Statutory demands- the present position

 

 

 

Summary

 

1. The burden of setting aside a statutory demand is on the debtor
2. Check that the creditor’s paperwork is in order
3. Reply to the demand in time and with a summary of your reasons for resisting the demand
4. Turn up on time for the master’s court
5. Have your case ready to articulate
6. If the creditor is using this system to collect money which is the subject of a genuine dispute, which has not been adjudicated on by [say] the County Court- then the debtor has a potentially good case
7. The Master conventionally will refuse to entertain an application to set aside if the sum demanded is :

• Damages ordered by a court
• Costs ordered by a court
• Rates bill which has been through the court
• Tax bill/VAT bill

8. Recent decisions suggest that this approach should be resisted by the debtor, for the reasons set out below

 

 

Rules 6.004 and 6.005 of the Insolvency Rules (NI) 1991 as amended.

“Hearing of application to set aside

6.005 . . .

(3) On the hearing of the application, the court shall consider the evidence then available to it, and may either summarily determine the application or adjourn it, giving such directions as it thinks appropriate.

(4) The court may grant the application if –

(a) the debtor appears to have a counter claim, set off or cross demand which equals or exceeds the amount of the debt or debts specified in the statutory demand; or

(b) the debt is disputed on grounds which appear to the court to be substantial; or

(c) it appears that the creditor holds some security in respect of the debt claimed by the demand, and either Rule 6.1001 (6) is not complied with in respect of it, or the court is satisfied that the value of the security equals or exceeds the full amount of the debt; or

(d) the court is satisfied, on other grounds, that the demand ought to be set aside.”

 

 

Andrew Allen v Burke Construction 2010 NICh 9

The view of Deeny J was:

 

The Court of Appeal in England in Re a Debtor (Lancaster No 1 of 1987) [1989] 1 WLR 271 held that the category of “other grounds” as specified in (d) above must be of the same degree of substance as those set out in (a), (b) and (c).

[5] These provisions were considered by Girvan J in James Moore Earthmoving v Commissioners of Inland Revenue [2001] NI Ch 15. He points out that the prevailing, although not undisputed, view is that if a debtor fails at this stage he may not raise the same arguments again in regard to the debt at the hearing of a petition. He concluded therefore that a debtor should not be in a worse position than a party seeking to set aside a judgment or a party seeking leave to defend a case and avoid summary judgment. I agree with that view. The language in the former situation is of a defendant showing that he has an arguable case. In the latter the court considers whether it is in the interests of justice for the defendant to be allowed to defend. Order 14 rule 4(1) provides that a “defendant may show cause against an application under rule 1 by affidavit or otherwise to the satisfaction of the court”. Rule 1 allows an application for summary judgment to be brought –

“On the ground that that defendant has no defence to a claim included in the writ, or to a particular part of such a claim, or has no defence to such a claim or part except as to the amount of any damages claimed . . .”

[6] Again analogy could be drawn with an application to stay a winding up petition. There the debtor company is required to show a substantial defence requiring investigation of the dispute. Mann v Goldstein [1968] 2 All ER 769; Spanboard Products Limited v Elias Altrincham Properties [2003] NI Ch 3.

[7] It may be thought that the words of the relevant Rule are clear i.e. in this case, is the debt “disputed on grounds which appear to the court to be substantial?” The court is not holding a full trial of the matter; it must only decide if the grounds appear to be substantial. They must be genuine. The grounds of dispute must not consist of some ingenious pretext invented to deprive a creditor of his just entitlement. It must not be a mere quibble. If there is a genuine dispute about part of a debt but not about another part, contained in the same statutory demand, the court has the power to grant the

application to set aside the statutory demand on condition that the debtor pays the genuinely owed debt within a reasonable period of time.

 

 

Matthew Watson of XXIV Old Buildings , Lincoln’s Inn said the following  in a paper he produced in 2014, in relation to the English legislation, which is similar to ours.

