To Demand or Not To Demand: A Reminder to Creditors

A statutory demand is a formal demand for payment of money owed. A statutory demand can be issued against a private individual, a limited company or a Limited Liability Partnership, and is not to be mistaken with a simple letter demanding payment of sums due, as the consequences can be rather costly!

This was demonstrated in the case of Martin v McLaren Construction Ltd [2019] EWHC 2059 (Ch) (29 July 2019) (Barber J), which involved a personal guarantee given by Mr R. Martin to McLaren Construction Ltd (‘McLaren’). Mr Martin guaranteed debts of a number of associated companies to McLaren.

Under the terms of the guarantee, Mr Martin agreed that if any of the companies failed to pay sums due, Mr Martin would immediately, on demand, pay these sums as if he were the principal obligor. It was the phrase ‘on demand’ that presented an issue for McLaren.

On 30 October 2018, McLaren served a statutory demand on Mr Martin, pursuant to section 268(1) of the Insolvency Act 1986. Prior to serving the statutory demand, McLaren did not issue a written demand to Mr Martin requesting he make payment. Section 268(1) governs debts that are “payable immediately” and it was Mr Martin’s assertion that, at the time the statutory demand was served, any liability for him to pay sums under the Personal Guarantee had not yet arisen as his liability was wholly contingent on a written demand being served. Mr Martin argued that in the absence of a demand being issued, there was no cause of action for McLaren to pursue by way of Statutory Demand and as such, section 268(1) did not apply. Incidentally, section 268(2) deals with payments that are not immediately payable; however, McLaren had not cited this section in the statutory demand.

The court accepted Mr Martin’s straight forward argument; McLaren could not present a bankruptcy petition against Mr Martin based on a statutory demand that related to a payment that was not immediately payable when the statutory demand was served.

McLaren unsuccessfully argued that, notwithstanding their failure to issue a written demand, the court should allow McLaren to proceed with a bankruptcy petition because setting aside the statutory demand would fail to remedy any injustice.

Judge Barber considered this and noted that the failings by McLaren were of substance, and that there was no injustice in setting aside the statutory demand.

This is perhaps a reminder for lenders to:

  • Be sure that the debt is due, owing and valid before serving a statutory demand;
  • Check the terms of any agreement / contract to establish the correct procedure for claiming a debt from a borrower or guarantor;
  • Be certain that if an insolvency process is to be followed, the Insolvency Act tests criteria can be met.

If you need assistance in pursuing a debt, due under a guarantee or otherwise, please do get in touch on DebtRecovery@woodfines.co.uk

For advice surrounding insolvency processes, please contact Alev Tonks or Maria Koureas-Jones.

Alev Tonks