With the approaching deadline for the increase in the bankruptcy threshold, there has been an increase in demand from councils for bankruptcy action to be taken in respect of council tax, before it is too late.

The initial step in that process is service of a statutory demand and so we look at two issues which come up time and again – valid service and dealing with an application to set aside.

Service

A creditor is under an obligation to do all that is reasonably practical to bring a statutory demand to the debtor’s attention [Anderson v Kas Bank [2004] BPIR 684].

That is a question of fact to be determined by the court in each case. Service should be by means of personal service (Insolvency Rules 1986, rule 6.4(2)). Those intending to personally serve a statutory demand will generally be required to make a number of attempts to effect service on the debtor. If it has not proved possible, service may be by other means such as first class post or insertion through a letterbox. The steps taken must be such as would satisfy the court that on the balance of probabilities the demand has come to the attention of the debtor. The following guidelines may assist:

– A personal visit should be made to the residence or place of business of the debtor. Visits may be required at different times of the day. It is suggested that up to three visits may be required.

– Where the debtor has more than one address, personal visits should be made at all known addresses.

– If personal service cannot be effected, first class pre-paid letter should be sent or a letter hand delivered to the debtor’s last known residence/business address specifying that a call was made, the purpose of that call and stating that there had been a failure to meet the debtor. An appointment should be made giving at least two days’ notice and such letter sent to all known addresses of the debtor (Insolvency Proceedings Practice Direction, para 11.4).

– If the debtor fails to keep the appointment the creditor may argue that the statutory demand has been validly served by advertisement/first class post/insertion through the letterbox.

– If the statutory demand is served by post, service is deemed to be effected on the seventh day after posting (IPPD, para 11.5).

– In the case of an individual debtor, if the statutory demand is based upon a judgment or order of the court, and the creditor knows or has reasonable cause to believe that the debtor has absconded or is avoiding service, and there is no reasonable prospect of the sum being recovered by execution or other process, than the demand may be advertised in one or more newspapers (Lilly v Davidson [1999] BPIR 91). The time for compliance with the demand runs from the date of the advertisement (IR 1986, rule 6.3(3)).

– If personal service has not been effected, the witness statement accompanying the subsequent bankruptcy petition must set out the steps that were taken to effect service. (IR 1986 rule 6.1(6)).

Applications to set aside

There is some concern that debtors will issue spurious applications to set aside statutory demands in an attempt to delay the issue of bankruptcy proceedings beyond the likely deadline of 1 October 2015.

The first point to bear in mind is that with every application to set aside submitted to court, there ought to be judicial consideration of it in order to weed out hopeless applications. This should always be insisted on if it appears that a court officer has simply listed it for hearing. IPPD para 13.3.3 states:

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

The case of Dias v London Borough of Havering [2011] EWHC 172 also provides a useful authority at this stage. The court held that even though the majority of liability order proceedings may be viewed as a “rubber stamping” exercise without the protection of a full judicial process with limited rights of appeal, a bankruptcy court cannot look behind the liability order unless the debtor or interest party is able to demonstrate that it was obtained by fraud, collusion or a miscarriage of justice.

In more general terms, it is not enough for the debtor to state that the debt is disputed. The court must be satisfied that there is a genuine dispute on substantial grounds. From IPPD para 12.4 “where the debtor disputes the debt the court will normally set aside the demand if, in its opinion, on the evidence there is a genuine triable issue”.

The debtor’s burden of proving to the satisfaction of the court that there is a dispute is generally less onerous that the test for summary judgment in the Civil Procedure Rules (a real prospect of successfully defending the claim). The court will not however conduct a mini trial of the issues and the benefit of the doubt at statutory demand stage is more likely to be provided to the debtor.

A technical error on the statutory demand ought not to be fatal. Rule 7.55 of the Insolvency Rules 1986 provides “no insolvency proceedings shall be invalidated by any formal defect or by any irregularly, unless the court before which objection is made considers that substantial injustice has been caused by the defect or irregularity, and that the injustice cannot be remedied by any order of the court”. For example in the case of re A Debtor No. 1 of 1987 [1989] 1 WLR 271, the court of appeal refused to set aside a demand on the grounds that the amount claimed was overstated.

It should also be remembered that even if part of the debt is disputed, as long as there is an undisputed element of at least £750 then the council ought to be entitled to proceed with the demand (re A Debtor [1993] BCLC 180).