Setting aside a statutory demand—what should the order say? (Clarke v Cognita Schools)

Where an application to set aside a statutory demand is dismissed on the papers, should the order contain a statement that the applicant has the right to apply to have the order set aside, varied or stayed? And if it should—but does not contain such a statement—what is the effect of that order?

Original news

Clarke v Cognita Schools Ltd [2015] EWHC 932 (Ch), [2015] All ER (D) 17 (Apr)

The appellant bankrupts applied for their bankruptcy orders to be set aside. This was on the basis that the orders dismissing their applications to set aside the statutory demands served on them did not contain a statement notifying them that they could apply to have the dismissal orders set aside, varied or stayed, which they submitted was required pursuant to the Civil Procedure Rules 1998, SI 1998/3132, 3.3(5) (CPR). Because of that, their applications to set aside the statutory demands were said to be outstanding at the time that the bankruptcy petitions were presented, meaning that the petitions should not have been presented in the first place and therefore that the bankruptcy orders should not have been made.

In dismissing the appeals, Newey J held that orders dismissing applications to set aside statutory demands—where such orders were made on the papers—did not have to notify the applicants that they could apply to have the orders set aside, varied or stayed. Even if he was wrong on that point, the absence of such notification did not mean the application to set aside the statutory demands could be said to be outstanding.

Briefly, what were the facts of this case?

Mr and Mrs Clarke were served with statutory demands by a judgment creditor.

Applications to set aside the statutory demands were made by Mr and Mrs Clarke on the ground that there was a discrepancy on the figures. However, their applications were dismissed on the papers pursuant to rule 6.5(1) of the Insolvency Rules 1986, SI 1986/1925 (IR 1986) as they showed no sufficient cause.

The judgment creditor subsequently presented bankruptcy petitions against Mr and Mrs Clarke, and bankruptcy orders were in due course made against them on those petitions. This was notwithstanding the district judge’s view that the debt alleged in the petitions was overstated.

What were the legal issues that the judge had to decide?

There were two issues that Newey J had to decide:

  • whether the orders dismissing the applications to set aside the statutory demands should have contained a statement notifying Mr and Mrs Clarke that they could apply to have those orders set aside, varied or stayed (the first issue), and
  • if so, whether the absence of such a statement meant that the applications to set aside the statutory demands were still outstanding at the time that the bankruptcy petitions were presented (the second issue)

In order for the appellants to be successful on the appeal, they needed the judge to find in their favour on both issues.

What were the main legal arguments put forward?

Section 267(2) of the Insolvency Act 1986 (IA 1986) sets out the conditions that must exist at the time that a bankruptcy petition is presented. This includes the condition that there is no outstanding application to set aside a statutory demand served in respect of the petition debt (IA 1986, s 267(2)(d)).

The first issue

The appellants submitted that an order made pursuant to IR 1986, r 6.5(1)—that is, an order made on the papers solely by reference to the application—is an order made pursuant to CPR 3.3(4), which states that the court ‘may make an order of its own initiative, without hearing the parties or giving them an opportunity to make representations’. CPR 3.3(5) provides that any such order must contain a statement notifying a party affected by the order that they may apply to have it set aside, varied or stayed.

Given that there is no equivalent provision in IR 1986, and that the CPR applies to insolvency proceedings by virtue of IR 1986, r 7.51A (subject to certain savings and modifications which did not apply in this case), the appellants submitted that an order made pursuant to IR 1986, r 6.5(1) must comply with CPR 3.3(5) and contain the required statement.

The second issue

The appellants then developed their submission further, stating that, because the orders in this case setting aside the statutory demands did not contain the required statement, the orders were not effective as they stood. That in turn meant that their applications to set aside the statutory demands were still outstanding at the time that the petitions were presented, contrary to IA 1986, s 267(2)(d).

What did the judge decide, and why?

The first issue

The judge stated that CPR 3.3(5) is in terms tied to CPR 3.3(4). In this case, the orders dismissing the set aside applications were made pursuant to IR 1986, r 6.5(1), and not CPR 3.3(4), so that CPR 3.3(5) had no application in this case. Further, the dismissal of a set aside application simply means that a creditor can present a bankruptcy petition—it does not necessarily follow that a bankruptcy order will be made, and the debtor may still be able to dispute liability for the petition debt within the bankruptcy proceedings.