 

6. The ground under IR r 6.5(4)(b): the debt disputed on grounds which appear substantial
7. This is the most commonly relied upon ground. It most closely reflects the policy reasons behind the statutory demand system. The statutory demand serves to identify, at a preliminary stage, whether the debtor has grounds to challenge the debt. If not, then the creditor is generally entitled to present a bankruptcy petition. Otherwise, where there is a dispute as to the existence of the debt, the appropriate course for the creditor is to bring ordinary proceedings to establish the debt.
8. This rationale was recently summarised by Norris J in Macpherson v Wise [2011] EWHC 141 (Ch) who held:

“The issue which the district judge had to decide arose under Insolvency Rule 6.54(b), namely whether he should grant the application to set aside the statutory demand because the debt was disputed on grounds which appeared to the court to be substantial. It was not on that occasion for the district judge to undertake some form of trial. As was said in Re a Debtor [1995] Ch 66 at page 70e:

“The scheme of the bankruptcy legislation is that substantial disputes about indebtedness are not matters to be resolved by the bankruptcy courts as part and parcel of the bankruptcy process. The bankruptcy courts are not intended to be the forum for resolving such disputes. Where such a dispute exists, the creditor should pursue his claim in the ordinary way outside the bankruptcy courts. If he does so and he succeeds in establishing his claim and the judgment he obtains is not satisfied, he may then use that judgment as the basis for initiating and pursuing bankruptcy proceedings against the debtor.”

([2011] EWHC 141 (Ch) at [18])

18. This gives guidance on the general nature of the application under IR r. 6.5(4)(b). It should not be a mini-trial of the debtor’s liability to the creditor. Instead, its function is to identify whether such a trial should take place. Implicit in this is that the onus is placed squarely on the creditor to ensure that he makes the correct selection between pursuing the debtor in bankruptcy, or in ordinary proceedings.

 

So if the Debtor has the burden , what is the level of proof required?

Watson says this:

There has been a degree of confusion as to what the debtor needs to show in order to establish that the debt is disputed “on grounds which appear substantial”. This is complicated by the existence of a second test, reproduced in the Insolvency Practice Direction 2012 (IPD 2012), which provides that:

“Where the debtor (a) claims to have a counterclaim, set-off or cross demand (whether or not he could have raised it in the action in which the judgment or order was obtained) which equals or exceeds the amount of the debt or debts specified in the statutory demand or (b) disputes the debt (not being a debt subject to a judgment, order, liability order, costs certificate or tax assessment) the court will normally set aside the statutory demand if, in its opinion, on the evidence there is a genuine triable issue.”

Note that this is an English Practice Direction and what is set out below is the position in England and Wales. The basic propositions are similar.

 

1. This provides an alternative wording to the ‘disputed on substantial grounds’ test in IR r. 6.4(5)(b). The meaning of ‘genuine triable issue’ has caused confusion. Under the CPR, the courts have an established (and much commented upon language) to describe hopelessly weak cases; the concept of a ‘real prospect of success’.
2. Considerable confusion arose following the decision in Kellar v BBR Graphic Engineers (Yorks) Ltd [2002] BPIR 544. Mr Roger Kaye QC (sitting as a deputy High Court Judge) held that it was easier to show a ‘genuine triable issue’ than a ‘real prospect of success’. He pointed to the origin of the ‘genuine triable issue’ test, and the serious consequences facing a debtor who fails to set aside a statutory demand.
3. This produced the odd result. A debtor sued in ordinary Part 7 proceedings might fail to resist an application for summary judgment by the creditor, but would succeed on an application to set aside a statutory demand served upon him for the same debt.
4. Nevertheless, in recent years more guidance on the meaning of “genuine triable issue” has removed the need for concern about the meaning of these terms and clarified any confusion. In Abernethy v Hotbed Limited [2011] EWHC 1476 (Ch), Newey J rejected a submission that “genuine triable issue” was a lower threshold than “real prospect of success”.
5. Summarising the effect of two recent Court of Appeal decisions, he held (at [8]):

