Re The Sky Wheels Group of Companies Limited

The High Court dismissed the creditor's appeal and upheld the County Court judge's order setting aside a statutory demand served on the debtor. Key legal principles applied were the grounds in IR 10.5(5) of the Insolvency Rules 2016 for setting aside a statutory demand: (a) cross-claim or set-off, (b) debt disputed on substantial grounds, (c) security held by the creditor and non-compliance with IR 10.1(9), and (d) other grounds where it would be unjust to insist on the demand. The court held that (1) the periodic drawings debited to the director's loan account were properly characterised as sums owing to the company (not re-characterisable as remuneration without tax consequences), (2) there was a substantial dispute as to whether the directors' loan account sums were presently due because of a legitimate expectation/arrangement that drawings would be repaid from dividends, and (3) there was no equitable charge or other security in the creditor's favour over future dividends or sale proceeds of shares. Finally, the court concluded it was just to set aside the demand under IR 10.5(5)(d) because the timing and manner of the creditor's resort to bankruptcy suggested a collateral purpose of forestalling the debtor's s.994 unfair prejudice petition.

Background and parties: The appellant creditor, The Sky Wheels Group Limited, served a statutory demand on the respondent, Christopher Stephen Jones, claiming c. £418,609.28 alleged to be due on his directors' loan account. Mr Jones was a director and minority shareholder; a dispute arose after he was excluded from the company's management and dividends ceased.

Nature of the application: Mr Jones applied to set aside the statutory demand under IR 10.5(5). He also had a parallel petition under s.994 Companies Act 2006 seeking a declaration of beneficial ownership of 35% of the shares and an order for purchase of his shares.

Issues framed:

• Whether the monthly drawings were remuneration or debts owed to the company (relevant to cross-claims for unpaid remuneration).
• Whether the debt was disputed on substantial grounds because of an alleged agreement/expectation that directors' loan accounts would be repaid only by declared dividends.
• Whether the company held security (an equitable charge) over future dividends or sale proceeds of shares and whether the statutory demand complied with IR 10.1(9).
• Whether the court should exercise its residual discretion under IR 10.5(5)(d) to set aside the demand on other grounds.

Decision and reasoning: The court held that the drawings of £144,868.08 debited to Mr Jones' loan account were properly characterised as sums owing to the company (not salary/remuneration) and therefore his cross-claim for unpaid drawings failed. However, the court found a substantial dispute as to whether the loan account sums were presently payable: the factual matrix and conduct supported an arguable legitimate expectation that drawings would be repaid from dividends and that the company should at least consider declaring dividends before demanding repayment. The court rejected the existence of an equitable charge over future dividends or sale proceeds: the arrangement was properly characterised as set-off between a dividend payable and the loan account rather than the appropriation or specific appropriation of a fund capable of supporting an equitable charge. Finally, the court exercised its discretion under IR 10.5(5)(d) and set the demand aside because the creditor's unexplained change to pursue bankruptcy (rather than Part 7 proceedings) shortly after the respondent threatened unfair prejudice proceedings gave rise to a justifiable concern that the bankruptcy process was being used to frustrate the s.994 petition; that collateral purpose made it unjust to allow the statutory demand to give effect to bankruptcy consequences.

The appeal is dismissed. The High Court upheld the County Court judge's order setting aside the statutory demand. The court agreed that the periodic drawings were debts owing to the company (not re-characterised as remuneration), that there was a substantial dispute as to whether the directors' loan account sums were presently payable because of an arguable expectation they would be repaid from dividends, that no equitable charge was created over future dividends or sale proceeds, and that it was just to set aside the demand under IR 10.5(5)(d) because the creditor's resort to bankruptcy appeared designed to frustrate the debtor's s.994 petition.

Appeal from the County Court at Manchester (Deputy District Judge Watkin), judgment of 18 June 2019 setting aside a statutory demand. Appeal heard in the High Court (Manchester) before Mr Justice Snowden, judgment [2020] EWHC 1112 (Ch).