Ashworth v Newnote Ltd

A statutory demand should normally be set aside where the debtor has a counterclaim, set-off or cross-demand equal to or exceeding the debt, or disputes the debt, and the evidence raises a genuine triable issue. The genuine-triable-issue threshold is, in practice, no different from a real prospect of success.

The procedure is not suitable for deciding fact-sensitive employment and financial disputes on affidavit. Although a court may reject inherently implausible evidence or evidence contradicted by documents, it should not conduct a summary trial of genuinely contested facts arising from a complex course of dealings. A late and legally difficult trust or mutuality point may properly be excluded from such an application.

The appellant, a former managing director and employee of the respondent, applied to set aside a statutory demand for approximately £23,000 said to be due on his director's loan account. He admitted that a lesser sum was due but relied on cross-claims for expenses, salary, holiday pay and payment in lieu of notice.

Deputy District Judge Masheder set aside the demand, holding that genuine triable issues arose from the parties' lengthy and complex dealings. On the respondent's appeal, HH Judge Pelling QC held that at least £6,976 was not met by genuinely triable cross-claims and allowed the demand to proceed. The appellant brought a second appeal. The respondent also sought to rely on a late contention that an admitted £10,000 overpayment was held on trust and could not be met by cross-claims for want of mutuality.

The central question was whether those matters could properly be resolved in the summary statutory-demand procedure.

1. Appeal allowed. The statutory demand was set aside. Lord Justice Lawrence Collins gave the reasons, with which Lord Justice Buxton agreed.

2. Under rule 6.5(4) of the Insolvency Rules 1986 and paragraph 12.4 of the Insolvency Proceedings Practice Direction, the relevant issue was whether the debtor's cross-claims or dispute raised a genuine triable issue. That threshold was for practical purposes the same as a real, rather than fanciful, prospect of success under CPR 24.2(a). The dispute about labels was therefore sterile.

3. The statutory-demand procedure should not have been used to decide whether the respondent was entitled summarily to dismiss the appellant. The alleged mistaken overpayment, later advance of funds, employment claims and wider dealings required proper determination. The appellant's account could not fairly be resolved on affidavit.

4. The same applied to the alleged removal of £2,000 cash. A court may reject implausible evidence or evidence contradicted by documents, but the judge could not decide that disputed issue summarily in the context of a cash business with apparently haphazard records. The judge also gave no sufficient basis for rejecting the expense claims merely because documentary evidence was absent.

5. The Deputy District Judge's brief reasons were adequate for this limited application. They identified that the cross-claims arose from an employment dispute and could not be determined through a statutory demand. Although HH Judge Pelling QC could review the exercise of discretion, there were grounds for the original conclusion.

6. The refusal to admit the late trust and mutuality point was within the judge's discretion. The point involved unsettled and fact-sensitive issues concerning payment by mistake, knowledge and any duty to account. It was unsuitable for summary resolution. The court also observed that the respondent's account showing the alleged loan in a sister company's accounts could independently indicate that the demand had been made by a person who was not the creditor.

• Court of Appeal (Civil Division): Allowed the appellant's second appeal and set aside the statutory demand: [2007] EWCA Civ 793.
• Manchester High Court District Registry, HH Judge Pelling QC: Allowed the respondent's appeal from the Deputy District Judge and held that the respondent could proceed on a demand for £6,976.
• Deputy District Judge Masheder: Set aside the statutory demand, finding that the appellant had raised genuine triable issues on substantial grounds.