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The use and abuse of a statutory demand

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The use and abuse of a statutory demand

A statutory demand is a useful remedy in recovery of commercial debts, but it should not be used lightly and the court will take a dim view of parties that abuse the insolvency procedure.  

Background

Our client M was engaged in lease renewal proceedings as a tenant, the landlord, L, had opposed the grant of a new lease and the issue had been listed for a preliminary hearing to determine whether a new lease should be granted.  L had also made an application for interim rent which was to be heard on the same day, time allowing.  L acted for himself as litigant in person.

At the hearing, as it became apparent that the court would dismiss the grounds of opposition L experienced a change of heart, agreed to stay the proceedings and entered into negotiations to settle the terms of the new lease. It appeared the parties were making progress but hadn’t concluded their negotiations so the court ordered a stay. As soon as the court had risen for the day L refused to conclude the negotiations and walked out of the building.

The statutory demand 

The following day L wrote alleging that an agreement had been reached on interim rent and that M was in rent arrears. At the same time L disputed the terms of the new lease and would not confirm that their opposition had been withdrawn. There followed an exchange of correspondence in which M made it clear that, in their view,  no agreement had been reached and their records showed that the rent had been paid in full.  L responded by serving a statutory demand for unpaid rent and interim rent.

It transpired that when rent had been paid by M by bank transfer, L had been raising and sending cheques to M in an attempt to repay the rent. As there was no covering letters to explain adequately what these payments related to M’s accounts department had simply cashed the cheques.  However, rent had been tendered and M was prepared to pay the balance it acknowledge was due but L refused to accept payment.

The consequences of serving a winding up petition.

M was part of a group of companies and one of the larger retailers on the High Street with over 1,000 stores, directly employing over 5000 people and with a turnover of over £300 million.  It was clearly solvent and able to pay its debts as they fell due.

The consequences if a petition had been presented would have been serious. As a minimum the bank accounts would probably have been frozen; the creditworthiness of the company would have been called into question and it would have resulted in problems paying its employees, distributors and suppliers.  The threat was therefore a serious one.

L was requested to confirm that the statutory demand would be withdrawn as no order or agreement was in place to pay any rent other than what was due under the terms of the Lease and to provide an undertaking that no petition would be presented, in the absence of which an injunction would be sought.  L responded by denying that any payments had been made and their intention to defend any application for an injunction.

Applying for the injunction

In the absence of an undertaking M’s concern was that L would present a winding-up petition 21 days after service of the demand or even sooner. Therefore an application was made for an interim injunction to prevent Headleigh presenting a petition before the application for a final injunction can been heard.

In making the application M had to put all the information before the court relevant the application including matters adverse to its case.  Further, they had to undertake to abide by any order which the court might make as to damages if, in the court’s opinion, L had sustained damages by reason of the Order sought.

Result of the application

As the matter was urgent the hearing of the application was heard the same day.  The interim order was granted and the hearing regarding the final order was heard three weeks later once all parties had submitted their evidence.

At the final application the judge determined that a final injunction should be granted and ordered costs against L assessed on an indemnity basis resulting in M recovering virtually all of its costs.

In making his decision the judge took account of L’s previous conduct as he had served statutory demands on two other occasions.  The judge found that L had resorted to the threatened use of the winding up procedure as a means to pressurise M into accepting terms which he knew were disputed and subject to existing proceedings.  L had also refused to accept payments when offered and denied receiving others when they had clearly been paid.

Given such a clear abuse of process L paid the usual penalty by being subject to an order for indemnity costs.

Conclusion

L had some knowledge of the law but refused to instruct anyone to act on his behalf.  It had become a deeply emotive issue that blinded common sense and commercial reality such that he was unwilling to compromise and resorted to abusing the insolvency procedure to further his own ends.  However, it is inevitable that as litigants in person become more common we will see more such instances where commercial clients have to take extreme measures to protect themselves.

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Who to contact

Alex is a sharp and tenacious problem-solver specialising in contentious and non-contentious employment law, commercial litigation, TUPE and advice on team moves.

Alex Kleanthous

Any form of commercial dispute is inherently stressful and unwanted – all the more reason to ensure you get the right advice from the right person.