A few weeks ago we published a blog post titled ‘can’t pay, won’t pay?’ which set out the benefits of using a statutory demand as a quick and inexpensive way of securing payment of undisputed debts of over £750. If, 21 days after it is served, the debtor has not paid up then the creditor can make the individual bankrupt or wind the company up. Faced with such a threat, most companies and individuals (that can afford to) pay up.
Some, however, go further and try to convince the creditor (and even a Court) that the debt is genuinely disputed. In this post we provide you with an instance when a creditor was faced with this exact situation.
In response to a Statutory Demand for over £300,000 the debtor sought to show that the debt was genuinely disputed and that to issue a winding up petition was an abuse of process and as such the creditor should be prevented from doing so by an injunction. Its grounds of dispute were long and, on the face of it, complex. They included:-
- The wording of the contract under which the debt was allegedly due, required the debtor to carry out the assessment of what was owed and it had not done so. As such, no debt had arisen.
- The debtor had a claim for damages against the creditor for breach of intellectual property rights and misuse of confidential information. As such, it had a set off against any debt due.
- The debtor had a claim for damages against the creditor for breach of an accessories agreement and sought to set off the damages it was entitled to against any debt owed.
- The Debtor had a claim for damages against the creditor (which it said exceeded £1.5 million) for breach of a software license agreement. As such it had a set off against any debt due.
- The Debtor had a claim against the creditor for breach of an agreement to provide services and sought to set off the damages it was entitled to against any debt owed.
- The ‘no set off’ and exclusion clauses in the contract under which the debt was owed had to be correctly construed in a commercial context and this had to be done at Trial following a normal litigation procedure, not by the Companies Court without the benefit of evidence.
- The law on exclusion clauses and deliberate breach of contract is in a state of flux following competing decisions of the High Court and this was not the forum to resolve that situation.
The list goes on…
To succeed on the application the debtor had to show that the debt was genuinely disputed, not that it would win that dispute or had a good chance of doing so. The test is simply to check that the dispute is not frivolous, that it has some chance of success.
Although the case took one and a half days for the High Court to hear, involved four box files of evidence and included the debtor raising all the issues above, the Court found that the creditor could proceed with the winding up petition.
In response to the issues raised by the debtor above, the Court found:-
- The creditor had set out the basis of the assessment of what was owed and it was based on data provided by the debtor. The debtor had had months to dispute those figures or provide its own calculation and had not done so. In any event the debt, for the purposes of a winding up petition, can be for an as yet unascertained figure as long as it is over £750.
- The contract under which the debt was due contained a clear no set off clause. Even if any damages were due for breach of intellectual property, breach of the accessories agreement, breach of the software license, breach of the contract to perform services or misuse of confidential information, they could not be set off against the debt to prevent a petition being issued*.
- The Software License also contained extensive exclusion clauses and when construing them in a commercial context they excluded any loss claimed for breach of that agreement.
- There was no state of flux and the case law was clear that the clause had to be construed in its commercial context.
The Court refused to grant an injunction. It awarded the creditor over 90% of its costs of the application. The debtor paid the sum due within two working days to prevent a petition being issued.
Even if, at first sight, your debt is disputed on complex grounds, with careful analysis and expert advice a Court can be persuaded that there is no genuine dispute and a statutory demand can be a quick and inexpensive way to force a debtor to pay up.
For more information, email firstname.lastname@example.org.
*Gateley won this case in the High Court