'Can an individual faced with a statutory demand set it aside on the ground that England and Wales is not the forum to make a bankruptcy order' - this was the question posed by Chief ICC Judge Briggs in Lyons v Bridging Finance Inc [2023] EWHC 1233 (Ch) ('Lyons'). While the question was answered shortly: 'no' (paragraph 15), it is illuminating to see how Chief ICC Judge Briggs: (1) reached that conclusion, in particular, what he said as to the jurisdiction to set aside a statutory demand under r.10.5(5)(d) of the Insolvency (England and Wales) Rules 2016 ('2016 Rules'); and (2) highlighted 2 alternative legal options for debtors claiming that the England and Wales bankruptcy court is the wrong forum for making a bankruptcy order.
Personal Insolvency vs Corporate Insolvency
Lyons is a personal insolvency case and applies to personal insolvency statutory demands[1]; the same issue cannot arise in corporate insolvency, as applications cannot be made in corporate insolvency, for an order setting aside a statutory demand. There is no mechanism/procedure in corporate insolvency for making such an application[2]
Grounds for Setting Aside a Personal Insolvency Statutory Demand
In personal insolvency, a (natural person/individual) debtor who is served with a statutory demand can apply[3] to have that statutory demand set aside. Where such an application is made, the court has jurisdiction to make the set aside order where r.10.5(5) of the 2016 Rules is satisfied. That rule prescribes four instances where the court may grant such an application. R.10.5(5) reads:
'(5) The court may grant the application if-
(a) the debtor appears to have a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt specified in the statutory demand;
(b) the debt is disputed on grounds which appear to the court to be substantial;
(c) it appears that the creditor holds some security in relation to the debt claimed by the demand, and either rule 10.1(9) is not complied with in relation to it, or the court is satisfied that the value of the security equals or exceeds the full amount of the debt; or
(d) the court is satisfied, on other grounds, that the demand ought to be set aside.
Two stage Process
A set aside application can be seen as subject to a two stage process under r.10.5(5) of the 2016 Rules:
(1) Gateway stage - is a ground established under one of the 4 gateways, that is, under one or more of r.10.5(5)(a) to (d) inclusive; and
(2) Discretionary stage - arising from the word 'may' - should the Court accede to the application and grant a statutory demand set aside order?
Lyons
In Lyons, a creditor served on a debtor a statutory demand (so section 2681(b) of the Insolvency Act 1986 was irrelevant[4]. The debtor/statutory demandee did not deny that he was a debtor and the statutory demander was his creditor (paragraph 11)[5] but did contend that England and Wales were not the correct forum to make a bankruptcy order against him, seemingly (though this is unclear from the law report) because it lacked territorial jurisdiction - because none of the section 265 of the Insolvency Act 1986 connecting factors/forensic ties, which as a matter of English law, grant the English bankruptcy courts, jurisdictional competence to make a bankruptcy order against the debtor, existed (I shall label this ground, the 'Wrong Forum' ground')
In Lyons, the parties accepted that the Wrong Forum ground could not be granted under r.10.5(5)(a) to (c). The issue was, could the Wrong Forum ground come within r.10.5(5)(d) (paragraph 9)?
In answering this question, Chief ICC Judge Briggs:
(1) said 'It is notable that 10.5(5)(d) relates to the demand only' (paragraph 10);
(2) statutory demands are 'concerned with establishing a debt for the purpose of presenting a bankruptcy petition' (paragraph 5)
(2) said Nicholls LJ in Re a Debtor, No.1 of 1987 [1989] 1 WLR 271 ('Debtor No.1') provided the 'best guidance' (paragraph 10) on r.10.5(5)(d). And that Debtor No.1 identified two aspects to r.10.5(5)(d):
(a) r.10.5(5)(d) is not 'free-standing' (paragraph 10) nor can it be viewed as 'stand-alone' (paragraph 13). r.10.5(5)(d), as explained in Debtor No.1, 'should be read in accordance with grounds (a) to (c) of the Rule.' (paragraph 10).
