Howell v Lerwick Commercial Mortgage Corporation Ltd

A statutory demand is not necessarily invalid merely because a debtor’s cross-claim would reduce the debt below the bankruptcy level of £750. The statutory demand may remain useful if the creditor has, or may obtain, other petitionable debts which can be aggregated to meet that level.

The residual power under rule 6.5(4)(d) of the Insolvency Rules 1986 should be used where a bankruptcy petition would inevitably fail. That principle does not require a demand to be set aside where other debts may provide a sufficient basis for a petition. A cross-claim which falls short of the debt is materially different from a dispute as to part of the debt.

The claimant appealed against an order of the Central London County Court dismissing his application to set aside a statutory demand served by the defendant. The demand arose from two county court costs orders and claimed £4,736.43, including interest and the costs of preparing and serving the demand.

The district judge held that the demand was overstated by £801.43, but authorised presentation of a bankruptcy petition for £3,935. The claimant maintained that his claim against the defendant, including interest and consequential losses, was sufficient to defeat or reduce the debt below £750. By the time of the appeal, he could pursue only a personal claim for repayment of £2,750, with costs and any arguable interest.

The central issue was whether the residual discretion under rule 6.5(4)(d) required the demand to be set aside where the cross-claim did not equal the debt but would reduce the balance below £750.

1. The appeal was dismissed. The statutory demand was properly left standing for £3,935.
2. Rule 6.5(4)(a) requires a counterclaim, set-off or cross-demand to equal or exceed the debt specified in the demand. It did not apply because the claimant’s cross-claim fell short of the debt.
3. Rule 6.5(4)(b) concerns a substantial dispute as to the debt itself and applies only where the dispute extends to the whole debt: Re a Debtor (No 1 of 1987) [1989] 1 WLR 271 and Re a Debtor (490-SD-1991) [1992] 1 WLR 507.
4. Re a Debtor (Nos 49 and 50 of 1992) [1995] Ch 66 was explained as applying where the undisputed part of a disputed debt was below £750 and there was no suggestion of other debts or creditors. In such circumstances a petition would inevitably fail and the demand could be set aside under rule 6.5(4)(d). The decision did not require every demand below £750, or every demand affected by a cross-claim, to be set aside.
5. Where the debt is undisputed but subject to a cross-claim, the creditor’s petitionable debt remains the debt specified in the demand, subject to any later determination at the petition hearing. If other debts may be relied upon, the court cannot conclude that a petition would inevitably fail. The residual discretion should therefore not be exercised.
6. The claimant had arguable entitlement to discretionary interest on his restitutionary claim under section 35A of the Senior Courts Act 1981 or section 69 of the County Courts Act 1984. The Late Payment of Commercial Debts (Interest) Act 1998 did not apply to a supplier’s obligation to refund a price after total failure of consideration. Even allowing interest, the cross-claim remained below the demand, while other costs debts owed by the claimant to the defendant meant that a petition would not inevitably fail.
7. The remaining grounds, including alleged procedural irregularity and bias, had no substance.

1. High Court (Chancery Division) — On appeal from the Central London County Court, Mr Justice Nugee dismissed the appeal and upheld the order authorising presentation of a bankruptcy petition for £3,935.
2. Central London County Court — District Judge Smart dismissed the application to set aside the statutory demand, but set it aside as to £801.43 representing wrongly claimed interest and costs.