In Mark Howell v Lerwick Commercial Mortgage Corporation Limited, the High Court has held that statutory demands will not necessarily be set aside if the undisputed debt is less than £750, where there other debts which would take the cumulative total over this limit.
Mr Howell obtained finance from Lerwick in 2010 to develop a property and paid £2,750 to Lerwick to obtain a valuation. Mr Howell claimed that the valuation provided was sub-standard, and as a result there were delays in the development and its subsequent sale.
Mr Howell claimed against Lerwick for £2,750 plus interest and consequential damages. Mr Howell initially obtained default judgment against Lerwick but this was set aside and Mr Howell was ordered to pay Lerwick's costs of £2,225. Mr Howell unsuccessfully tried to appeal and was ordered to pay further costs of £1,710.
The two costs orders above formed the basis of a statutory demand by Lerwick in 2012, for £3,935.
Mr Howell unsuccessfully appealed to set aside the statutory demand. The debt itself was not disputed, but Mr Howell sought to rely on a cross-claim for the return of the £2,750 surveyor fee, plus interest. He was not allowed to rely on his claim for consequential damages. Taking account of the cross-claim, Mr Howell's debt to Lerwick was less than the minimum required of £750.
The court assessed the amount of the claim plus such additional items at £3,145, which fell far short of the amount of Lerwick’s statutory demand. Crucially, this meant a debt payable by Howell to Lerwick, but one of less than £750.
Under the Insolvency Rules 1986, Rule 6.5(4)(d), if a cross-claim reduces the debt below the bankruptcy level of £750, then Mr Howell was entitled to have the statutory demand set aside. However, the court dismissed the appeal and held that the statutory demand should not be set aside even though of the cross-claim would reduce the debt to less than £750.
A single debt under £750 cannot form the subject of a petition for bankruptcy under s.267(4) of the Insolvency Act 1986, but it could be based on multiple debts, as long as together those debts amount to more than £750.
Significantly, it was widely believed that for a statutory demand to be set aside, all a debtor had to do was demonstrate that the debt was disputed or that a cross-claim existed, to reduce the debt demanded to less than £750. However, the High Court determined that a statutory demand should not necessarily be set aside just because under Rule 6.5(4)(d) the debt would be less than £750 if there is a suggestion of any other debts.
In this case, Mr Howell owed Lerwick other debts arising from further subsequent costs order. For this reason, Mr Howell failed to set aside the statutory demand.
The case is a helpful reminder to look at all available debts when pursuing bankruptcy.
It is also worth noting that the debt threshold of £750 under s.267(4) of the Insolvency Act 1986 will increase to £5,000 as of 1 October 2015.