(b) r.10.5(5)(d) is a residual discretion (gateway). It exists to enable the court to set aside a statutory demand, where the consequences of allowing the statutory demand to continue in force, would be 'unjust' (paragraph 11). What are those consequences? Nicholls LJ in Debtor No.1 identified the consequences, as follows, at 276 ('the 'Regarded as being unable to pay the Debt Consequence'):
'Under the Act, a statutory demand which is not complied with founds the consequence that the debtor is regarded as being unable to pay the debt in question or, if the debt is not immediately payable, as having no reasonable prospect of being able to pay the debt when it becomes due. That consequence, in turn, founds the ability of the creditor to present a bankruptcy petition because, under section 268(1), in the absence of an unsatisfied return to execution or other process, a debtor's inability to pay the debt in question is established if, but only if, the appropriate statutory demand has been served and not complied with.'[6]
Nicholls LJ then said that, where the '...circumstances which would make it unjust for the statutory demand to give rise to those consequences in the particular case...' (at 276) '...the court's intervention is called for to prevent that injustice' (at 276).
(4) Looking then at r.10.5(5)(a) to (c), these 3 were '...all matters that concern and deal with the integrity of the debt claimed on the face of the demand, not where the debt can be enforced.' (paragraph 10). In other words, r.10.5(5)(a) to (c) are:
(a) just in respect to faults/issues with the debt relied upon in the statutory demand;
(b) not faults/issues extraneous to the integrity of the debt itself, for instance, the faults/issues with enforcement of the debt in a court in England and Wales.
To put this another way: r.10.5(5)(a) to (c) only permit a statutory demand to be set aside, where: (a) the integrity of the debt is successful impugned; or (b) the form of the statutory demand is defective. And not for any other reason, including faults/issues surrounding whether the debt could be enforced in England and Wales.
The result of a statutory demand remaining extant/not being set aside, is that the 'Regarded as being unable to pay the Debt Consequence' applies. Is this unfair? could this be unfair? well Chief ICC Judge Briggs reasoned that '...where the debt stated is not disputed and the demand is not said to be defective' (paragraph 11) it was not easy to discern how prejudice caused by the statutory demand could be said to be unjust[7].
(6) Drawing the strings together, Chief ICC Judge Briggs said, at paragraph 11, r.10.5(5)(d) does not grant the court the power to set aside the statutory demand on grounds equivalent to an anti-suit action (i.e. an action for an order, injuncting/prohibiting a creditor from presenting a creditors bankruptcy petition against a debtor):
'...ground (d) does not permit the equivalent of an antisuit action to resist the presentation of bankruptcy petition where a debt is due and owing. If ground (d) of Rule 10.5(5) is to be read in the context of the preceding grounds, it does not include a ground unrelated to the debt or unrelated to the form of a statutory demand as prescribed, for it is possible to owe the debt stated in the demand (or a sum over £5,000) giving the creditor a right to present a petition but for court to find that the petition fails for lack of forum because the service of a statutory demand is, except where Section 268 1(b) of the IA 1986 applies, a pre-cursor to the presentation of a petition.'
(7) For completeness, Chief ICC Judge Briggs said he took into account the wider legislative context (Insolvency Act 1986 and 2016 Rules), when he came to this conclusion on the correct interpretation of r.10.5(5)(d). He said:
(a) he reached this conclusion on r.10.5(5)(d) by reading it 'against the background of the legislative framework' (paragraph 11); and that
(b) he was 'fortified' (paragraph 12) in reaching the interpretation on r.10.5(5(d) that he did, as a result of '...by cross-checking the requirements for a statutory demand provided by Rule 10.1 and comparing those requirements with the prescribed matters required for a bankruptcy petition: Rule 10.7 of the Rules.' (paragraph 12). As to the respective requirements, for: (i) statutory demands, and (2) bankruptcy petitions, he said that 'Only the latter requires a statement that England and Wales is the correct forum to make a bankruptcy order.' (paragraph 12). In other words:
(a) the procedural requirements for a bankrupt petition include an obligation to include a statement, that England and Wales is the correct forum to make a bankruptcy order.
