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Statutory Demands: A Serious Wind-Up

publication date: Nov 14, 2009
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Court hammerAHMED V LANDSTONE LEISURE LTD,
Court of Appeal - Chancery Division,
JANUARY 30, 2009, [2009] EWHC 125 (Ch)


In the current economic climate it comes as no surprise that the ability to raise finance by the collection of debt is an important consideration in property transactions – or at least it should be; the old adage that ‘cash is king’ could not be more true. A Statutory Demand is one mechanism that can be used to force a debtor to pay the sum due. It is a formal demand under the Insolvency Act for payment which, if not complied within a specified period, will entitle the creditor to present a bankruptcy or winding up petition, depending on the nature of the debtor.

An individual can apply to set aside a demand within 18 days from receipt and there are specific circumstances in which the court will allow this. In the recent case Waheed Ahmed v Landstone Leisure Ltd, Birmingham High Court considered those very circumstances when it heard an appeal against the refusal to set aside a Statutory Demand based on a bounced cheque.


CONVOLUTED PURCHASE AND PAYMENT

Mr Ahmed had given the cheque as a deposit to his brother. His brother was purchasing some land at auction on behalf of another brother, who was acting for a third party. The cheque was subsequently dishonoured at Mr Ahmed’s instruction on the basis that the plot of land they thought they were buying had been misrepresented as being larger than it was. In the circumstances, Mr Ahmed argued both that the sale contract was rescinded and the cheque was not enforceable and that he had a counterclaim for the amount of the cheque.

The auctioneer served Mr Ahmed with a Statutory Demand in respect of the dishonoured cheque which was upheld by the Judge in the first instance. Mr Ahmed argued that he would have a claim for the return of the deposit directly or indirectly and as such, it would be wrong to allow a Statutory Demand to stand where the sum would have to be repaid.

A Statutory Demand may be set aside if the debtor appears to have a counterclaim, set off or cross demand which is equal to or exceeds the debt claimed, or the debt is disputed on substantial grounds and if the court is satisfied on other grounds that the demand ought to be set aside. In Ahmed, the court found that there was a seriously arguable case that the sale contract and cheque were induced by misrepresentation and so there may be a cross demand for the amount of the cheque, particularly given that the land was sold to another purchaser. Mr Ahmed received nothing of value for the cheque tendered, for which he would be entitled to damages. The court took the view that it might even give rise to a defence of circuity of action; that is “it is no good trying to get something back which immediately afterwards you are going to have to hand back”. It would not be satisfactory if Mr Ahmed was made bankrupt on the basis of the cheque only for his Trustee in Bankruptcy to immediately recover the same sum.


Property Law

From a property law perspective, the court held that it was doubtful that the usual rule that an auctioneer had no implied or ostensible authority to make representations could apply where in essence he was carrying out the job he was employed to do: merely identifying the property he is offering for sale.

This was particularly so where, as in this case, the general conditions of sale to which the auction was subject advised buyers to make all necessary enquiries with the auctioneer’s firm in respect of the plot’s measurements. It may be possible to argue that had the case been brought forward as a result of a regular sale of land ie, not at auction, then the claimant’s argument of misrepresentation may not have stood up in court as the onus would have been on the buyer to check the accuracy of the plot measurements before handing over the cheque. This case is illustrative of the court’s approach to consider all the circumstances of a case when deciding whether or not to allow an application to set aside a Statutory Demand and what may amount to “other grounds”.

Verona CocksA Statutory Demand is still, therefore, an effective method of debt collection in respect of a variety of situations where monies become due, including transactions involving property. However, it appears that an application to set aside a Statutory Demand will succeed where there has been a misrepresentation involving a property transaction, such as in Ahmed. Nevertheless, each case will continue to turn upon its individual facts and where the court thinks appropriate, it will dismiss such an application without a hearing or notice to the creditor.

Verona Cocks is a partner and heads up Commercial Dispute Resolution and Insolvency in the Midlands offices of Weightmans LLP

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