Statutory demands are a key asset in a lender’s arsenal when seeking to enforce under a guarantee. The mere threat of bankruptcy is often a powerful method of brining a reticent debtor to the table. Above all else, they are quick, simply and relatively inexpensive to present, often avoiding the need to bring proceedings against the debtor in court.
Whilst often effective, presenting a statutory demand against a debtor is by no means a guaranteed means of obtaining settlement of the debt. Even in cases where the lender has carefully considered and negotiated an instrument giving rise to a guarantee and there are no obvious circumstances under which the demand could be disputed, lenders are often (and increasingly) becoming subject to applications by the debtor to have the demand set aside.
The Statutory Regime
Once a statutory demand is validly served, an application to set aside the demand must be made by the debtor within 18 days of service on him/her. An individual can apply to have a statutory demand set aside on the following grounds:
- the debt is disputed on substantial grounds;
- the debtor has, or appears to have a counterclaim or set off which, if successful, would bring the net indebtedness below £5,000;
- the creditor holds security for the value of the debt (such as a legal mortgage); or
- the court is satisfied on other grounds that the demand ought to be set aside.
(rule 10.5(5) Insolvency Rules 2016 (“IR 2016”)).
It should be noted that once an application has been made, the 21 day time limit to comply with the demand is paused until the application has been determined or dismissed (rule 10.4 IR 2016).
Of these grounds, (1) above is the most commonly relied upon by debtors and the ground considered in this note.
In Crossley-Cooke v Europanel (UK) Ltd  BPIR, it was confirmed that the appropriate test for determining whether a debt was disputed on ‘substantial grounds’ was whether the debtor could demonstrate a ‘triable issue’. It was not necessary to assess the full credibility of the arguments advanced by the debtor; all that was required was for a prima facie dispute over the validity of the debt to be established.
This view was reaffirmed in Guinan III v Caldwell Associates  EWHC 3348 (Ch) (and endorsed in Re Russell Ian Payne; Woolsey v Payne & anor  EWHC 968 (Ch)). In Guinan III, Neuberger J allowed an appeal against a decision to refuse an application to set aside a statutory demand, on the grounds that ‘unless there is no real prospect of one person’s evidence being believed or accepted, the matter has to go to cross examination (and disclosure)’. In the court’s view, a low hurdle existed for debtors to overcome in demonstrating their case has some prospect of success, particularly given the draconian nature of the potential penalties for failing to comply with a statutory demand.
These cases raise genuine questions over where the threshold should lie: if it is set too low, the effectiveness of statutory demands as a means of relatively simply and cheaply enforcing a debt owing becomes significantly diluted. At what point should policy considerations - whereby protection should be afforded to debtors against unscrupulous lenders attempting to enforce questionable debts - give way to responsible lenders seeking to enforce a debt, whereby the debtor has had the opportunity to take legal advice, the guarantee is prima facie valid, and the facts suggest that the debtor is attempting to evade enforcement by raising what are, at best, weak claims disputing the debt?
An example of the courts taking a more lender-friendly approach to such applications can be found in the judgement of Gaind v Dunbar Assets Plc  EWHC 3187(Ch), whereby a personal guarantee was held to be valid and enforceable, despite indications from the lender that the guarantee was a ‘formality for the purposes of the [lender’s] creditor committee to approve the lending’ and that the bank had no policy of enforcing such guarantees. It was determined that as the guarantee was a legal document, any reasonable businessman (however inexperienced) would expect it to be enforceable, and to assume otherwise would have been ‘wholly unrealistic’.
Further, in Dunbar Assets Plc v Lawrech John Butler  EWHC 2546 (Ch), the High Court determined that in order for a demand to be set aside, the debtor must demonstrate factual issues that are capable, as a matter of law, as being grounds to dispute liability. In this instance, the case of estoppel advanced by the debtor could not, on the facts as pleaded in the application, give rise to a genuinely triable issue on whether the debt was valid and enforceable. The court, on appeal, came to this conclusion notwithstanding claims by the debtor of a compromise reached with the lender in 2009 that the guarantee given would not be enforceable, and that the lender was, in effect, a shadow director or a de facto director of the obligor company, and that it would be unconscionable for the lender to seek to enforce the guarantee.
What these cases demonstrate is a mixed judicial treatment of debtors seeking to set aside a statutory demand. It is clear from Europanel and Guinan III that a low threshold exists for debtors to overcome. Whilst it is accepted that a hearing on an application is not the appropriate forum for the adjudication of complex and detailed disputes of fact, it will often be relatively easy for an advised debtor to issue a well constructed application to dispute the statutory demand.
It is hoped that the courts look to adopt a more pragmatic approach to applications in future, as was seen in Gaind. In our experience, guarantors have become more astute in seeking to set aside a statutory demand presented against them, often raising a number of weak and spurious claims in an effort to escape liability. A change in approach by the courts to recognise this fact, and the commercial certainty required by lenders – particularly in instances when they are seeking to enforce against a guarantee given by a sophisticated and adequately advised debtor – would be welcome news to lenders and practitioners alike.