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When might a Statutory Demand for a debt payable immediately be set aside?

In Martin v McLaren Construction Ltd [2019 EWHC 2059 (Ch) the Court was asked to decide whether the Respondent had issued a valid Demand Letter against the Applicant prior to issuing a Statutory Demand, and even if it had not, whether the Court should still exercise its discretion to uphold the Statutory Demand pursuant to Rule 10.5(5) of the Insolvency (England and Wales) Rules 2016.

In this current era of economic unpredictability as we approach 31 October 2019, this ruling is important as it serves as a stark reminder to construction entities relying on Personal Guarantees, and indeed the lending industry in general, of the need to fully and properly comply with demand terms and in ensuring that a debt is in fact “payable immediately” if a Statutory Demand is to be issued pursuant to Section 268(1) of the Insolvency Act 1986 (“the Act”)

Background

Ronald Martin (the “Applicant”) provided a Personal Guarantee (the “PG”) to a construction company named McLaren Construction Limited on 9 December 2013. Under the terms of the PG, the Applicant guaranteed the payment or discharge of his own liabilities as well as those of 3 other entities. In December 2015 the Respondent assigned its rights to a company now also known as McLaren Construction Limited. There was no issue taken in respect of the validity of the assignment before the Court. 

In June 2018 a Statutory Demand (the “first Demand”) was served on the Applicant by the Respondent. This was later withdrawn. In October 2018 a second Statutory Demand (“the second Demand”) was served on the Applicant demanding repayment of the sum of just over £7 million. The second Demand was made on the basis that the debt was a liquidated sum payable immediately (emphasis added) pursuant to Section 268(1) of the Act. 

The Applicant challenged the validity of the second Demand and successfully applied to have it set aside.

The main ground of the Applicant’s challenge was that the Respondent had not made a proper written demand under the terms of the PG. Clauses 1.1 and 9 of the PG respectively stated that the Applicant would be liable to make payment in respect of the guaranteed debts immediately on demand and following a demand to be made in writing. The PG set out the service requirements for any notices or demand. The Applicant argued that until demand had been made in writing in accordance with the terms of the PG (which he did not believe it had been), his liabilities as guarantor under the PG were merely contingent, not actual, and as such the debt was not one payable immediately. 

Decision

Having considered the evidence provided in the Respondents’ witness statements, the Court agreed with the Applicant. It held that no valid written demand had been made. A demand had been made by the Respondent via email but the Court agreed that as the terms of the PG did not provide for service in this format the demand was not valid. Significantly, the Court also held that the first Demand did not qualify as a written demand for the purposes of serving the second Demand.

Notwithstanding the above, the Respondent asked the Court to exercise its discretion under Rule 10.5(5) of the Insolvency (England and Wales) Rules. It argued that even if proper written demand had not been made, that the second Demand should still not be set aside. This was on the basis that the Applicant was well aware of his liabilities, that there had been no injustice caused, and that service of a written demand letter would not have made any difference i.e. he would still not have been in a position to repay the debt.

The Court rejected this argument and held that “the court should be slow to exercise its discretion against the setting aside of a statutory demand under Rule 10.5(5)(d)”, when the prerequisites of presenting a bankruptcy petition have not been met. The Court also made specific comment on the fact that the Respondent had not and had still not served a proper written demand, or indeed explained why that had not been done.

Citing Lloyd LJ in White v Davenport Trust Ltd [2011] BPIR 1187, Judge Barber echoed the position that “If it is to be seen as an example of injustice, the creditor’s lack of any right to present a bankruptcy petition if the statutory demand is not complied with is what makes it unjust”.

Commentary

The Court made it explicitly clear that liability for a debt such as a guarantor liability must first be triggered. If the liability is not triggered, then the debt may remain a contingent one and not an actual one upon which a Statutory Demand and subsequent Bankruptcy or Winding Up petition could be presented under Section 286 (1) of the Act. 

The Court’s judgment may seem obvious in its reminders but its implications are far reaching. 

Practitioners and creditors should carefully review security documents and scrutinise service requirements for written demands. For example is email service permitted or must demand be served in writing by first class post? Service of the demand letter should be seen as a fundamental part of the insolvency recovery process and not just a burdensome requirement prior to service of a Statutory Demand. 

Consideration must also be given to the correct form of Statutory Demand to be used and the type of debt that is being demanded, i.e. one payable immediately or not.

It may seem inconsequential to a creditor as to whether an email or letter of demand is issued, but invalid service could open the doors to an Applicant seeking to set aside a statutory demand and/or subsequent petition, a creditor incurring substantial cost and time in defending any such application, and potentially becoming liable for a successful Applicant’s costs. 

It also flags the importance of parties considering alternative forms of resolution, such as Arbitration in a construction context, prior to embarking upon insolvency proceedings.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at September 2019. Specific advice should be sought for specific cases. For more information see our terms and conditions.

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