Setting aside a statutory demand

Overview

This case considers whether a court will set aside a statutory demand in circumstances where the liquidated nature of the debt is disputed, a cross demand is asserted, and it is alleged that the statutory demand was issued for an improper purpose.

Background

Susan May King, James Patrick King and Anthony Douglas King (collectively, the “Kings”) applied to set aside statutory demands (collectively, the “Statutory Demand”) for £219,700.00 (the “Debt”) issued against them by the Bar Mutual Indemnity Fund (“BMIF”) pursuant to s 268(1)(a) Insolvency Act 1986 (“IA 1986”).

The Debt arose from an unsuccessful lawsuit brought by the Kings against their solicitors, their barrister Mr Downes and others for allegedly conspiring to pressure the Kings into settling a previous dispute, among other allegations. The defendants successfully applied to strike out the lawsuit and were awarded costs. Mr Downes was awarded £219,700 in costs, and assigned his right to the Debt to BMIF, his insurer.

BMIF made the Statutory Demand and served it by letter dated 7 October 2021 on the Kings. On 12 October 2021, BMIF sent a 'without prejudice' letter proposing a settlement, agreeing to withdraw the Statutory Demand if the Kings ceased to pursue separate proceedings brought against their solicitors for professional negligence (the “Professional Negligence Proceedings”).

The Kings applied to set aside the Statutory Demands, arguing that the Debt was not for a liquidated sum, that they had cross demands and that the Court should otherwise exercise its discretion to set aside the Statutory Demands.

The Court’s Decision

Is the Debt a 'liquidated sum'?

IA 1986 section 267 provides the requirements for presenting a creditor's petition to the court, including that the debt is for a liquidated sum.

The Kings argued that the Debt was not liquidated because the costs order expressly provided that the interim payment was “subject to detailed assessment on the indemnity basis if not agreed”.

The Court reviewed the relevant case law, including the directly relevant case of Rocha-Afodu v Mortgage Express [2013] 9 WLUK 4, where the statutory demand also arose out of a costs order which included the same proviso with respect to assessment. Registrar Derrett found that, notwithstanding this language, there was no stay in place or appeal in relation to the debt, thereby making it a liquidated debt.

The Court applied this reasoning and found that the mere fact that the £219,700 was subject to a right of assessment and could potentially change in amount did not turn the otherwise liquidated sum into an unliquidated sum.

Do the Kings have a cross demand sufficient to set aside the Statutory Demand?

The Kings argued that they had two cross demands: the Professional Negligence Proceedings, due to be heard in 2023, and certain other proceedings which had not yet commenced. BMIF did not take issue with whether the Professional Negligence Proceedings had a real prospect of success. Accordingly, the only issue was whether the claim made in the Professional Negligence Proceedings qualified as a cross demand to the Debt and/or satisfied the principle of mutuality.

BMIF argued there was no mutuality of identity of parties – the Professional Negligence Proceedings were brought against two barristers, Mr Hall Taylor and Mr Morcos, as defendants, and BMIF was not a party to those proceedings. The Kings argued that this ignored BMIF's position as insurers for both Mr Hall Taylor and Mr Morcos. They relied on BMIF’s offer to settle the Statutory Demand if the Kings agreed to drop the Professional Negligence Proceedings against Mr Hall Taylor and Mr Morcos.

The Court considered that Popely v Popely [2004] EWCA Civ 463 was the starting point for analysis. It is Court of Appeal authority that (1) a cross demand does not have to arise in the same set of proceedings from which the statutory demand debt arose and (2) a mutuality of the identity of parties is necessary and sufficient.

Applying Popely to the facts, the question was whether BMIF was the defendant in the Professional Negligence Proceedings, taking into account the observation in Hurst v Bennett [2001] EWCA Civ 182 that "the courts are prepared in certain situations to look at the reality of the situation". In the Court’s judgment, BMIF was the real defendant in the Professional Negligence Proceedings.

The 12 October 2021 without prejudice offer to settle showed that BMIF recognised it was in substance the real defendant in the Professional Negligence Proceedings. The letter emphasised that BMIF was not prepared to countenance any payment to the Kings in either claim. Although different claims handlers were dealing with the different claims, BMIF was able to make an offer of settlement concerning both claims.

Accordingly, the Court concluded that the Professional Negligence Proceedings were a cross demand sufficient to set aside the Statutory Demand.

Should the Statutory Demand be set aside on other grounds?

Rule 10.5(5)(d) of the Insolvency Rules 2016 (“IR 2016”) vests a broad discretion in the court to set aside statutory demands.

The Kings took the position that the Court should exercise its discretion to set aside the Statutory Demand because the Statutory Demand was issued for an improper purpose. According to the Kings, BMIF's pursuit of the Statutory Demand (and, inevitably, a creditor's petition) had nothing to do with recovering money. Instead, BMIF’s true purpose was to stifle the Professional Negligence Proceedings.

The Court found that bankruptcy proceedings may not be used or threatened for the purpose of obtaining some collateral advantage (the “Rule in Bankruptcy”). The Court in In Re Maud [2015] EWHC 1626 (Ch) made clear that the Rule in Bankruptcy is triggered in two situations: (1) where the petitioner does not really want to obtain the bankruptcy of the company or individual at all, but issues or threatens to issue the proceedings to put pressure on the target to take some other action which the target is otherwise unwilling to take; (2) where the petitioner does want to achieve the relief sought but he is not acting in the interests of the class of creditors of which he is one or where the success of his petition will operate to the disadvantage of the body of creditors. A mixed motive on behalf of the petitioner does not amount to abuse of process.

The Court rejected this argument, finding that the mere fact that BMIF would gain a commercial advantage from pursuing bankruptcy proceedings did not mean it fell foul of the Rule in Bankruptcy. In any event, it was unclear that BMIF would gain any commercial advantage by "stifling" the future claims by forcing bankruptcy. By sections 283 and 436 IA 1986, the Kings' "property" which would vest in the Trustee in Bankruptcy include "things in action". Even if the Kings were bankrupted, there was no reason to think that a Trustee in Bankruptcy would not bring the future claims if they were as strong and as valuable as the Kings asserted.

Conclusion

The Court concluded that the Statutory Demand should be set aside because there was a cross demand in the form of the Professional Negligence Proceedings which exceeded the value of the Debt.

Judge: Her Honour Judge Kelly sitting as a Judge of the High Court

Counsel: Christopher Newman of Twenty Essex instructed directly by the Applicants

Martin Ouwehand of Radcliffe Chambers (instructed by DAC Beachcroft) for the Respondent