The case of Howell v Lerwick Commercial Mortgage Corporation Limited heard in the High Court in May 2015 has given some interesting guidance regarding the setting aside of statutory demands.

Background

Lerwick Commercial Mortgage Corporation had issued a statutory demand against Mr Howell for the sum of £3,935.00 in respect of two costs orders which they had obtained against him. Mr Howell, in the first instance, applied to set aside the statutory demand on the basis that he had a cross claim of £3,145.00. The application to set aside the statutory demand was dismissed at first instance on the basis that even when the cross claim amount was deducted from the statutory demand amount the difference (£790) and therefore the undisputed sum was still above the bankruptcy threshold. Lerwick had originally claimed a greater sum, but the District Judge at the hearing of first instance had reduced the sum down on the basis that Lerwick was not entitled to interest on the cost awards.

The Hearing

At the hearing of the appeal, crucially for the legal significance of the case, the figures in relation to the cross claim were adjusted by the court. The cross claim was found to be either £240 or just over £100 greater than first pleaded, depending on which rate of interest was applied to it (the court declined to rule on what the proper rate should be). As a result of these calculations, the difference between the cross claim and the statutory demand amount fell to less than the £750 bankruptcy threshold and the court was asked to consider whether or not the statutory demand should be set aside as a result pursuant to the discretion given in Rule 6.5(4)(d) of The Insolvency Rules 1986.

The court dismissed the appeal and did not set the statutory demand aside. This was as a result of the fact that the appellant debtor had other creditors known to both he and the court which, when combined with the difference between the statutory demand amount and the cross claim amount, would have seen his total indebtedness rise to well in excess of the £750 bankruptcy threshold. The court did hold that, in line with previous case law, if the only debt in question had been that owed to Lerwick, then the statutory demand would likely have been set aside because no bankruptcy petition could proceed on the back of it. However the very existence of the other debts meant that a bankruptcy petition could be presented on the back of the statutory demand and so it was not set aside.

Significance

If a statutory demand is presented against a debtor and the debtor can evidence a cross claim in respect of that particular debt and bring it below the bankruptcy threshold then, for the purposes of that debt, they may well succeed in have the statutory demand set aside. However where it can be shown that the debtor is “insolvent” in that they have numerous other debts which they cannot satisfy, the very fact that one debt has been reduced below the statutory demand level should not stop the action where collective action going forward could be possible from creditors.

On a practical level, this could lead to greater cooperation by creditors. If a debtor owes individual debts to ten creditors, all of which fall below the statutory demand threshold, it may be possible for a statutory demand in respect of one of the debts to be effective, if evidence of the others can be produced to the court. The decision could also curb the practice utilised by some serial debtors of reducing balances on debts to just below the Insolvency threshold so as to stave off the threat of bankruptcy.

Michael Adamson