Susan May King v Bar Mutual Indemnity Fund

An interim costs order creates a liquidated sum capable of founding a statutory demand, even where the amount remains subject to detailed assessment. A debtor may rely on a cross-demand under rule 10.5(5)(a) of the Insolvency Rules 2016 where the claim has a real prospect of success and is sufficiently connected through the parties’ legal character. The court may examine the commercial reality to identify the creditor and debtor. A statutory demand based on a judgment cannot ordinarily be used to reopen or challenge that judgment. Bankruptcy proceedings may be set aside for an improper collateral purpose, but the burden of proving abuse is high.

Three applicants applied under section 268(1)(a) of the Insolvency Act 1986 to set aside statutory demands for £219,700. The debt arose from an interim costs payment ordered against them following the striking out of conspiracy proceedings. The costs order was payable to a barrister and had been assigned to the respondent insurer.

The applicants relied on proposed professional-negligence proceedings against their former legal representatives, alleging that the respondent was the real defendant because it insured the barristers and had offered a global settlement. They also argued that the debt was unliquidated, substantially disputed, issued for an improper purpose, would stifle future proceedings, and served no useful purpose.

1. Liquidated sum. The £219,700 interim costs payment was a liquidated sum under section 267(2)(b) of the Insolvency Act 1986. The court had assessed and crystallised the amount payable on an interim basis. A right to later detailed assessment, and the possibility that the amount might increase or decrease, did not make the sum unliquidated. The applicants’ argument wrongly equated liquidation with finality.
2. Cross-demand. A claim under rule 10.5(5)(a) must have a real prospect of success, but it need not already be capable of being litigated or have been issued. A cross-demand need not arise from the proceedings producing the statutory-demand debt. The essential connection is ordinarily that it is a demand by the debtor against the creditor.
3. Mutuality and commercial reality. Mutuality remains a requirement, following Hurst v Bennett rather than the contrary approach in Makki v Bank of Beirut SAL. The court must assess whether the parties act in the same legal character and may examine the reality of the situation. On the evidence, the respondent was the real defendant in the professional-negligence proceedings. Its global settlement offer concerning both sets of proceedings supported that conclusion. The professional-negligence claim was therefore a qualifying cross-demand exceeding the statutory-demand debt.
4. Other grounds. The court would not investigate the validity of the underlying costs order. The proposed misleading-submissions proceedings amounted in substance to an impermissible attempt to go behind that order and had no realistic prospect of success. The applicants failed to establish that the statutory demand was issued for an improper collateral purpose. The respondent’s possible commercial advantage and settlement proposal did not establish abuse, and bankruptcy would not necessarily stifle claims because choses in action would vest in the trustee.
5. The applicants provided no corroborated evidence that bankruptcy would serve no useful purpose. The statutory demands were accordingly set aside because of the qualifying cross-demand arising from the professional-negligence proceedings.