“For his part, Mr Tiran Nersessian, who appears for Hotbed, contended that there was no practical difference between the two tests. In support of this submission, Mr Nersessian referred me to the decision of the Court of Appeal in Ashworth v Newnote Ltd [2007] BPIR 1012, where Lawrence Collins LJ said this in paragraph 33:

“It seems to me that a debate (see e.g. Kellar v BBR Graphic Engineers (Yorks) Ltd [2002] BPIR 544, at 551) as to whether there is a distinction between the ‘genuine triable issue’ test for cross-claims and ‘real prospect of succeeding on the claim’ (i.e. on the cross-claims) involves a sterile and largely verbal question, and that there is no practical difference between ‘genuine triable issue’ and ‘real prospect’ of success and certainly not in this case.”

Mr Poole suggested that Lawrence Collins LJ’s comments related only to crossclaim cases, but in Collier v P & MJ Wright (Holdings) Ltd [2008] 1 WLR 643 Arden LJ expressed the view in paragraph 21, in the context of a disputed debt case, that the passage from Kellar on which Mr Poole relied should not be followed. In the circumstances, I do not consider that the “genuine triable issue” test can be taken to be less stringent than that applied for summary judgment.”

(Emphasis added)

1. Two points are worth noting:
   1. (a)  Two Court of Appeal decisions insist that there is no difference of substance between a ‘genuine triable issue’ and a ‘real prospect of success’. This should put to rest any doubt as to whether there is a distinction between the two tests.
   2. (b)  The same approach is applicable when dealing with applications to set aside on IR r. 6.4(5)(a) where the debtor asserts that he has the benefit of a counterclaim, set- off or cross demand. Thus, the debtor does not need to prove (as he would at trial) his counterclaim, set-off or cross demand. The debtor succeeds if the court is satisfied that he has a real prospect of successfully establishing those defences.
2. It is in this light that it is apt to return to the IPD 2012. It could, given that it was issued after the above judgments, have clarified the situation by expressly equating ‘grounds which appear to the court to substantial’ with a ‘real prospect of success’ and abandoning the ‘genuine triable issue’ test altogether. In the author’s view, there is little justification for retaining different formulations of what the higher courts accept is, in substance, the same test.
3. It is worth adding by way of post-script, that the IPD 2012 has also clarified the correct approach that should be taken where the debt upon which the statutory demand is based upon a judgment or order. Paragraph 13.4.3 states:

“Where the debt claimed in the statutory demand is based on a judgment, order, liability order, costs certificate, tax assessment or decision of a tribunal, the court will not at this stage inquire into the validity of the debt nor, as a general rule, will it adjourn the application [to set aside the statutory demand] to await the result of an application to set aside the judgment, order decision, costs certificate or any appeal.”

1. This is an exception to the usual procedure of enquiring whether the debtor’s challenge to the debt has merit. Instead, the proper course is simply to proceed on the assumption that the order or judgment is valid.

 

What about disputes over what was said?

 

Disputes of evidence and oral evidence

Courts are often stuck between the rock of the desire to avoid conducting mini-trials and the hard place of wishing to do justice to debtors who genuinely dispute the debt. One particularly vexed area is where the debtor raises either: (1) an issue that requires oral evidence, or (2) an otherwise complex issue of fact. This is often a common feature of attempts to set aside statutory demands under ground IR r. 6.4(5)(b). It is often not difficult to find some evidence upon which to assert that some oral collateral contract exists which prevents enforcement of the debt.

