Hurst v Bennett & Ors

A statutory demand may be set aside for a counterclaim or cross-demand only where the rival claim can undermine the debtor’s apparent inability to pay the demanded debt. Ordinarily, this requires mutuality: the creditor and debtor must claim against each other in the same respective capacities.

A partner’s unliquidated claim may qualify as a cross-demand. However, a claim dependent upon the taking of partnership accounts cannot ordinarily be pursued separately before those accounts are taken. By contrast, trustees who have discharged a partnership liability may enforce their distinct right of indemnity without awaiting the final partnership account.

Former partners who held a partnership lease served a statutory demand on another former partner for his contribution towards rent which they had paid. He sought to set aside the demand under rule 6.5(4)(a) of the Insolvency Rules 1986, asserting that partnership accounts would disclose a larger sum due to him.

A deputy registrar dismissed the application. Ferris J dismissed the ensuing appeal, holding that the asserted claim against the partners was not a counterclaim or cross-demand against the respondents in their capacity as trustees. The debtor appealed to the Court of Appeal.

The central issues were whether rule 6.5(4)(a) required mutuality, whether the trustees could enforce their indemnity before final partnership accounts, and whether the asserted cross-demand was sufficiently substantial to justify setting aside the statutory demand.

1. Appeal dismissed unanimously. Lady Justice Arden and Peter Gibson LJ held that rule 6.5(4)(a) of the Insolvency Rules 1986 requires mutuality. A cross-demand must be capable of reducing or displacing the debt supporting the statutory demand. A claim against persons in one capacity cannot ordinarily answer a debt which they recover in another capacity.

2. The respondents’ demand concerned their personal entitlement to indemnification after paying rent for which they were liable as lessees. The debtor’s proposed cross-demand was against all the other former partners jointly and depended upon the outcome of a dissolution account. It could not establish that the respondents would owe him a corresponding amount. The necessary mutuality was therefore absent.

3. Lady Justice Arden held that an unliquidated claim may constitute a counterclaim or cross-demand even though proceedings have not been issued or reduced to judgment. The earlier order declaring the debtor liable for his percentage of partnership liabilities was not itself a judgment debt. It neither fixed the sum payable nor identified the persons to whom payment was due.

4. The trustees’ right of indemnity was distinct from the right of a partner who had paid more than his proper share to obtain contribution from other partners. The trustees could enforce their indemnity without awaiting final partnership accounts. A former partner’s claim concerning partnership assets or liabilities, however, must ordinarily be pursued through an account unless the case is exceptional and an account would serve no useful purpose.

5. The alleged cross-demand was in any event insufficient. The only claim having any substance concerned a share of post-cessation book debts, which was less than the demanded rent. Other alleged credits were unsupported or had already been appropriated. There was no sufficient prospect that a partnership account would produce a balance in the debtor’s favour.

6. Sir Christopher Staughton agreed with the dismissal but did not rely on lack of mutuality. He considered it decisive that the debtor could not pursue his partnership claim before an account, that no account was likely to be taken, and that there was no reason to expect the respondents to be net contributors. The appeal was dismissed with costs, and leave to appeal to the House of Lords was refused.

1. Court of Appeal (Civil Division): The appeal was dismissed unanimously: [2001] EWCA Civ 182. Costs were assessed at £5,000 inclusive of VAT, and leave to appeal to the House of Lords was refused.

2. High Court, Chancery Division: Ferris J dismissed the debtor’s appeal on 24 May 2000. He held that a possible balance arising from partnership accounts was not a counterclaim or cross-demand against the respondents’ separate claim under their indemnity.

3. High Court: Harman J had earlier adjourned the appeal pending related partnership litigation.

4. Deputy Registrar: Deputy Registrar Middleton dismissed the application to set aside the statutory demand on 10 November 1997 because no cross-demand was shown which could reduce the debt below the relevant level.