Shalson v DF Keane Ltd

A statutory demand is a formal precursor to bankruptcy proceedings, not “legal proceedings” for the purposes of section 9 of the Arbitration Act 1996. The existence of an arbitration agreement, or the possibility that a future bankruptcy petition might be stayed, does not itself justify setting aside the demand. The residual discretion under rule 6.5(4)(d) of the Insolvency Rules 1986 is directed to preventing injustice, assessed on the circumstances existing at the hearing. The mere availability of arbitration or adjudication does not prevent a creditor using bankruptcy proceedings to enforce payment. On an application to set aside a statutory demand, the court must not resolve genuinely contested issues, but may evaluate whether a cross-claim raises a genuine triable issue. The application is not a trial on the underlying debt.

Peter Shalson appealed against orders made by Chief Registrar James on 28 November 2002 dismissing applications to set aside two statutory demands served by DF Keane Ltd. The demands concerned sums certified as due under a JCT building contract. Before the Chief Registrar, Mr Shalson relied on the contract’s arbitration and adjudication provisions, and on alleged cross-claims for defects, direct payments to subcontractors and damage to a tapestry.

The Chief Registrar rejected the arbitration argument and found that the cross-claims fell short of the debts claimed. On appeal, the central issues were whether section 9 of the Arbitration Act 1996 required the statutory demands to be set aside, whether the residual discretion under rule 6.5(4)(d) should be exercised because a future petition might be stayed, and how far the cross-claims should be assessed.

1. Arbitration and statutory demands. The appeal was dismissed. A statutory demand is not a “legal proceeding” within section 82(1) of the Arbitration Act 1996. It is a formal demand and a statutory prerequisite to presenting a bankruptcy petition. Section 9 therefore did not apply to the demands themselves.
2. The possibility that a future bankruptcy petition might be stayed under section 9 did not require the demands to be set aside under rule 6.5(4)(d) of the Insolvency Rules 1986. A stay is available only once legal proceedings have been brought and an application for a stay has been made. At the hearing, no arbitration reference had been made and it could not be said that a future petition was bound to fail. The Chief Registrar was entitled to disregard that possibility in exercising his discretion.
3. The availability of arbitration or adjudication did not make resort to bankruptcy proceedings improper. Where a demand has been duly served and no ground under rule 6.5(4)(a)–(c) is established, the existence of alternative dispute-resolution procedures does not of itself require intervention under paragraph (d).
4. Cross-claims. The court declined to determine the precise value of the alleged cross-claims. Payment of £62,348.16 meant that the issue was academic, and an application to set aside a statutory demand is not a trial or hearing on the merits of the underlying debt or cross-claim.
5. Nevertheless, the court confirmed that the Insolvency Practice Direction permitted the Chief Registrar to scrutinise the alleged cross-claims. The court must not resolve genuinely contested issues, but may assess whether the evidence discloses a genuine triable issue. The appeal was dismissed.

High Court (Chancery Division): Mr Justice Blackburne dismissed the appeal from orders made by Chief Registrar James on 28 November 2002 dismissing the applications to set aside the statutory demands.