Unpopular demand

Despite the exhortation that bankruptcy proceedings are not to be used for the purpose of debt collection, the use of statutory demands is widespread and, of course, often effective. But it is not unknown for the odd mistake or misunderstanding to creep in.

A debtor will be deemed to be unable to pay his debts if he fails to meet either sort of demand in the prescribed form served on him within three weeks. A bankruptcy petition can then be presented.

Until the presentation of a bankruptcy petition, however, there are no proceedings. Accordingly, a statutory demand is not a court document and there is no power, say, to make an order for substituted service. Instead, the provisions of Insolvency Rules 1986 (IR) 6.3 and 6.11 should be observed. Advertisement of the demand is generally not an acceptable form of service.

Setting aside

Remember the forms must be signed by an individual, not an organisation (Dacorum Borough Council v Horne [2000] 4 All ER 550). But a statutory demand is not liable to be set aside merely because it overstates the debt, or because part of the debt is disputed unless the disputed part is paid (Re a Debtor (No. 1 of 1987), Lancaster ex p debtor v Royal Bank of Scotland plc [1989] 2 All ER 46). So, technical defects will not automatically justify the setting aside of the demand.

An application to set aside must be made within 18 days of service, or an explanation for the delay given in the application. The only circumstances in which the court may set aside the demand are set out at IR 6.5(4), and developed in the Practice Direction Insolvency Proceedings (PDIP).

First, the debtor appears to have a counterclaim, set-off or cross-demand that equals or exceeds the amount of the debt. The test set out in paragraph 12.4 PDIP is one of 'genuine triable issue' and, although there are some conflicting authorities, the preferred view equates it with the test under CPR part 24 (Ashworth v Newnote Ltd [2007] EWCA Civ 793). Arguments that a counterclaim is precluded as a matter of contract or law are likely to fall on deaf ears at this stage. So, for example, a 'no set-off' provision in a contract did not disentitle the court from setting aside the demand (Re Debtors (Nos. 4449 and 4450 of 1998) AER (Comm) 149). The same is true even if the demand is based on a bounced cheque (Ahmed v Landstone Leisure Ltd [2009] EWHC 125 (Ch)).

A counterclaim raised in a different capacity is also likely to succeed (Re A Debtor (No. 87 of 1999) [2000] BPIR 589); as is an arguable case of promissory estoppel (Collier v P & MJ Wright (Holdings) Ltd [2007] EWCA Civ 1329); or misrepresentation (Mahon v FBN Bank (UK) Ltd [2011] EWHC 1432 (Ch)).

Second, the debt is disputed on grounds that appear to the court to be substantial. Again, the test is 'genuine triable issue'. Where a demand is based on a judgment or court order the court will not go behind that, nor as a general rule will it adjourn the application to await the outcome of an application to set aside the judgment.

Third, the creditor holds security for the debt and either the creditor has not complied with the requirement to specify the nature of the security, its value and the quantum of the debt less the security or the court is satisfied that the value of the security equals or exceeds the debt. If no mention is made of the security in the demand, or the security is undervalued, the demand will be set aside. But, where a debtor has guaranteed the debt of a company to the bank, security over the company's assets does not secure the debtor's liability (White v DavenhamTrust Ltd [2011] EWCA Civ 711). However, the real rub of this ground, and what often catches people out, is that, despite what the notes in the margin say, an offer of security does not satisfy this ground, unless the creditor is satisfied the debt is compounded (Re a Debtor [1994] 1 WLR 917).

Fourth, that the demand should be set aside on other grounds. The same degree of substance as the other grounds is needed (Re a Debtor (No. 1 of 1987) [1989] 1 WLR 271). Where the undisputed balance is less than the bankruptcy level of £750, the demand should also be set aside.

How will the court deal with it?

An application to set aside will be referred to a district judge in the box-work. The matter can, in theory, be dealt with summarily on paper where it is clear no ground exists. Otherwise, it will be listed. Be aware that many judges believe that such cases should take no more than 30 minutes to dispose of, otherwise they are likely to consider there is a triable issue: this procedure is not intended as a debt-collecting exercise and there will be costs penalties where a demand has been inappropriately served and is later overturned. If the application to set aside fails, the judge will authorise the presentation of a petition immediately, or after a specified time. However, delaying a petition potentially prejudices other creditors, so, if you ask for time, you should not expect 28 days while you decide whether or not to appeal!

Finally, remember the court has no power to set aside a statutory demand served on a company. The only avenue available to the company is to apply for an injunction to restrain presentation of a petition, to be listed before a circuit judge and following the insolvency practice direction.