Maud v The Libyan Investment Authority

A statutory demand may be set aside under rule 6.5(4)(d) of the Insolvency Rules 1986 where allowing it to found bankruptcy proceedings would be unjust. That discretion applies where payment of the debt would contravene a sanctions regime and expose the debtor to criminal penalties. A guarantee is a fund for the purposes of the asset-freezing provisions. The obligation to pay under it remains frozen, notwithstanding that the creditor is no longer subject to the general prohibition on making funds available. A statutory demand for payment of a guarantee may itself be a claim whose satisfaction is prohibited by article 12 of Regulation 204/2011. The debtor is not necessarily required to apply for a licence where the licensing criteria concern matters principally within the creditor’s knowledge, and cannot be expected to make payment where payment itself would be unlawful.

Mr Maud applied under rule 6.4 of the Insolvency Rules 1986 to set aside a statutory demand served by the Libyan Investment Authority for approximately £17.6 million due under a guarantee. He accepted the guarantee, the principal debtor’s default and his present inability to pay, but contended that payment was prohibited by the Libyan sanctions regime.

The application was made out of time. The court therefore considered whether time should be extended, whether the statutory demand should be set aside on the ground that the debt was substantially disputed or on other grounds, whether payment under the guarantee was prohibited by Regulation 204/2011 and the domestic regulations, and whether Mr Maud was precluded from relying on illegality because he had not sought a Treasury licence.

1. Extension of time. The court extended time under section 376 of the Insolvency Act 1986. The prejudice to Mr Maud included the risk of bankruptcy proceedings, while the public interest required that the sanctions issue should not be determined by default. The delay and the implausibility of Mr Maud’s explanation reduced the weight of his prejudice, but the prejudice to the LIA was limited.
2. Residual discretion. Rule 6.5(4)(d) permits the court to set aside a statutory demand where it would be unjust for the demand to generate the consequences provided by the insolvency legislation. Payment of the guaranteed debt would contravene the sanctions regime and expose the payer to criminal penalties. It was therefore unjust to allow the demand to stand.
3. Asset freeze. The expression “funds and economic resources” has the same meaning throughout article 5 of Regulation 204/2011. The definition of funds expressly includes guarantees, and the definition of freezing includes changes enabling funds to be used. Payment under the guarantee would convert frozen rights into cash and was prohibited by article 5(4) and regulation 3(1A) of the domestic regulations. Article 9 did not justify a narrower construction; payment into a frozen account would not amount to unfreezing the obligation.
4. Article 12. The statutory demand was a claim under a guarantee and its enforcement would amount to satisfaction of that claim. Article 12 was not confined to judgments following court proceedings. Since the contract was affected by the sanctions, article 12 provided a further reason to set aside the demand.
5. Licence. The authorities on conditional licensing did not establish a general rule that the debtor must apply for a licence. The relevant exemptions depended substantially on the intended use of the money and on consideration by the UN Sanctions Committee. The LIA had not explained the proposed use of the money, and the court could not assume that a licence would be granted. Payment would itself be unlawful. Mr Maud was therefore not precluded from relying on the sanctions regime. The statutory demand was set aside.