Statutory demand abuse & use

Gannons resolved a commercial dispute involving a landlord making an unjustified statutory demand for rent against their tenant.

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. In general terms, a debtor who, for three weeks, fails to comply with a statutory demand for a debt of more than £750 (for companies), or a debt of £5,000 or more (for individuals), is at risk of having bankruptcy or winding-up proceedings issued against it.

A statutory demand has the following potential advantages:

• It does not involve the courts from the outset.
• Preparing and serving a statutory demand is quick and inexpensive.
• It can either result in prompt payment of a debt, or flush out details of any dispute or cross-claim.

It is advisable to avoid mistakes in statutory demands as they cause delay and costs.

Background to statutory demand

Our client 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 5,000 people and its turnover exceeded £300 million. They were clearly solvent and able to pay any debts as they were due.

The landlord served the statutory demand to our client as a result of a dispute arising over the lease.

Lease dispute

Our client was a tenant attempting to renew their lease. The landlord, however, 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. The landlord had also made an application for interim rent. If time allowed, this was to be heard on the same day. The landlord acted for himself as litigant in person.

Entering negotiations

At the hearing, it became apparent that the court would dismiss the landlord’s grounds of opposition. As a result, he appeared to experience a change of heart, and agreed to stay the proceedings and enter negotiations to settle the terms of the new lease.

Negotiations break down

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, the landlord refused to conclude the negotiations and walked out of the building.

The statutory demand

Following that day in court, the landlord wrote alleging that he and our client had reached an agreement on interim rent, and that per the terms of that agreement our client was in rent arrears. Our client made it clear in an exchange of correspondence that in their view they had not reached any such agreement. Their records showed that they had paid the rent in full. It transpired that our client had in fact paid the rent by bank transfer.

At the same time, the landlord disputed the terms of the new lease. Nor would he confirm that he had withdrawn his opposition. He then served a statutory demand for unpaid rent and interim rent due during the negotiation process.

Our client had tendered the rent, was prepared to pay the balance, and acknowledged the rent was due. The landlord, however, refused to accept payment.

How we resolved the commercial dispute

Our client instructed us on these circumstances, and we primarily set about defending against the debt claim. We also obtained an injunction to prevent the landlord from issuing a winding-up petition and entitled our client to its full costs on the indemnity basis.

Winding-up petition

The consequences would have been serious for our client if a winding-up petition had been presented. As a minimum their bank accounts would probably have been frozen; their creditworthiness would have been called into question and their payments to employees, distributors and suppliers might cease.

Our client requested that the landlord confirm that he would withdraw the statutory demand. After all, no order or agreement was in place to pay any rent other than what was due under the terms of the lease. Our client also requested the landlord to provide an undertaking that he would not present them with a winding-up petition. If there was no undertaking, then our client would seek an injunction to prevent the winding-up petition.

The landlord responded by denying that our client had made any payments to him. In addition, his intention was to defend any application for an injunction.

Applying for the injunction

In the absence of the landlord’s undertaking, our client was concerned that they would be presented with a winding-up petition 21 days after service of the demand. Therefore, our client made an application for an interim injunction. This prevented the landlord from presenting a winding-up petition before the application for a final injunction went to court.

Application process

Our client had to put all the information before the court relevant to the application, including matters adverse to their case. They also had to abide by any order which the court might make regarding damages if, in the court’s opinion, the landlord sustained damages through pursuit of the order.

Result of the application

The court heard the application on the same day because of the urgency of the matter. The courts then granted an interim order. The hearing regarding the final order took place three weeks later once all parties had submitted their evidence.

The court’s decision at the final hearing

At the final application the judge granted a final injunction. The judge also ordered costs against the landlord assessed on an indemnity basis. Our client recovered virtually all its costs.

In making his decision, the judge took account of the landlord’s previous conduct. He had served statutory demands on two previous occasions. The judge also found that the landlord’s conduct in this case was not proper. He had threatened our client with the winding up procedure to pressurise our client into accepting terms. This was despite the fact that he knew the terms were disputed and subject to existing proceedings. He also refused to accept the payments our client offered to him. Furthermore, he denied receiving others that had clearly been paid to him.

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

Conclusion

The landlord had some legal knowledge, however, he refused to instruct anyone to act on his behalf. The issue became deeply emotive. The result was that he 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 must take extreme measures to protect themselves.