Insights

Statutory Demands: A little warning about costs

Great emphasis has already been made about the use of statutory demands. Their popularity stems from the fact that they can be processed quicker than most court actions and often at a lesser cost. Remember that when a court action has to be raised, money has to be paid into court. In Scotland these are known as ‘warrant dues’, in England issue fees.

In Scotland with their maximum cost at £120 these are, perhaps, not too dear. But in England, their equivalent ‘issue fees’ can be several thousands of pounds for larger debts. Whilst these monies can be recoverable from the debtor the creditor will have to fund them at the commencement of the court action with possibility they might never be recovered in the event of the debtor not settling them.

Statutory demands don’t have this cost frontloading which is, of course, one of their attractions.

The Problem

What the creditor is hopeful for is that once served the demand will, so to speak, bring the debtor to the table and either settle in full or offer to repay the debt in acceptable instalments.

Creditors have to face the possibility that despite their best intentions the debt is disputed. So, for example, a creditor may serve a statutory demand in conformity with the bankruptcy legislation. In the event of there being no response from the debtor the creditor will be in a position to petition for the debtor’s bankruptcy. However, upon receiving the demand the debtor disputes the debt and makes an application to the court to have it set aside.

In relation to a corporate debt a creditor may serve a statutory demand against a limited company and who also dispute the debt. Their response is to make an application to restrain the creditor from petitioning for the debtor company’s winding up.

In both scenarios the creditor could proceed with the petition because, in their view, the dispute is spurious and without substance.

Who bears the cost?

The issue will be what are the consequences for costs? The creditors will likely argue that the putative debtors should be liable or that there should be no costs order at all. The rationale for this will be that the creditors were unaware of the potential defences until seeing the evidence presented to them by the ‘debtors’. However, the position in England is that it is likely that the creditor will have to pay the other parties costs.

This is because of the legal principle – set out by Warner J in Re Cannon Screen Entertainment Ltd [1989] BCLC 660 – that an alleged creditor who chooses to go down the statutory demand route (rather than issuing a claim and obtaining judgment) must bear the costs risk of doing so:

“… there is nothing improper in a creditor who has no notice of a substantial defence to his claim serving a statutory demand, but to my mind he does that at his own risk, before the normal course for a creditor to adopt, if he wants to enforce a debt by proceedings, is to issue a writ, and of course, if he issues a writ and is sufficiently confident that there is no defence to his claim, the procedure under RSC Ord. 14 is available to him. If instead of adopting that course the creditor takes the shortcut of serving a statutory demand with a view to presenting a winding up petition without having obtained a judgment, in my opinion he does so at his risk as to costs. If it should turn out that there is a defence to his claim he must pay the costs of the company against whom he has chosen to take such proceedings.

Conclusion

If there circumstances were replicated in Scotland it is more than likely that the court will award costs against the creditor in respect of any insolvency process. Indeed in the event of the dispute being seen as genuine it is possible that the court would regard the petition as an abuse of the court’s process and award expenses against the creditor’s solicitors personally.

English creditors should take note that in relation to Scottish bankruptcy a simple denial is sufficient to prevent a bankruptcy court process. This differs from England where some judges are of the view that a denial has to detail a genuine dispute. As this is not the case in Scotland a bankruptcy petition will almost automatically be dismissed in the event of a ‘debtor’s bear denial that the debt is due. Expenses will be awarded against the creditor.

The advice is that if creditors consider that their debt may be disputed it is probably best to initiate court action rather than pursue the statutory demand route rather than be subject to an adverse award of costs.

Questions?
For more information please email Stephen Cowan on scowan@yuill-kyle.co.uk or call him on 0141 572 4251 and he'll be happy to help