When can statutory demands for undisputed debts be upheld? (Howell v Lerwick Commercial Mortgage Corporation)

An appeal against a statutory demand where a cross-claim would reduce the sum to less than the bankruptcy level of £750 led to an interesting judgment. Marc Brown, a barrister with St Philips Commercial chambers, explains the issues surrounding the decision in Howell v Lerwick Commercial Mortgage Corporation Ltd.

Original news

Howell v Lerwick Commercial Mortgage Corporation Ltd [2015] EWHC 1177 (Ch), [2015] All ER (D) 42 (May)

The appellant appealed against a decision of a district judge dismissing his application to set aside a statutory demand. The debt itself was not disputed but the appellant relied on a cross-claim which did not equal the debt but fell short of it by less than £750. The Chancery Division held that a statutory demand should not necessarily be set aside under the residual discretion under rule 6.5(4)(d) of the Insolvency Rules 1986 (IR 1986), SI 1986/1925, simply because the undisputed part was less than £750. On the facts of the present case, the appropriate course was not to set aside the statutory demand under IR 1986, r 6.5(4)(d).

What was the background to the appeal, briefly?

The respondent had issued a statutory demand against the appellant in the sum of £4,736.43, being the sum of two costs orders totalling £3,935, plus interest and the costs of the demand.

The appellant sought to set aside the statutory demand on the grounds that he had a cross-claim. This cross-claim was the subject of an issued claim in the sum of £2,750. He also wished to amend that claim to claim a further £14,763.60. However, the application to amend and an appeal against it were dismissed, leaving just the cross-claim of £2,750.

On the hearing of the application to set aside the statutory demand, the district judge reduced the demand debt to £3,935 as the respondent was not entitled to interest on the costs orders (being for less than £5,000 in the county court) or costs on the demand unless and until ordered.

The district judge proceeded on the basis that the appellant had an arguable cross-claim for £2,750 and might also recover fixed sums for costs amounting to £395 in total. This gave a total cross-claim of £3,145, being £790 short of the properly demanded sum.

On the appeal, it was held that the appellant should also have been entitled to add interest to the cross-claim, amounting to either £240 (at 3.5%) or just over £100 (at 1.5%). Either sum of interest would have the effect of reducing the amount of the demand in respect of which there was no dispute or cross-claim to below £750.

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

In the circumstances set out above, the judge had to decide whether a statutory demand should be set aside under the discretion provided for in IR 1986, r 6.5(4)(d) when it is the subject of a cross-claim which would not equal or exceed the debt, but which would have the effect of reducing the demand sum to less than the bankruptcy level (£750) and therefore a bankruptcy petition could not be pursued in respect of it.

Why did these issues arise?

Given the additions to the appellant’s cross-claim of £2,750 and various costs allowances (totalling £395) and interest (of either £240 or just over £100), the total cross-claim was between £3,245 and £3,385.

The proper amount of the demand was £3,935.

As a result, the appellant’s cross-claim was short of equalling or exceeding the demand debt by somewhere between £550 and £690.

Both of those sums were below £750. As a result, if a statutory demand should be set aside under IR 1986, r 6.5(4)(d) if the effect of a cross-claim is not to equal or extinguish the debt, but to reduce it to below the bankruptcy level of £750, then the appellant was entitled to have the statutory demand set aside and succeed on his appeal.

However, if a statutory demand does not have to be set aside in such circumstances, the appeal would fall to be dismissed.

What were the main legal arguments put forward?

The appellant appeared in person and the respondent did not appear and was not represented. As a result, the judge had to do a great deal of the work himself in terms of identifying the key arguments and their resolution.

The judge noted that in doing so, he had consulted with the bankruptcy registrars (including the Chief Registrar) who came across the issues with more frequency.

The principal argument in favour of setting aside the demand was that the Court of Appeal had held in Re a Debtor (No’s 49 and 50 of 1992) [1995] Ch 66 that where a debt was the subject of a dispute and the undisputed sum was less than £750, the court would exercise its general discretion to set aside a statutory demand under IR 1986, r 6.4(d), as a petition presented in respect of such a sum would be bound to fail as the debt would be less than the bankruptcy level.

What did the court decide, and why?

The court dismissed the appeal and held that the statutory demand should not be set aside even though the effect of the cross-claim would be to reduce the remaining sum to less than the bankruptcy level of £750. In order to do so, it was necessary for the decision of the Court of Appeal in Re a Debtor (No’s 49 and 50 of 1992) to be considered. The judge held that while one debt of less than £750 could not by itself form the subject of a viable petition for bankruptcy, it could if it was combined with other debts, whether owing to the same or other creditors, that together amounted to more than £750.

In this respect, the judge noted that the decision of the Court of Appeal had been in relation to disputed debts (as opposed to cross-claims) and had been based on the premise that ‘there [was] no question or suggestion of other creditors or other debts’.

The judge applied the same reasoning in respect of cross-claims. He said that IR 1986, r 6.5(4)(a) did not apply because the cross-claim did not equal or exceed the value of the demand debt. The judge also held that the discretion in IR 1986, r 6.5(4)(d) should not be exercised because, while the demand debt could not by itself form the basis of a viable petition, it could well do so if it formed the basis of a petition in conjunction with other petitionable debts, whether owed to the respondent or other creditors, and this was not a case where there was no question of other creditors or other debts.

As a result, the appeal failed and the statutory demand stood.

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

It has often been thought that all a debtor needed to do in order to set aside a statutory demand was demonstrate that the debt was disputed to the extent that any undisputed sum was below £750, or that there was a cross-claim which would have the effect of reducing the demand debt which was not the subject of the cross-claim to below £750.

This judgment clarifies that in respect of statutory demands this is not the case (even though it remains so in relation to the bankruptcy petition itself).

In other words, the judgment clarifies that a statutory demand may be upheld even if the undisputed debt, or the debt in respect of which there is no cross-claim, is less than £750.

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

First, it is clear that the idea that a demand will be set aside if the undisputed debt or the amount in respect of which there is no cross-claim is less than £750 no longer holds good.

The key issue to be aware of that appears from the case is that what is important in such cases is whether there are other debts or other creditors. Plainly in a case where the value of the demand and an asserted cross-claim are close, it will be in the interests of the debtor to seek to show that there are no other debts or creditors. Conversely, it will be in the interests of the presenter of the demand to seek to show that there are such other debts or creditors, such that even if the properly demanded sum is less than £750, the debt can still form the subject of a viable petition in conjunction with other debts or other creditors, and so the demand ought not to be set aside in its entirety.

The interesting feature is that where the outcome of an application to set aside a statutory demand is that the application fails, but the debt is less than £750, this may well give rise to a costs order against the debtor which (if the subject of a further statutory demand) could then be aggregated with the original debt to give a total debt exceeding £750.

The judge noted that the provision in IR 1986, r 6.5(6)—to the effect that where the court dismisses an application to set aside a statutory demand it will make an order authorising the creditor to present a bankruptcy petition—needed to be considered carefully in such a circumstance to ensure that the court was not authorising the creditor to present a petition for a debt that was less than the bankruptcy limit of £750.

Marc Brown undertakes work across a broad spectrum of commercial work, but is a particular specialist in insolvency matters. He is regularly instructed in relation to high value and complex cases. He has experience of dealing with cases involving lengthy and detailed factual backgrounds and complex issues of law.

Interviewed by Fran Benson.

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

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First published on LexisPSL Restructuring and Insolvency