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Insolvency Law

Expert guidance on all aspects of corporate and personal insolvency

14 JAN 2010

Bankruptcy as a Draconian Step and Setting Aside Statutory Demands Shaw & Anor v MFP Foundations & Piling Ltd (Rev 1) [2010]

His Honour Judge Stephen Davies has handed down his decision in: Shaw & Anor v MFP Foundations & Piling Ltd (Rev 1) [2010] EWHC 9 (Ch). The case is particularly interesting as the judge considers the setting aside of statutory demands. He notes:

24. "The central focus of the appellants' appeal, summarised in paragraphs 30 and 31 of the skeleton argument which accompanied their appeal notice, was that it is wrong and contrary to established law that the court should refuse to set aside a statutory demand simply because the debtor appears to have the means to pay. They placed particular reliance upon a decision of the Court of Appeal, given on 17 June 2009, and to which District Judge Smith was not referred, in the case of Remblance v Octagon Assets Ltd [2009] EWCA Civ 581.

25. In Remblance the facts were that the creditor had served a statutory demand upon the debtor as guarantor for rent due from his company, which it had covenanted to pay 'without deduction or set off'. The debtor's company had a counterclaim for damages for breach of covenant of quiet enjoyment, which it was pursuing in the county court. It was common ground that if the creditor had served a statutory demand upon the company, it would have been able successfully to apply to set it aside on the ground that, pursuant to rule 6.5(4)(a) of the Insolvency Rules 1986, it appeared to have a counterclaim equalling or exceeding the amount of the debt specified in the statutory demand. Equally, however, it was common ground that the appellant as guarantor was unable to set up that counterclaim, with the result that he could not bring himself within that sub-rule. He argued, however, that he was entitled to bring himself within the residual ground provided for by sub-rule 6.5(4(d), where the court is entitled to set aside the statutory demand if it is satisfied, on other grounds (i.e. on grounds other than those appearing in sub rules (a)-(c) inclusive), that the demand ought to be set aside. The District Judge had agreed, but her decision had been overturned on appeal by the High Court judge. He had held that he would have acceded to the appellant's argument that it was unfair to allow the creditor to proceed to bankruptcy against the appellant as guarantor when it could not have proceeded to wind up against the company as principal debtor, save for one point, which was that the appellant could pay the amount claimed, so that there was no risk that he would be made bankrupt in respect of that amount. Dyson and Ward LJJ allowed the appeal; Mummery LJ would have dismissed the appeal.

26. Dyson LJ said in paragraphs 44 and 45 of his judgment:

44. Subparagraph (a) provides that, if one of the conditions specified in the subparagraph is met, then the court may set aside the demand. I accept that the court retains a discretion not to do so even if one of the conditions is satisfied. But it seems to me that, if one of the conditions is satisfied, then the demand will usually be set aside. That is because it will usually be unjust to require the principal debtor to face the consequences of bankruptcy if he appears to have a counterclaim, set off or cross demand. There may be circumstances where the principal debtor's ability to pay is a relevant factor. But as Nicholls LJ said [in Re A Debtor [1989] 1 WLR 271, 276D], the theme running through rule 6.5(4) is that a statutory demand will be set aside where it is just to do so. In my judgement, it is difficult to see how it can be just not to set aside a demand where the principal debtor satisfies one of the conditions in subparagraph (a) merely because he can afford to pay the debt.

45. It has not been suggested (rightly in my view) that, even where the principal debtor appears to have a bona fide arguable counterclaim, set off or cross demand, an application to set aside a statutory demand under subparagraph (a) should be dismissed because he has the means to pay the debt that he owes to the creditor. Were the position to be otherwise, it could always be said of a principal debtor who has the means to pay the debt that he has the ability to avoid the consequences of a bankruptcy and that his application to set aside the statutory demand should be dismissed for that reason. Ability to pay would always be a trump card in the hands of the creditor in answer to such an application. I would add that, if ability to pay were fatal to an application to set aside a statutory demand, one would have expected that to be spelt out in the rules.'

27. Accordingly, in paragraph 48, Dyson LJ concluded that the judge was wrong to consider that the fact that the appellant had the means to pay the debt was an important factor which militated against setting aside the statutory demand. He added:

'I would not rule out the possibility that ability to pay may be a relevant factor in certain circumstances. But for the reasons that I have given, I find it difficult to conceive of circumstances where ability to pay can be the sole or principal reason for refusing to set aside a statutory demand. No such circumstances have been identified in the present case.'

28. In this case, it is clear from the argument and from the decision of District Judge Smith to which I have already referred that the decisive or principal reason which he gave for exercising his discretion not to set aside the statutory demand was that he was satisfied that the appellants were able to pay the sums due, so that there was no real risk that they would be prevented by bankruptcy from pursuing the arbitration to overturn the adjudicator's decision. In my judgment, it follows from the decision in Remblance that it was wrong as a matter of law for the District Judge to have regarded this as a decisive or a principal reason for refusing to set aside the statutory demands. Of course in fairness to District Judge Smith, he can scarcely be criticised for approaching the matter in the way that he did when he was not referred to Remblance, which had only recently been decided.

29. It appears from paragraph 30 of his judgement that the only other point taken into account by the District Judge was that he thought that the only consequence of setting aside the statutory demand would be that the respondent would be able to enforce the judgement obtained from the TCC by other means, and that this was not a step which the court should on the facts of this case require the respondent to have to take. However, it is clear from his decision that this was a supplementary rather than a decisive or principal reason for his decision. Furthermore, it is not immediately apparent why it would be wrong to set aside the statutory demands, so as to prevent the respondent from using bankruptcy as a means of enforcement, simply because the respondent would be entitled to seek to enforce the judgment in other ways. If the respondent here was able to enforce its judgment against the appellants by, for example, obtaining a third party debt order against funds standing to their credit in their bank account, then that is something they would be perfectly entitled to do. It does not seem to me that their ability to do so could be relevant to the exercise of the discretion whether or not to allow the respondent to seek to bankrupt them instead or as well. The point, as Ward LJ observed in Remblance, is that bankruptcy is a draconian step, especially when compared to other means of enforcement and, as Dyson LJ observed in paragraph 50 of the judgement, 'the question whether execution of a judgement should be stayed is distinct from the question of whether a statutory demand should be set aside'."

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