This article considers the cost consequences following service of a statutory demand in two scenarios:

  1. X serves a statutory demand on Y (an individual). Y applies to set aside the statutory demand. Upon seeing the application and evidence in support, X withdraws the statutory demand.
  2. X serves a statutory demand on Z (a company). Z applies to restrain presentation of a winding-up petition. Upon seeing the application and evidence in support, X gives an undertaking not to present a winding-up petition.

Creditor takes the risk

Whilst scenarios (a) and (b) are common scenarios, awareness of the authorities governing the costs consequences seems to be less so. Often X will assert that Y and Z should bear X’s costs – or that there should be no order as to costs – because X simply did not know that there was any potential defence until seeing the evidence. The invariable outcome though is that X will have to pay Y and Z’s costs. This is because of the legal principle – set out by Warner J in Re Cannon Screen Entertainment Ltd [1989] BCLC 660 – that an alleged creditor who chooses to go down the statutory demand route (rather than issuing a claim and obtaining judgment) must bear the costs risk of doing so:

“… there is nothing improper in a creditor who has no notice of a substantial defence to his claim serving a statutory demand, but to my mind he does that at his own risk, because the normal course for a creditor to adopt, if he wants to enforce a debt by proceedings, is to issue a writ, and of course, if he issues a writ and is sufficiently confident that there is no defence to his claim, the procedure under RSC Ord. 14 is available to him. If instead of adopting that course the creditor takes the shortcut of serving a statutory demand with a view to presenting a winding-up petition without having obtained a judgment, in my opinion he does so at his risk as to costs. If it should turn out that there is a defence to his claim he must pay the costs of the company against whom he has chosen to take such proceedings.”

Cannon Screen was a scenario (b) case. It was confirmed in Liveras v a Debtor No 620/1997 [1999] B.P.I.R. 89 that the principle applies to scenario (a) as well.

Thus, Y and Z will want to push strongly for costs in correspondence and at any subsequent hearing, citing Cannon Screen. X will need to identify facts and circumstances that distinguish his case from Cannon Screen, but often this will be difficult or even impossible. It will therefore be advisable for X to try to reach a deal on costs at an early stage (and before incurring the additional costs of a hearing).

Standard or indemnity costs?

A secondary issue is whether costs should be payable on the standard or indemnity basis. The ordinary principles apply, as set out in Excelsior Commercial v. Industrial Holdings [2002] EWCA Civ. 879 (and, most recently, in Siegel v Pummell [2015] EWHC 195 (QB)), in which Waller LJ said: 

"…is there something in the conduct of the action or the circumstances of the case which takes the case out of the norm in a way which justifies an order for indemnity costs?" 

Examples of cases where indemnity costs were awarded include:

  • Re Kirkman-Moeller [2005] EWHC 381 (Ch).  It was considered very risky to begin and persist with statutory demands where a case against another individual on identical facts had already been tested and had failed.
  • Re A Company (No 12209/1991) [1992] 1 WLR 351.  It was an abuse of process to pursue the statutory demand route as the debt was disputed.

A distinction can be drawn between those cases where X is on notice of a potential defence and those where he is not. In the latter, costs are likely to be awarded on the standard basis but, in the former, there is a strong case for indemnity costs.

To support an indemnity costs claim, it will be helpful for an alleged debtor in correspondence:

  • to set out – at least in outline – the main strands of the defence;
  • to state that to proceed with service of a statutory demand – or failure to withdraw a statutory demand or to give an undertaking not to present a winding-up petition – would amount to an abuse of process because the debt is disputed; and
  • to state that an indemnity costs order will be sought.

In short, if an alleged creditor does not wish to take the costs risk, he should instead issue a claim and, after seeing the defence, decide whether to apply for summary judgment.