Statutory demand abuse & use
- John Deane
- Updated: Thu, 8th Dec 2016
A statutory demand is a useful remedy to recover commercial debts. However, it should not be used lightly. The courts take a dim view of parties that abuse the insolvency procedure.
How we resolved the commercial dispute
We were instructed by M, and:
- Defending the debt claim.
- Obtained an injunction to prevent L from issuing a winding-up petition.
- Entitled M to its full costs on the indemnity basis.
Background to statutory demand
Our client M was engaged in lease renewal proceedings as a tenant. The landlord, L, opposed the grant of a new lease. 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. If time allowed, this was to be heard on the same day. L acted for himself as litigant in person.
At the hearing, it became apparent that the court would dismiss L’s grounds of opposition. So, L appeared to experience a change of heart, and agreed to:
- Stay the proceedings;
- Enter into negotiations to settle the terms of the new lease.
It appeared the parties were making progress. However, since the parties hadn’t concluded their negotiations, 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
Following the day in court, the following sequence of events occurred:
- L, the next day, wrote alleging that an agreement had been reached on interim rent, and M was in rent arrears.
- L, at the same time, disputed the terms of the new lease. Nor would L confirm that they had withdrawn their opposition.
- M made it clear, in an exchange of correspondence, that in their view no agreement had been reached.
- M’s records showed that the rent had been paid in full.
- L responded by serving a statutory demand for unpaid rent and interim rent due during the negotiation process.
- M, it transpired, had paid the rent by bank transfer.
M had tendered the rent, was prepared to pay the balance, and acknowledged the rent was due. L refused to accept payment.
The consequences of serving a winding up petition
M was part of a group of companies. The company was one of the larger retailers on the High Street with over 1,000 stores. It directly employed over 5000 people and it’s turnover exceeded £300 million. M was clearly solvent and able to pay its debts as they fell due.
How to resolve a commercial debt dispute
For M, if a winding-up petition had been presented, the consequences would have been serious. As a minimum, M’s:
- Bank accounts would probably have been frozen;
- Creditworthiness would have been called into question;
- Payments to employees, distributors and suppliers might cease.
M requested L to confirm that the statutory demand would be withdrawn. After all, no order or agreement was in place to pay any rent other than what was due under the terms of the Lease. So M requested L to provide an undertaking that no winding-up petition would be presented. If there was no undertaking, then M would seek an injunction.
L responded by denying that any payments had been made. In addition their intention was to defend any application for an injunction.
Applying for the injunction
In the absence of L’s undertaking, M was concerned that L would present a winding-up petition 21 days after service of the demand. Therefore M made an application for an interim injunction. This was to prevent L presenting a winding-up petition before the application for a final injunction could be heard.
In making the application M had to:
- Put all the information before the court relevant to the application, including matters adverse to M’s case.
- Undertake to abide by any order which the court might make as to damages if, in the court’s opinion, L sustained damages by reason of the Order sought.
Result of the application
As the matter was urgent, the application was heard the same day. The interim order was granted. The hearing regarding the final order was heard three weeks later once all parties had submitted their evidence.
The court’s decision at the final hearing
At the final application the judge determined that a final injunction should be granted. The judge also ordered costs against L assessed on an indemnity basis. M recovered virtually all its costs.
In making his decision, the judge took account of L’s previous conduct. L had served statutory demands on two previous occasions. The judge found that L had:
- Threatened use of the winding up procedure to pressurise M into accepting terms which L knew were disputed and subject to existing proceedings;
- Refused to accept payments when offered;
- 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.
L had some legal knowledge. Unfortunately L refused to instruct anyone to act on his behalf. The issue became deeply emotive. The result was that L was unwilling to compromise and resorted to abusing the insolvency procedure to further his own ends.
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.
John Deane heads the commercial team at Gannons. John advises businesses on effective debt recovery. There are a number of avenues to be explored.