Personal Guarantees and Statutory Demands

Posted: Wednesday, 28 March 2018 @ 16:16

You have given a Personal Guarantee to a creditor of a debt payable by another person company or organization, the creditor has made a formal demand and followed it up with service of a Statutory Demand. What should you do?

First of all you must act quickly. To avoid a bankruptcy petition you must make payment to the creditor within 21 days of service of the Statutory Demand or secure it or compound it to the creditor’s satisfaction. But what if you have a dispute over the legality of the Personal Guarantee or the amount of the debt? It may be possible to persuade a court to set aside the Statutory Demand.

You should first of all contact the creditor giving your reasons for disputing the debt, and provide any documentary evidence, and invite them to withdraw the Statutory Demand. But keep your eye on the clock because if they refuse or fail to reply you must lodge an application to set aside with the court within 18 days of service of the Statutory Demand.

Rule 10.5(5) of the Insolvency Rules 2016 provides 5 grounds on which a court can set aside a Statutory Demand:

1.     The debt is disputed on substantial grounds

2.     The debtor has, or appears to have a counterclaim or set off which, if successful, would bring the net indebtedness below £5000 for the value of the debt

3.     The creditor hold security for the value of the debt

4.     The court is satisfied on other grounds that the demand ought to be set aside

I will now look at the first ground. If you have a genuine dispute about the debt-and here I mean a legal defence, then you should apply immediately and within the required 18 day period from service of the Statutory Demand to the court to have the Demand set aside.

So, what will constitute “substantial grounds”? The test is whether there is a “triable issue”. Hopeless cases will not pass this test, but the bar is set quite low.

The courts currently take the view that unless there is no real prospect of success then the dispute has to go to court for determination and this means that the Statutory Demand is inappropriate and will be set aside. So only some prospect of success must be demonstrated. But it is very important to construct any argument well, and urgent legal advice should be obtained before making an application to court.

If you consider that you have a good case to apply then Set Aside Applications are governed by Rules 10.4 and 10.5 of the Insolvency Rules. It may be a good move to make an application anyway, as once it is filed in court then the 21 day time period is suspended until the application has been determined or dismissed. This could buy you some time for negotiation.

I will now confirm the main rules you should take note of.

Time Period :the Set Aside Application must be made by you within 18 days (which will be clear days) from the date of service of the Statutory Demand.

Form and Content of the Application:  you will be able to get the appropriate forms from the Court Office. Rule 10.4(3) sets out what information the Set Aside Application must contain. Briefly, the Application must:

1. Identify the debtor

2.  State that the Application is for an order to have the Statutory Demand set aside

3.Give the date of the Statutory Demand

4. Be dated and authenticated by the debtor or someone authorised to act on their behalf

Rule 10.4(6) also provides that the Set Aside Application must be supported by a witness statement and a copy of the Statutory Demand (if the debtor has it in his possession). The witness statement must set out:

1. The date the debtor became aware of the Statutory Demand

2. The grounds on which the debtor claims that it should be set aside. Namely that you have a defence and provide details.

3. Any evidence in support The Statutory Demand must be exhibited "if it is in the debtor's possession"

Appropriate court Set Aside Applications must be made to the debtor's own hearing centre in accordance with Rule 10.48 (subject to the conditions outlined in that rule). That should be set out in Part A of the Statutory Demand.

Courts' power to dismiss: Rule 10.5(1) and (2) provide that a court may, on receipt of a Set Aside Application, dismiss it if it considers it to be baseless, without giving notice to the creditor. The time for the debtor to comply with the Statutory Demand will then run again from the date the Set Aside Application is dismissed. This will buy you time.

Venue: If the Set Aside Application is not dismissed on paper, the court must fix a venue for it to be heard, and must give at least 5 business days' (which will be clear days) notice to the debtor (or their solicitor), the creditor and "whoever is named in the Statutory Demand as the person with whom the debtor may communicate about the demand".

Summary determination or adjournment:  When the Set Aside Application is initially heard, the court will consider the evidence available and may either summarily determine the Set Aside Application (i.e. rule in either party's favour on summary basis)  or adjourn the hearing giving appropriate directions

Usually a summary hearing will be listed for about 20 minutes, at which the court will adjourn with directions for a more substantial hearing. In practice the parties may agree their own directions and adjourn by consent.

Court Order - Dismissal If the court dismisses the Set Aside Application, it must make an order authorising the creditor to present a Bankruptcy Petition either as soon as possible or at a date specified by the court.

Note that costs are normally awarded on applications, so if you succeed in having the Demand set aside normally you will be awarded any legal costs and fees, particularly if you have prior to the application given full reasons to the creditor and invited them to withdraw. But if you lose you will be ordered to pay the creditor’s legal costs and fees.         

For free advice on this topic please call us on 0845 003 5639.

This blog is not intended to constitute legal advice, nor is it intended to be a complete and authoritative statement of the law, and what we say might be out of date by the time you read it. You should always seek legal advice to confirm whether or how any information in this article applies to your particular situation. We offer a free telephone consultation to discuss your particular circumstances.


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