District Judge Graeme Smith explains how a debtor can apply to set aside a demand

A necessary condition for presenting a creditor's bankruptcy petition, and for the court subsequently making a bankruptcy order, is that the debt is one that the debtor 'appears either to be unable to pay or have no reasonable prospect of being able to pay' (see section 267(2)(c) of the Insolvency Act 1986).


Section 268 provides a presumption that this condition is met if the creditor has served a statutory demand on the debtor, which, after three weeks have elapsed, has not been complied with or set aside.


A debtor served with a statutory demand can apply to set aside the demand pursuant to rule 6.4 of the Insolvency Rules 1986. The application should be made within 18 days of service of the statutory demand, and the time for compliance with the statutory demand ceases to run from the date when the application is filed at court. The application must be supported by affidavit evidence setting out the grounds on which the debtor seeks to have it set aside.


The court may dismiss the application summarily if satisfied that it is without merit, though it must give reasons for doing so (Popely v Popely [2004] EWCA Civ 463, [2004] All ER (D) 346 (April)). Alternatively, it may list the application and at the hearing may grant it, dismiss it, or adjourn it with directions.


The grounds for granting the application are set out in rule 6.5(4), and include that 'the debt is disputed on grounds which appear to the court to be substantial'. If the application is dismissed, the court must make an order authorising the creditor to present a petition either forthwith or on a date specified in the order (see rule 6.5(6)).


So far, so clear. However, consider three scenarios. First, the debtor applies unsuccessfully to set aside the statutory demand, and then challenges the making of a bankruptcy order on the same grounds. Second, the debtor applies unsuccessfully to set aside the demand, and then challenges the making of a bankruptcy order on different grounds. Third, the debtor does not apply to set aside the statutory demand, but challenges the making of a bankruptcy order.


There is some judicial guidance available when considering these scenarios. In Turner v Royal Bank of Scotland plc (2000) BPIR 683, the Court of Appeal considered the first scenario. After protracted litigation, RBS obtained judgment against Mr Turner in 1992.


Mr Turner applied unsuccessfully to set aside a statutory demand, relying on his own claim against RBS for damages for breach of confidence. He unsuccessfully appealed against the order, and also against the making of the bankruptcy order subsequently.


His claim against RBS then succeeded on liability, so he brought a second appeal against the bankruptcy order. The Court of Appeal held that the court hearing the petition could not re-visit arguments that had been rejected on the application to set aside the demand, unless a real change in circumstances could be shown. Mr Turner could not show this. The court hearing the first appeal had already considered the possibility of his claim succeeding, and had concluded that any damages awarded would not extinguish his debt to RBS.


The second scenario was considered in Maple Division Ltd v Wilson [1999] BPIR 102. Mr Justice Jacob said that a wholly new point could be raised for the first time at the hearing of the petition, because 'that is not a two bites of the cherry case'.


In that case, the debtor had found, since the hearing before the district judge, that the creditor was an unregistered moneylender. A variation on this scenario was dealt with by Bernard Livesey QC, sitting as Deputy High Court Judge in the case of Adams v Mason Bullock [2004] EWHC 2910 (Ch) [2004] All ER (D) 292 (Dec).


Mason Bullock served a statutory demand on Mr Adams for unpaid invoices and interest. Mr Adams applied to set the demand aside, and filed an affidavit and witness statements raising various arguments as to why the debt was disputed, including an argument that Mason Bullock was not entitled to charge interest. His application was dismissed, but the argument as to interest was not raised by Mr Adams at the hearing, nor did the judge adjudicate upon it.


Mr Adams was subsequently made bankrupt and appealed on the basis that the judge hearing the bankruptcy petition had a discretion to consider the matter, and should have exercised that discretion in his favour. Bernard Livesey QC held that, where there had been a hearing on the merits where the point had not been advanced, the court would not normally allow the debtor to take the point on the hearing of the bankruptcy petition unless a good reason was given and it was in the interest of justice to do so. Mr Adams had not given any good reason, and so the judge concluded that the point had been abandoned and he declined to allow Mr Adams to raise it.


The third scenario was dealt with in Barnes v Whitehead [2004] BPIR 693. Judge Maddocks, sitting as a judge of the Chancery Division, held that a debtor could raise matters on the hearing of the petition even though he had not made any application to set aside the statutory demand.


In Owo-Samson v Barclays Bank [2003] EWCA Civ 714 [2004] EWCA Civ 285 (May), it was held that such matters could be raised on an application to annul even where they had not been raised on an application to set aside the demand or on the hearing of the petition. In that case, the debtor contended that the true value of the creditor's security exceeded the debt. The Court of Appeal remitted the case to the registrar to decide whether the order should be annulled.


The rationale appears to be issue estoppel and abuse of process. A debtor will be given one opportunity to raise an issue. He cannot then raise it again unless a real change of circumstances can be shown. Failing to apply to set aside the statutory demand does not prevent issues from being raised on the hearing of the petition. If an application is made to set aside the demand, different issues can be raised on the hearing of the petition.


The lesson for debtors is to ensure that any issue raised on an application to set aside a statutory demand is properly prepared and advanced at the hearing, as this is the only bite of the cherry that will be permitted.


District Judge Graeme Smith sits at Manchester County Court