The court has held that a statutory demand is valid despite the high default interest rate on an underlying loan.

In White v Davenham Trust Ltd, White, a former director of a company, guaranteed the company's loan obligations to the defendant lender. The default interest rate on the loan was 36% which was almost double the ordinary interest rate on the loan. The company went into administration and the defendant served a statutory demand on White in respect of the guarantee. White sought to set the demand aside on the basis that the debtor had provided other security for the debt which could be enforced, the underlying loan was an extortionate credit bargain and the level of default interest made it an unenforceable penalty at common law. At first instance the demand was set aside on the basis that the defendant could have enforced other security held.

On appeal, the statutory demand was reinstated as the court held that the existence of other security was not relevant. Such security did not have to be exhausted before proceedings against the guarantor could be brought. However, the court held that there was a triable issue that the default interest on the loan did constitute an unenforceable penalty. It accepted that this was a commercial, rather than consumer, loan and that it was relatively high risk which could have merited a higher interest rate, but not at the level it was. In all the circumstances, it was not an extortionate credit bargain. The court further held that where a statutory demand is for an excessive amount, that is not a ground for setting it aside if there is an underlying debt that exceeds the bankruptcy limit of £750 and which is not disputed. Here, White could have paid the undisputed amount and argued about the excessive interest rate. He had chosen not to and this would be taken as evidence of his inability to pay, so permitting the bankruptcy proceedings.

Things to consider

The court can, in principle, evaluate the terms of an underlying loan when determining whether a demand against a guarantor is fair, or otherwise.