1. In such circumstances, there has been a tendency for courts to conclude that the existence of oral disputes of fact, or otherwise complex factual issues, necessarily make a debt genuinely disputed.
2. Nevertheless, it is submitted that in recent years the steer from the higher courts has been that judges should ‘grab the bull by the horns’ and make findings about the debtor’s prospects of success notwithstanding that oral evidence would be required to finally determine an issue.
3. As Patten J held in Portsmouth v Alldays Franchising Ltd [2005] EWHC 1006 (Ch) at [12]:

“The mere fact that a party in proceedings not involving oral evidence or cross- examination asserts that certain things did or did not occur is not sufficient in itself to raise a triable issue. That evidence inevitably has to be considered against the background of all the other admissible evidence and material in order to judge whether it is an allegation of any substance. Once the court considers that the evidence is reliable in that sense and not some attempt to obfuscate the real issues by raising a series of hopeless allegations, then it does of course become necessary to consider what the legal consequences of it are. The application of these principles can be particularly acutely difficult where the debtor asserts an oral agreement with his creditor that his creditor has legally postponed the due date for payment. But in such cases the question is not whether there are substantial grounds for thinking that some sort of agreement was reached. The question is always whether there are substantial grounds for thinking that the agreement asserted by the debtor was reached.”

1. More recently, in Abernerthy v Hotbed [2011] EWHC 1476 (Ch) Newey J reiterated these points. He rejected a submission that:

“Whether…an oral agreement was entered into in the manner and terms described by [the debtor] is a matter for witness evidence and is unsuitable for summary determination in the context of statutory demand proceedings”.

1. He continued: “the fact that a witness has asserted something will not invariable mean that there is a triable issue as to that point”: see [13]-[14]. Courts are entitled to (and should) test the debtor’s contentions against the available evidence at the hearing. In Abernethy,Newey J examined the debtor’s written evidence (and ultimately rejected it) by considering against:

(a) the available documentary evidence which was inconsistent with its contents;

1. (b)  a previous affidavit provided by the witness, whose contents was inconsistent with that of the witness statement relied upon in the statutory demand application; and
2. (c)  the inherent probabilities or improbabilities of the case advanced.

1. Norris J made a similar point in Macpherson v Wise [2011] EWHC 141 (Ch) at [19]:

“A consideration of whether there are substantial grounds for disputing the debt does not mean that the court is simply bound to accept that, if in respect of any issue, there is a dispute on the evidence, then the matter must go to trial”

1. There is thus an increasing recognition that even where a dispute, to be finally determined, would require the hearing of oral evidence, the courts can still conclude that the debtor has not shown that the debt is disputed on substantial grounds. Courts are likely to become increasingly robust with arguments which are without merit, when viewed in the context of the whole case and the available documentary evidence.

The decision of the NI Court of Appeal in

Robert James Shaw and Deidre Kathleen Shaw v Lawrence Patterson

2014 NICA 70

is  significant and is useful for debtors and should be used to support an application to have a demand , even for damages/costs/rates etc to be set aside, after a hearing by the Master.

The significance of the Shawcase is that the Court of Appeal conducted an extensive examination of the issues which arose before the case ever came before the Master. The key paragraph is this :

[9] The statutory demand arose as a result of two orders for costs made by Deeny J on 15 March 2010 and McCloskey J on 30 March 2011 arising out of proceedings connected to this background. The costs were taxed by the Taxing Master in the sums of £8,150.65 and £11,577.63 respectively. The applicants’ application to set aside the statutory demand was refused by the Master and also by Deeny J. It is not contended that there was anything irregular about the obtaining of the Orders but the applicants continue to take issue with the outcome in January 2009 contending that it arose as a result of fraud. The applicants complain particularly about the circumstances in which the initial ex parte application for an interim injunction was pursued. We considered that we should allow the applicants to bring forward the material upon which they relied for this assertion.

 

Lawyers talk of the ratio decidendiof a case, defined as ‘the statement of law applied to the material facts’. Theratio of a case is binding on inferior courts by reason of the doctrine of precedent.

The ratio of the Shaw case is that where a serious allegation is made in respect of how the demand came into being, the court should make enquiries.

Thus the debtor should employ the decision in Shaw to request a hearing, where there are grounds to ask the court to investigate how the sum demanded came about.