Philbin v Davies

For an application to set aside a statutory demand, the applicant must show a real prospect of successfully establishing that the debt is below the bankruptcy threshold. In a connected mortgage sale, the mortgagee bears a heavy burden at trial of showing that reasonable steps were taken to obtain the best price reasonably obtainable. That burden does not impose an inflexible obligation to follow a particular sale procedure or obtain particular advice. The court must assess all the circumstances broadly. Prima facie concerns about the sale, including the absence of proper enquiries concerning vacant possession or reliance on artificial valuation assumptions, may establish a real prospect of success. Where that prospect cannot fairly be rejected as fanciful, the statutory demand should be set aside.

The applicant sought to set aside a statutory demand for approximately £3.9 million issued in respect of unpaid loans secured by charges over property. The respondent mortgagee had taken possession and sold the charged properties to a company owned and controlled by him. The applicant disputed the resulting debt, alleging that the connected sale was not conducted so as to obtain the best price reasonably obtainable. He also relied on proposed claims concerning unfair terms, default interest, penalties and an unfair credit relationship.

The central questions were whether the applicant had a real prospect of establishing a defence or cross-claim sufficient to reduce the debt below the bankruptcy threshold, and whether the evidence concerning the connected sale was sufficient to satisfy that test.

1. Application granted. The statutory demand was set aside.
2. The governing threshold was whether the applicant had a real, rather than fanciful, prospect of establishing that the debt was below £5,000. This was materially the same test as that applied on an application for summary judgment.
3. In a connected sale, the mortgagee had a heavy burden at trial to establish that reasonable steps had been taken to obtain the best price reasonably obtainable. The existence of a connected sale did not alter the legal test, but justified closer scrutiny of the evidence.
4. The authorities did not impose an absolute obligation to obtain particular advice or follow a prescribed marketing procedure. The court had to examine the facts and circumstances broadly. Nevertheless, the mortgagee had failed to make proper enquiries about the occupants’ willingness to leave, had relied on an unexplained 90-day sale condition, had not marketed the property, and had not obtained advice on the best method of sale.
5. Those matters were significant, particularly because the valuation difference attributable to vacant possession was approximately £1 million and the sale price was substantially below earlier valuations. They provided a real prospect that the applicant could establish that reasonable steps had not been taken to obtain the best price.
6. The proposed claims concerning unfair default interest, acceleration and other loan terms could not be rejected as unrealistic or fanciful. If successful, they could materially reduce the alleged debt. On the figures advanced, a sufficient sale-price and interest challenge could eliminate the debt for statutory-demand purposes.

not stated in the judgment.