(b) No such obligation exists for statutory demands.
The implication from this difference in requirements/obligations, is that bankruptcy petitions can be challenged on the basis of Wrong Forum, whereas a statutory demand cannot.
Options for Debtor/Statutory Demandee claiming England and Wales not Proper Forum
In Lyons, Chief ICC Judge Briggs said that his conclusion on the scope of r.10.5(5)(d) did not render the debtor/statutory demandee without a remedy. He said, at paragraph 16 'My conclusion does not mean that a debtor is without remedy'.
He went on to raise two possible (albeit the first one tentatively) alternative routes available to a debtor/statutory demandee - where the debtor's objection is Wrong Forum: one prior to a bankruptcy petition presentation, and the other during the currency of bankruptcy proceedings. The two were:
(1) Anti-suit injunction - prior to bankruptcy petition presentation. He said 'Although an anti-suit injunction is not commonly made, it may be possible, I do not need to decide, to apply for such an injunction.' (paragraph 16). Presumably he had in mind something similar to the court's jurisdiction to issue injunctions in corporate insolvency, prohibiting a would-be/prospective winding up petition petitioner, from presenting a winding up petition[8].
(2) Bankruptcy petition stay/adjournment - stay/adjournment of Bankruptcy petition while preliminary issues is determined. He said, 'If no injunction is made and a petition is presented a respondent may apply for a stay of the petition pending the outcome of a preliminary issue. Although the consequences of a petition are quite different to the issuing of a claim form it is notable that the procedure is not dissimilar to CPR 11 which provides where an acknowledge service permits a defendant to raise at an early stage, the issue of forum.' (paragraph 16)[9]
Conclusion
In Lyons, Chief ICC Judge Briggs reached the conclusion that:
(1) Wrong Forum ground is not a ground that comes within r.10.5(5)(d) of the 2016 Rules. It also does not come r.10.5(5)(a) to (c) of the 2016 Rules either. Indeed, he said 'there is no jurisdiction to deal with the issue of forum...' under r.10.5(5)(a) to (d)[10]. In essence therefore, it is not a ground that can be run on an application to set aside a statutory demand.
(2) r.10.5(5)(d) of the 2016 Rules is not a free-standing gateway. Just as r.10.5(5)(a) to (c) of the 2016 Rules only relates to faults/issues with the integrity of the debt, so does r.10.5(5)(d). r.10.5(5)(d) also relates to defects with the form of the statutory demand. r.10.5(5)(d) does not empower the court to set aside a statutory demand in equivalent circumstances to an anti-suit injunction. Debtor who accept there is no issue with the integrity of the debt in the statutory demand, and who cannot fault the form of the statutory demand, but allege there is no territorial jurisdiction in the England and Wales courts, to impose a bankruptcy order, might wish to consider an anti-suit injunction, or await the bankruptcy petition, and seek an adjournment of the bankruptcy petition, depending determination, as a preliminary issue, of whether the Wrong Forum ground/objection is meritorious.
SIMON HILL © 2023*
BARRISTER
33 BEDFORD ROW
NOTICE: This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole, or the Copyright holder. No attempt has been made to provide an exhaustive review/account of the law in this area. *Copyright is owned by Barrister Search Limited.
[1] In Lyons v Bridging Finance Inc [2023] EWHC 1233 (Ch), Chief ICC Judge Briggs gave a summary of what a statutory demand is. At paragraphs 2 and 3, he said:
'A statutory demand, to state the obvious, is not a bankruptcy petition. It is not a court process. A statutory demand is completed and served on an individual before court proceedings start. It is an out of court process. However, the form of a statutory demand is a matter for the 2016 Rules: see Rule 10.1. Similarly, service of the statutory demand is subject to the 2016 Rules and the Insolvency Practice Direction.
