Article by Thomas Wheeler

A Creditor who is owed a sum of money from another who does not make payment in a timely fashion, will understandably be frustrated. After all, the Debtor is withholding sums which are rightfully yours and so you wish to recover that money as soon as possible.

The question to then pose is “how do I go about this?”

There are a number of ways of obtaining the sums owed, one of which is to go through the Court and obtain a judgment. This judgment can then be enforced by, again, a number of means. This can be lengthy and costly depending on the level of the sums owed and the time it takes to go through the Court process. However, at the end of those proceedings, you will have had a determination of whether you are owed those sums or not.

Another option is to issue a Statutory Demand on the Debtor. This is the pre-cursor to bankruptcy proceedings and can be a much shorter process than making a claim.

However, except where a Statutory Demand is based on a judgment from the Court, there must be careful consideration as to the appropriateness of pursuing this method of obtaining a debt owed. If such consideration is not properly undertaken, the implications could be considerably costly.

The bankruptcy legislation and the Insolvency Rules are designed to deal with the bankruptcy process summarily – the Court will generally not hear oral evidence or get involved with substantial disputes between the Creditor and the Debtor during this process.

And therein lies a problem for any Creditor who seeks to make someone bankrupt: “Are the sums owed to me likely to be disputed?”

Upon serving a Statutory Demand, a debtor has 18 days to apply to set it aside, or 21 days to pay the sums due before a Bankruptcy Petition can be presented to the Court. Should there be an application to set aside made by the Debtor, the Court will have to make a determination as to whether the Statutory Demand should be set aside.

Under Insolvency Rule 10.5(5), the Court may grant the application to set aside 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.”

The most common argument is that the debt is disputed on grounds which are substantial. The Court will not hear evidence from the parties, but only see what is written down in witness evidence and documents. The Court will hear oral argument from the parties or their representatives.

In determining whether there is a substantial dispute, the Court will look at whether the defence raises a genuine triable issue (even if improbable) – see Markham v Karsten [2007] EWHC 1509 (Ch).

Despite the wording “substantial” indicating a high threshold for such a Defence, the Court merely needs to be satisfied there is an issue which can be tried, even if such an issue is unlikely to succeed.

Should the Debtor be successful in setting aside the Statutory Demand the Debtor would be entitled to their costs. These could be substantial if they have legal representation, and in some cases could be more than the debt being sought by the Creditor.

The Creditor would then be back at square one, still owed a debt, but will have to pay out costs to the Debtor.

It is for this reason that a Creditor who wishes to recover a debt of over £5000.00 should consider whether this debt could be disputed, for whatever reason. If there is likely to be a dispute, then bankruptcy proceedings may be inappropriate and a claim through the Court would be the better choice.