The judge therefore held that an order made pursuant to IR 1986, r 6.5(1) does not have to state that the debtor can apply to have that order set aside, varied or stayed.

The second issue

Despite having found against the appellants on the first issue—which was sufficient to dispose of the appeal—the judge went on to consider the second issue, in the event that he was wrong on the first issue.

The judge held that an order which omits a statement required by the CPR must, at least in general, be effective unless and until set aside. That proposition derived support from the decisions in Isaacs v Robertson [1984] 3 All ER 140, and Re Mid East Trading Ltd [1998] 1 All ER 577.

Additionally, in the context of IA 1986, s 267(2)(d), the judge referred to Ahmad v Commissioners of Inland Revenue [2004] EWHC 2292 (Ch), [2004] All ER (D) 435 (Jul) in which the existence of a pending appeal against the dismissal of an application to set aside a statutory demand was held not to mean that the set aside application was outstanding—the application had failed and had been dismissed, and the presentation of a petition whilst the appeal was pending was not prohibited.

Taking the above into account, the judge held that, even if an order made pursuant to IR 1986, r 6.5(1) did have to contain the statement required by CPR 3.3(5), the absence of such a statement did not affect the validity of the order—it would be valid unless and until set aside—and the application to set aside the statutory demand could not be said to be outstanding.

In coming to his decision, the judge identified the serious implications that would result if the position was different. In that event, it could mean that numerous bankruptcies would be open to challenge, and could render nugatory orders made in ordinary civil proceedings which overlooked the requirements of, among others, CPR 3.3(5).

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

The argument made by the appellants in relation to CPR 3.3(4), (5) appears to have been a novel one, so in that respect the law has not been clarified as such. However, to the extent that any other debtor is thinking of challenging an order made pursuant to IR 1986, r 6.5(1) on the same grounds, the judgment is relatively unequivocal and clear in terms that such challenge will be unsuccessful.

This case also reiterates that a court order, once made, will ordinarily be effective unless and until it is set aside, even if the order does not necessarily comply with the CPR.

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

The judgment mentions that Mr and Mrs Clarke had not received the orders from the court dismissing their set aside applications. Although not directly linked to the decision in this case, if you are acting for a debtor who applies to set aside a statutory demand, it is worth enquiring with the court, say, a couple of weeks after issuing the application to find out its status. Upon receiving an application to set aside a statutory demand, the court will either dismiss it pursuant to IR 1986, r 6.5(1) as in this case, or it will list the application for a hearing pursuant to IR 1986, r 6.5(2). That is not necessarily to say that Mr and Mrs Clarke or their advisers did not make any such enquiry in this case.

Another point to take away is that, while the CPR does in the main apply to insolvency proceedings, decisions in such proceedings are often made by reference to specific insolvency provisions, and would seemingly be given primacy. Therefore, if any challenge to a decision of the insolvency courts is contemplated by reference to the CPR, practitioners should first identify the basis upon which the order to be challenged was made.

Finally (and, again, not necessarily to say that the petitioning creditor in this case did not do this), petitioning creditors who have served a statutory demand on a debtor should ensure that the appropriate checks are carried out prior to the presentation of a bankruptcy petition to ensure, so far as possible, that there are no outstanding applications to set aside the statutory demand upon which the petition is based. This is particularly so given that the petitioning creditor may not be informed that such an application has been made. Although debtors would usually be advised to give notice to the creditor that they had made an application, in accordance with IR 1986, r 6.5(2), the first time that a creditor may become aware of the application would be once a hearing of the application has been listed. As part of presenting a bankruptcy petition, the petitioning creditor will need to confirm with a statement of truth that, to the best of their knowledge and belief, the statutory demand has not been set aside and no application to set it aside is outstanding.

Stephen Leslie is a solicitor in the LexisPSL Restructuring and Insolvency team

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

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First published on LexisPSL Restructuring and Insolvency

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