enterprise Chambers comments on the recent decision in National Asset Loan Management Ltd v Cahillane.

Original news

National Asset Loan Management Ltd v Cahillane; Re John Christopher Cahillane [2015] EWHC 62 (Ch), [2015] All ER (D) 171 (Jan)

The claimant company served a statutory demand on the defendant. A judge dismissed the defendant's application to set aside the statutory demand and for an extension of time to adduce a supplemental expert report. The claimant presented a bankruptcy petition against the defendant. It appealed against orders by the Chief Registrar, adjourning the bankruptcy petition and making directions on the defendant's application to rescind or vary orders of the judge. The Chancery Division, in allowing the appeal, held that section 375(1) of the Insolvency Act 1986 (IA 1986) gave the court jurisdiction to review, vary or rescind the appellate orders of the judge. However, on the requirements imposed on the defendant by rule 6.5(4)(c) of the Insolvency Rules 1986 (IR 1986), the application under IA 1986, s 375(1) failed on the merits and was dismissed and the bankruptcy order was made.

Briefly, what was the background to the application?

The appellant (NALM) served a statutory demand on the debtor (Mr Cahillane), claiming to be a creditor for the shortfall between the debt which Mr Cahillane owed and the value of properties over which NALM had security. Mr Cahillane contended that there was no shortfall and that the statutory demand should be set aside. Mr Cahillane argued that NALM had a statutory duty to hold the properties for a certain period (possibly until 2020) in order to maximise the return to taxpayers.

Mr Cahillane sought to adduce evidence to show that by 2020 the value of the properties would have risen sufficiently to cover the amount of the debt. The Registrar dismissed Mr Cahillane's application to set aside the statutory demand, holding that the relevant value of the security was the present value, not some notional future value.

On appeal, HHJ Pelling QC (sitting as a Deputy High Court Judge) upheld the Registrar's order, and agreed that the relevant valuation was the present value of the security. The judge also commented that the expert evidence on which Mr Cahillane sought to rely did not show how expected future increases in the values of the property would affect the values now. Mr Cahillane subsequently applied under IA 1986, s 375(1) to rescind or vary the order of HHJ Pelling QC on the ground that his expert could—given more time—produce a schedule which showed this. Mr Cahillane also applied for specific disclosure of previous valuations of the properties (including a valuation obtained in 2009 when the debt and security was transferred from AIB to NAMA), and economic forecasts relating to the calculation of long-term economic values of the properties. NALM argued that the s 375(1) application was hopeless and that a bankruptcy order should be made.

Registrar Baister refused to make a bankruptcy order. NALM appealed against that refusal.

What were the legal issues that the judge had to decide in this application?

First, whether an order made on appeal (HHJ Pelling QC's order) could be the subject of an application to rescind/review under IA 1986, s 375(1). Second, whether the s 375(1) application was bound to fail on its merits. This turned on whether Mr Cahillane's expert was going to be able to produce a report which showed that the value of the security equalled or exceeded the amount of the debt.

What were the main legal arguments put forward?

On the jurisdiction point—whether the court should follow Appleyard v Wewelwala [2012] EWHC 3302 (Ch), [2013] 1 All ER 1383 and Sands v Layne [2014] EWHC 3665 (Ch), [2014] All ER (D) 141 (Nov). On the merits of the s 375 application—whether the evidence which Mr Cahillane sought to adduce could show that the value of the security equalled or exceeded the amount of the debt.

What did the judge decide, and on what basis?

The judge decided that the court's jurisdiction under IA 1986, s 375 did extend to an order made on appeal. The interpretation of that section by the judge (Briggs J) in Appleyard v Wewelwala was obiter. The judge in Sands v Layne (Mr David Donaldson QC) had wrongly concluded that Briggs J's interpretation was not obiter and, accordingly, that he should follow it. In those circumstances, the judge was not required to follow the decision of Mr Donaldson either.

The judge held that, correctly interpreted, the section does give the court jurisdiction to review, vary or rescind appellate orders. On the merits of the application, the judge endorsed the previous decisions of Registrar Jones and HHJ Pelling QC that the relevant valuation for an application under IR 1986, r 6.5(4)(c) was the value at the time of the statutory demand or possibly the hearing (but not any future value). That was the case regardless of the identity etc of the creditor. The judge also held that the evidence that Mr Cahillane sought to adduce (which involved a prediction of future increases in value of the secured assets) could not show that the present value of those assets covered the sum that was owed.

To what extent is the judgment helpful in clarifying the law in this area?

The judgment is helpful in explaining the jurisdictional extent of IA 1986, s 375(1). The judgment also clarifies what a debtor needs to show in order to set aside a statutory demand on the basis that the creditor is fully secured.

What practical lessons can those advising take away from the case?

An appellate order can be reviewed, rescinded or varied under IA 1986, s 375(1) by a court of the appropriate level. This is likely to be preferable to launching a second appeal. Evidence to support an application to set aside a statutory demand on the basis that the value of the creditor's security covers the full amount of the debt, must address the present value of the assets that constitute the security.

Interviewed by Nicola Laver.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

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What to do if you are served with a statutory demand and you dispute the debt

Appeals in insolvency proceedings

Reviews of orders from the insolvency court: what is the process and how can you appeal or review a decision and which court do you apply to?

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First published on LexisPSL Restructuring and Insolvency

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