Rule 10.1 provides that the demand must contain a statement of the grounds on which it is alleged that the debtor appears to have no reasonable prospect of paying the debt if the demand is made under section 268(2) of the 1986 Act. It must state the judgment or order of court if the demand is made pursuant to section 268(1) of the 1986 Act. This is not exhaustive, but it can be seen from Rule 10.1 that it is a requirement of a statutory demand that the nature of the debt and how it arose must be included in the demand.
The requirement to state the debt is important and has a bearing on the answer to the question posed on this application. Section 267 of the 1986 Act provides (where relevant):
(1) A creditor's petition must be in respect of one or more debts owed by the debtor, and the petitioning creditor or each of the petitioning creditors must be a person to whom the debt or (as the case may be) at least one of the debts is owed.
(2) Subject to the next three sections, a creditor's petition may be presented to the court in respect of a debt or debts only if, at the time the petition is presented—
(a) the amount of the debt, or the aggregate amount of the debts, is equal to or exceeds the bankruptcy level,
(b) the debt, or each of the debts, is for a liquidated sum payable to the petitioning creditor, or one or more of the petitioning creditors, either immediately or at some certain, future time, and is unsecured,
(c) the debt, or each of the debts, is a debt which the debtor appears either to be unable to pay or to have no reasonable prospect of being able to pay, and
(d) there is no outstanding application to set aside a statutory demand served (under section 268 below) in respect of the debt or any of the debts.' [underlying in original]
He continued, at paragraphs 5 and 6:
'I have said the above with emphasis as the stressed parts of section 267 of the 1986 Act highlight the nature of a statutory demand. It is concerned with establishing a debt for the purpose of presenting a bankruptcy petition. This is apparent from section 268 of the 1986 Act:
(1) For the purposes of section 267(2)(c) , the debtor appears to be unable to pay a debt if, but only if, the debt is payable immediately and either—
(a) the petitioning creditor to whom the debt is owed has served on the debtor a demand (known as "the statutory demand") in the prescribed form requiring him to pay the debt or to secure or compound for it to the satisfaction of the creditor, at least 3 weeks have elapsed since the demand was served and the demand has been neither complied with nor set aside in accordance with the rules, or
(b) execution or other process issued in respect of the debt on a judgment or order of any court in favour of the petitioning creditor, or one or more of the petitioning creditors to whom the debt is owed, has been returned unsatisfied in whole or in part.
(2) For the purposes of section 267(2)(c) the debtor appears to have no reasonable prospect of being able to pay a debt if, but only if, the debt is not immediately payable and—
(a) the petitioning creditor to whom it is owed has served on the debtor a demand (also known as "the statutory demand") in the prescribed form requiring him to establish to the satisfaction of the creditor that there is a reasonable prospect that the debtor will be able to pay the debt when it falls due,
(b) at least 3 weeks have elapsed since the demand was served, and
(c) the demand has been neither complied with nor set aside in accordance with the rules
Section 268 1(b) of the IA 1986 is the only exception where a statutory demand is not required before presenting a petition. This is not relevant for today's purposes.'
[2] This question illuminates some differences between personal insolvency (i.e. a bankruptcy case) and corporate insolvency:
(1) In personal insolvency, an application can be made to Court, seeking an order setting aside a statutory demand; whereas:
(2) in corporate insolvency, there is no equivalent mechanism/procedure;
In Corporate Insolvency: Law and Practice, 5th Edition, paragraph 14:44, footnote 1, the authors state that:
‘There is no procedure similar to that in bankruptcy for applying to set aside the statutory demand (IR 2016 r.10.4). The proper course of action is to seek the restraint of the petition by way of application (IR 2016 r.7.24)'
[3] In Lyons v Bridging Finance Inc [2023] EWHC 1233 (Ch), Chief ICC Judge Briggs described how the set aside application seises the court with jurisdiction. At paragraph 7, he said:
'An application to set aside a statutory demand is an application to the court. On the making of an application to set aside, the court becomes seised of the matter, giving it jurisdiction to decide whether or not the demand should be set aside'
[4] In personal insolvency, for immediately payable debts, a debtor can only 'appear to be unable to pay a debt' for the purposes of section 267(2)(c) if either of section 268(1)(a) or (b) is satisfied (where the debt is not immediately payable, section 268(2) applies instead). In short, (a) is a statutory demand is served and the debt therein is unmet/unsatisfied after a period of time; and (b) is that the debt is a judgement debt or order ('order debt', so to speak), and execution or other process was attempted, but the execution or other process returned unsatisfied in whole or in part.
