Martin v MclAren Construction Ltd

A statutory demand under section 268(1) of the Insolvency Act 1986 requires a debt that is payable immediately. Where an on-demand guarantee makes a prior written demand a contractual precondition to liability, the guaranteed debt is not immediately payable until that demand has been served in the contractually required manner. A statutory demand cannot itself satisfy that precondition. The court’s residual discretion to decline to set aside a demand must be exercised consistently with the statutory conditions governing presentation of a bankruptcy petition. Failure to satisfy an essential precondition is a substantive defect, rather than a mere technicality, and ordinarily justifies setting aside the demand.

The applicant sought to set aside a statutory demand for £7,099,670.34 served by the respondent under a personal guarantee. The demand was made under section 268(1)(a) of the Insolvency Act 1986, on the basis that the debt was a liquidated sum payable immediately.

The guarantee provided that the applicant would pay the guaranteed liabilities immediately on written demand, with specified methods of service. No prior written demand had been served. The respondent relied on an earlier withdrawn statutory demand and an email, but neither complied with the guarantee. The central issues were whether the debt was payable immediately and whether the court should nevertheless decline to set aside the statutory demand under rule 10.5(5)(d) of the Insolvency (England and Wales) Rules 2016.

1. The statutory demand was set aside. The respondent had not established the statutory presumption of insolvency required by sections 267 and 268 of the Insolvency Act 1986.
2. The guarantee was an on-demand guarantee. Its terms required a written demand before the applicant became liable to pay. The contractual demand had to comply with the specified methods of service. No qualifying demand had been served before the statutory demand. The email was ineffective because email was not an authorised method of service.
3. The statutory demand could not itself operate as the contractual demand. A statutory demand proceeds on the basis that the debt is already immediately payable and is not intended to fulfil a contractual precondition making the debt immediately payable. The earlier statutory demand, which had been withdrawn, was likewise ineffective.
4. The court accepted the reasoning in Wallace LLP v Yates [2010] EWHC 1098 that, in the context of section 268(1), a debt must be both liquidated and immediately payable. The demand therefore failed the statutory requirement.
5. The court declined to adopt the obiter approach in TS & S Global Ltd v Fithian-Franks [2007] EWHC 1401, which suggested that a premature demand might nevertheless be retained where setting it aside would cause no practical injustice. The residual discretion under rule 10.5(5)(d) had to be exercised consistently with primary legislation. The defect here was substantive because the statutory gateway to bankruptcy proceedings had not been established.
6. The court was fortified by White v Davenport Trust Ltd [2011] BPIR 1187: the relevant injustice arose from permitting a creditor to take a preliminary step towards insolvency proceedings when it had no present right to present a bankruptcy petition.