When should a court exercise its discretion under the Insolvency Rules?

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The decision in Martin v McLaren Construction Ltd [2019] EWHC 2059 (Ch) serves as a useful reminder of when a statutory demand can be served and discusses when the court can use its discretion under rule 10.5(5) of the Insolvency Rules to set one aside.

Mr Martin had given a guarantee to a construction company for the payment or discharge of his own liabilities and those of three companies. The construction company had then assigned its rights in the documents to the respondent, McLaren Construction Ltd (McLaren). Under the guarantee, the guarantor was obliged to pay immediately on demand, with the guarantee also specifying that all notices and demands had to be in writing and personally delivered or sent by post or fax.

McLaren did not send a written notice to Mr Martin demanding payment under the guarantee but instead issued a statutory demand in the sum of approximately £7 million, which it said was owed by Mr Martin under the terms of the guarantee. The statutory demand was expressly made under section 268(1)(a) of the Insolvency Act 1986 (the IA 1986), involving a debt for a liquidated sum payable immediately. Mr Martin refused to pay and argued that the debt was not “payable immediately”, as the guarantee provided that he would only become liable to make payment when he had been served with a written demand for payment, and he had not been served with a written demand.

Mr Martin asked the court to set aside the statutory demand under rule 10.5(5) of the Insolvency (England and Wales) Rules 2016 (the Insolvency Rules), which gives the court a discretion to set aside a statutory demand if “satisfied, on other grounds, that the demand ought to be set aside”.

The High Court agreed and used its discretion to set aside the statutory demand as the creditor had failed to make demand under the guarantee itself first. The court held that owing to McLaren’s failure to serve a written demand under the guarantee, the requirement of s.268(1) that the debt forming the subject of the statutory demand should be “payable immediately”, was not met. Even by the date of the hearing, the respondent had not served a formal demand under the guarantee or filed evidence stating whether and, if so, when it proposed to do so, meaning that, as at the date of the hearing, it did not comply with IA 1986. Any residual discretion conferred on the court under the Insolvency Rules had to be considered and exercised in a manner consistent with primary legislation. The judgment stated that the court should be slow to exercise its discretion against the setting aside of a statutory demand under rule 10.5(5)(d) when essential prerequisites of s.267 and s.268 of IA 1986 had not been met.

WM comment

This case is as a useful reminder that before making any statutory demand, it is necessary to make a demand under the guarantee itself. In addition it illustrates the discretion that the court has under rule 10.5(5) of the Insolvency Rules as to whether a statutory demand ought to be set aside. The judgment highlights that the court should be slow to exercise its discretion where the essential prerequisites to issuing the statutory demand have not been met, such as where the creditor has not made demand under a guarantee and has therefore failed even to establish the statutory presumption of insolvency.