In Lyons v Bridging Finance Inc [2023] EWHC 1233 (Ch)('Lyons'), a statutory demand had been served. The creditor did not also claim that the debtor 'appear to be unable to pay a debt' under (b) also. And so section 268(1)(b) was not an issue in Lyons.
For a better understanding of section 268(1)(b) see the cases of:
(1) Re a Debtor (No.340 of 1992) [1996] 2 All ER 211; and
(2) Skarzynski v Chalford Property Co Ltd [2001] BPIR 673.
[5] In Lyons v Bridging Finance Inc [2023] EWHC 1233 (Ch), Chief ICC Judge Briggs recorded, at paragraph 11:
'In this case it is not argued that the debt is not owed.'
[6] Chief ICC Judge Briggs in Lyons v Bridging Finance Inc [2023] EWHC 1233 (Ch) did not quote this passage from Re a Debtor, No.1 of 1987 [1989] 1 WLR 271, but it seems convenient to note it here.
[7] What Chief ICC Judge Briggs in Lyons v Bridging Finance Inc [2023] EWHC 1233 (Ch) said, at paragraph 11, was:
'The unjust nature of the demand causing prejudice where the debt stated is not disputed and the demand is not said to be defective is not easy to divine: Re a Debtor, No.1 of 1987 [278 A].'
[In the author's view, 'divine' might be better read as 'discern']
There are different categories of defective document. Where a 'statutory demand':
(1) is so defective, the defects can deprive the document altogether of its character as a statutory demand. In other words, it is not a statutory demand at all (even a defective one);
(2) is defective, but not such as to fall into category (1) above, then it remains a statutory demand, albeit a defective one. A statutory demand will likely fall into this category where the essentials, required for a statutory demand, are present.
Explaining the above, Nicholls LJ in Re a Debtor, No.1 of 1987 said, at 277 to 278 (making reference at times to the case before him):
'No doubt there may still be cases where the document served as a statutory demand is so defective that it cannot sensibly be regarded as a statutory demand at all. That is not this case. The essentials required of a statutory demand were present in this case. The deficiencies in the demand make this indeed a defective demand, but I do not think that they are sufficient to deprive the document altogether of its character of a statutory demand.'
[8] For an article setting out the court's jurisdiction to grant an injunction, prohibiting a would-be/prospective creditors winding up petitioner, from presenting a threatened winding up petition, see here.
[9] Chief ICC Judge Briggs in Lyons v Bridging Finance Inc [2023] EWHC 1233 (Ch) seems to be pointing out that creditor bankruptcy petitions can involve separate preliminary issue hearings, and that, where in creditors bankruptcy petition, the debtor claims Wrong Forum, the Court hearing the bankruptcy petition, could decide to hive off that issue, and list that issue for a preliminary issue hearing. The rest of the creditor bankruptcy petition would then be 'on hold', pending the outcome of that preliminary issue hearing determination.
Such a preliminary issue will be on: whether the England and Wales bankruptcy court has territorial jurisdiction under section 265 of the Insolvency Act 1986? In other words, as a matter of English law, does the England and Wales bankrutpcy court have jurisdiction to make a bankruptcy order against the debtor? For an article on a related topic (whether a bankruptcy adjudicator, determining a bankruptcy application brought by the debtor, has territorial jurisdiction under section 263I of the Insolvency Act 1986), click here.
[10] In paragraph 15 of Lyons v Bridging Finance Inc [2023] EWHC 1233 (Ch), Chief ICC Judge Briggs actually said:
'there is no jurisdiction to deal with the issue of forum under grounds 10.5 (a) to (d)'
whereas he clearly meant to refer to 10.5(5)(a) to (d) of the 2016 Rules.