An unreasonable demand?

In the current economic climate it is no surprise that the collection of debt is at the forefront of all business operations '“ or at least it should be: the old adage that 'cash is king' could not be truer.

A statutory demand is one mechanism that can be used to force a debtor to pay the sum due. It is a formal demand under the Insolvency Act for payment which, if not complied within a specified period, will entitle the creditor to present a bankruptcy or winding up petition, depending on the nature of the debtor.

An individual can apply to set aside a demand within 18 days from receipt, and there are specific circumstances in which the court will allow this. In the recent case Waheed Ahmed v Landstone Leisure Ltd [2009] EWHC 125 (Ch), Birmingham High Court considered these circumstances when it heard an appeal against the refusal to set aside a statutory demand based on a bounced cheque.

Specific circumstances

Mr Ahmed had given the cheque as a deposit to his brother. His brother was purchasing some land at auction on behalf of another brother, who was acting for a third party. The cheque was subsequently dishonoured at Mr Ahmed's instruction on the basis that the plot of land they thought they were buying had been misrepresented as being larger than it was. Mr Ahmed argued both that the sale contract was rescinded and the cheque was not enforceable, and that he had a counterclaim for the amount of the cheque.

The auctioneer served Mr Ahmed with a statutory demand in respect of the dishonoured cheque which was upheld by the first instance judge. The only defence to a dishonoured cheque is when nothing is received for the payment; to this extent cheques can be said to be the same as cash, so Mr Ahmed was certainly on the back foot from the start. Mr Ahmed argued that he would have a claim for the return of the deposit directly or indirectly and, as such, it would be wrong to allow a statutory demand to stand where the sum would have to be repaid.

A statutory demand may only be set aside if the debtor appears to have a counterclaim, set off or cross demand which is equal to or exceeds the debt claimed, or the debt is disputed on substantial grounds; and if the court is satisfied on other grounds that the demand ought to be set aside. In Ahmed, the court found that there was a seriously arguable case that the sale contract and cheque were induced by misrepresentation and so there may be a cross demand for the amount of the cheque, particularly given that the land was sold to another purchaser. Mr Ahmed received nothing of value for the cheque tendered, for which he would be entitled to damages.

The court took the view that it might even give rise to a defence of circuity of action; that is 'it is no good trying to get something back which immediately afterwards you are going to have to hand back'. It would not be satisfactory if Mr Ahmed was made bankrupt on the basis of the cheque only for his Trustee in Bankruptcy to immediately recover the same sum. This amounted to at least other grounds for setting aside.

This case is illustrative of the court's approach to consider all the circumstances when deciding whether or not to set aside a statutory demand, and what may amount to 'other grounds'.

No reasonable prospect of repayment

Ahmed is in contrast to a case I have recently acted in. In this instance, the court dismissed the debtor's application to set aside the statutory demand without a hearing or giving notice to the creditor, on the basis that it was satisfied that no sufficient cause was shown for the application. The statutory demand was served for a debt which the court had already ordered payment by instalments. The application to set aside was made on the basis that she was making these repayments.

The creditor claimed that, irrespective of the instalment order made by the court, the continuing interest on the sum meant the debtor had no reasonable prospect of ever repaying the debt. An order for payment by instalments imposes a stay on the issue of execution but does not suspend the judgment or order. Furthermore, a stay on the issue of execution is not a bar to the making of a bankruptcy order provided that a statutory demand has been served.

Despite the fact that an instalment order had been made, the statutory demand was substantiated on the basis that, in the absence of a future date by which the debt must be paid and in the circumstances, there was no reasonable prospect of the debt being paid in full or at all.

A statutory demand is still, therefore, an effective method of debt collection and an invaluable one in the current economic environment. However, it appears that each application to set aside a demand will turn upon its individual facts and, where the court thinks appropriate, it will dismiss such an application without a hearing or notice to the creditor. Conversely, where there are serious issues to be argued such as in Ahmed, the court may not allow a statutory demand to stand.