Statutory demand thwarted by would-be illegal payment (Maud v Libyan Investment Authority)

In Maud v Libyan Investment Authority, the Chancery Division had to decide whether a statutory demand should be set aside in circumstances where the debtor claimed he was unable to make any payment as to do so would be illegal.

Original news

Maud v Libyan Investment Authority [2015] EWHC 1625 (Ch), [2015] All ER (D) 101 (Jun)

The applicant debtor sought an order setting aside a statutory demand served on him by the respondent creditor, claiming that any payment made by him to the respondent would be in breach of a sanctions regime imposed by the UN that prohibited people in certain circumstances from dealing with certain Libyan individuals and entities, including the respondent.

The Chancery Division (Mrs Justice Rose) granted the application and set aside the statutory demand. Having considered the sanctions regime by reference to the international, EU and UK law enacted to give it effect, the judge held that any payment made by the applicant to the respondent would be in breach of the sanctions regime and that it would be unjust in those circumstances to allow a creditor to present a bankruptcy petition when the payment of the debt would expose the debtor to criminal penalties. It did not matter whether or not the applicant was able to pay the debt.

Briefly, what were the facts of the case?

The debtor (Mr Maud) entered into a guarantee in April 2008 with the Libyan Investment Authority (LIA) in support of the indebtedness of his company, Propinvest Group Ltd (Propinvest), to the LIA. Propinvest defaulted in March 2010 and in February 2014 the LIA served a statutory demand on Mr Maud in the sum of about £17.5m. The LIA then presented a bankruptcy petition against Mr Maud, and he applied to set aside the statutory demand.

Mr Maud did not dispute that he entered into the guarantee, or that he was liable to pay following Propinvest’s default. He also accepted that he did not at that time have the money to pay the debt. However, he claimed that any payment to the LIA would be in breach of the sanctions regime which had been imposed on Colonel Gaddafi, members of his family and, latterly, certain other entities including the LIA. Mr Maud therefore sought to have the statutory demand set aside under either:

  • rule 6.5(4)(b) of the Insolvency Rules 1986, SI 1986/1925 (IR 1986)—on the basis that the debt was disputed on substantial grounds, or
  • IR 1986, r 6.5(4)(d)—on the basis that the court should be satisfied on other grounds that the demand ought to be set aside

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

Rose J had to deal with the following issues:

  • as Mr Maud’s application was made out of time, whether an extension of time should be granted (the first issue)
  • whether a statutory demand should be set aside under IR 1986, r 6.5(4)(d) in circumstances where any payment of the debt demanded would be illegal and expose the debtor to criminal penalties (the second issue)
  • whether in this case any payment by Mr Maud to the LIA would in fact be in breach of the sanctions regime (the third issue)
  • even if it is was, whether Mr Maud was precluded from relying upon that argument if he could have applied for the appropriate licence from HMRC to make any payment (the fourth issue)

What did the judge decide, and why?

Rose J’s judgment contains a thorough review of the international, EU and UK law that had been enacted (both originally, and as modified following the fall of the Gaddafi regime in August 2011) to give effect to the sanctions regime (see paras [6]–[23]). Having done that, she made the following decisions:

The first issue

Mr Maud was allowed an extension of time in which to make his application:

  • he would clearly be prejudiced by having to deal with bankruptcy proceedings were the statutory demand not to be set aside—the LIA’s submission that, because Mr Maud did not have the funds in any event to pay the sum demanded he could not suffer the prejudice of having to make a payment which would be illegal, was rejected
  • however, the weight given to that prejudice was nonetheless lessened by Mr Maud’s implausible assertion that he only became aware of the conflict in Libya in May 2014 despite being a person with complex business affairs and regular dealings with the LIA, and that he knew from March 2010 (when Propinvest defaulted) that he was liable under the guarantee
  • there was little prejudice to the LIA in allowing Mr Maud’s application to set aside the statutory demand, albeit that a relevant factor taken into account would be the delay in appointing a trustee in bankruptcy to investigate and prosecute any potentially voidable transactions
  • there was a public interest (as well as the private interest of Mr Maud) in ensuring that the sanctions regime was observed—the issue of whether any payment could be made to the LIA, either by Mr Maud or any trustee in bankruptcy subsequently appointed over his estate (in the event a bankruptcy order was made against Mr Maud), was something that had to be determined at some point in time. As that issue had been fully argued before the judge, it was convenient to deal with it at that time

The second issue

Rose J confirmed that the correct test to apply where an application to set aside a statutory demand is founded on IR 1986, r 6.5(4)(d) is for the court to consider whether the interests of justice require it—applying In re: A Debtor (1 of 1987) [1989] 2 All ER 46 and Remblance v Octagon Assets Ltd [2009] EWCA Civ 581, [2009] All ER (D) 180 (Jun).

Applying that test, the judge held that it would be unjust if a creditor was able to present a bankruptcy petition in circumstances where to otherwise make any payment of the sum demanded would be in breach of a sanctions regime and expose the debtor to criminal penalties. She further held that it did not matter whether Mr Maud had in any event sufficient funds in which he could otherwise discharge the debt.

The third issue

Mr Maud submitted that, for the purposes of his application, it was only necessary for the judge to determine whether it was arguable that the debt was not payable, rather than to actually consider whether the sanctions regime applied or not. However, for the reasons mentioned in respect of the first issue, the judge decided to determine the issue.

In doing so, she held that on a proper construction of the appropriate legislation, any payment to be made by Mr Maud to the LIA would be caught by the sanctions regime, and that to make any such payment would expose Mr Maud to criminal penalties.

The fourth issue

The sanctions regime provides that its prohibitions do not apply to anything done under the authority of a licence granted by HM Treasury. It was argued on behalf of the LIA that it was Mr Maud’s responsibility as the debtor to take whatever steps he could to enable the payment of monies owed, and that he could and should have applied for the appropriate licence from HM Treasury.

The judge rejected this argument, however, by looking at the terms of the sanctions and licensing regime itself and that in this case the regime did not place a burden on Mr Maud to apply for a licence. There was also no certainty that a licence would be granted if applied for, particularly as it would necessitate the involvement of third parties.

Accordingly, having allowed Mr Maud an extension of time to make his application, the statutory demand was set aside on the basis that:

  • it would be unjust to uphold a statutory demand where to pay the sum demanded would be in breach of a sanctions regime
  • any payment to be made by Mr Maud would in fact be in breach of the sanctions regime, and
  • there was no burden on him to apply for a licence to allow him to make any payment

Unfortunately for Mr Maud, although he was successful in this case in having the LIA’s statutory demand set aside, he was not so successful in a parallel case determined by Rose J at the same time that concerned his application to set aside a statutory demand served by another creditor in the sum of about £40m (see Maud v Aabar Block SARL [2015] EWHC 1626 (Ch), [2015] All ER (D) 97 (Jun)).

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

This case will clearly have limited application to most practitioners given its facts and that hardly any creditors will be subject to a UN sanctions regime. However, it does provide some useful—and perhaps unsurprising—authority that, where a statutory demand can only be satisfied by the carrying out of an illegal act, the statutory demand ought to be set aside under IR 1986, r 6.5(4)(d).

It also confirms that the appropriate test to be applied when considering applications made under that ground is whether it would be unjust to allow the creditor to present a bankruptcy petition in all the circumstances.

Stephen Leslie, solicitor in the LexisPSL Restructuring & Insolvency team.

Further Reading

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

Disputed bankruptcy petitions

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First published on LexisPSL Restructuring and Insolvency

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