Popely v Popely

A claim by a debtor against the creditor is a “cross demand” under rule 6.5(4)(a) of the Insolvency Rules 1986. Its status does not depend on the nature of the statutory-demand debt or on whether both claims arise in the same proceedings.

Where a genuine cross demand equals or exceeds an undisputed debt, the court will normally set aside the statutory demand unless special circumstances justify a different result. A costs order remains valid and enforceable after the demand is set aside. Bankruptcy is not a method of execution, and the fact that the debt arises under an immediately payable costs order is not itself a special circumstance.

A court summarily dismissing an application to set aside a statutory demand must give sufficient reasons to disclose why the application failed.

Ronald Popely served a statutory demand on his brother, John Popely, for £41,617 plus interest due under a Crown Court costs order. John relied on a consolidated Chancery claim against Ronald, valued at more than £1.8 million, as a cross demand under rule 6.5(4)(a) of the Insolvency Rules 1986.

A district judge dismissed John's application to set aside the demand under the summary procedure in rule 6.5(1), without notice to Ronald and without giving reasons. On appeal, a deputy High Court judge set the demand aside: [2003] EWHC 2028 (Ch).

Ronald's second appeal raised three central issues: whether the underlying claim was a cross demand despite its close procedural connection with the costs order; how the discretion to set aside the demand should be exercised; and whether the district judge's unexplained summary decision could stand.

1. Appeal dismissed. Jonathan Parker LJ, with whom Moses J and Ward LJ agreed, held that the district judge's failure to give reasons meant that his decision could not stand. Rule 6.5(1) did not displace the general duty to explain why no sufficient cause had been shown. The peremptory nature of the procedure made an explanation particularly important. The deputy judge therefore had to determine the matter afresh.

2. A “cross demand” under rule 6.5(4)(a) is a demand running from the debtor to the creditor. The expression does not imply a procedural or juridical relationship between that demand and the debt specified in the statutory demand. Its meaning cannot vary with the nature of that debt or according to whether the two claims arise in the same proceedings. John's underlying claim was therefore a cross demand even if the costs order were treated as an interlocutory order made in the consolidated action.

3. Setting aside a statutory demand does not invalidate or render unenforceable the judgment or costs order on which it is based. The creditor retains the ordinary enforcement methods under Part 70 of the Civil Procedure Rules 1998, and may seek a stay of the action under section 49(3) of the Supreme Court Act 1981. Bankruptcy is not a form of execution.

4. Under paragraph 12.4 of the Practice Direction: Insolvency Proceedings, a statutory demand will normally be set aside where a genuine cross demand equals or exceeds the debt. Departure requires special circumstances. The fact that the debt arises under an interlocutory costs order is not, without more, such a circumstance. The court declined to adopt the contrary reasoning expressed on the application for permission to appeal in Barnes v Uttlesford District Council.

5. Alleged impecuniosity was a matter potentially relevant at the petition stage under section 271(3) of the Insolvency Act 1986, rather than a matter for investigation on an application under rule 6.5(4)(a). Delay may cast doubt on the genuineness of a cross demand and might conceivably have wider relevance in another case. A debtor is not, however, subject to an absolute requirement to show that the cross demand could not previously have been litigated. Here the cross demand was plainly genuine, and neither alleged impecuniosity nor delay had been raised below. No special circumstances justified departure from the normal practice.

1. Court of Appeal (Civil Division): Ronald Popely's second appeal was dismissed. The order setting aside the statutory demand was upheld: [2004] EWCA Civ 463.
2. High Court, Chancery Division: A deputy High Court judge allowed John Popely's appeal from the district judge and set aside the statutory demand: [2003] EWHC 2028 (Ch).
3. Canterbury County Court (Bankruptcy): The district judge summarily dismissed the application to set aside the statutory demand under rule 6.5(1) of the Insolvency Rules 1986, without notice to the creditor and without giving reasons.