Where the debt in a statutory demand itself was not disputed but the debtor relied on a cross-claim which did not equal the debt but fell short of it by less than £750, the statutory demand was not necessarily to be set aside under the residual discretion in rule 6.5(4)(d) of the Insolvency Rules 1986.

Nugee J, sitting in the Chancery Division, so held when dismissing the appeal of the claimant, Mark Howell, from the order of District Judge Smart on 18 December 2012 in which the district judge dismissed the claimant’s application to set aside a statutory demand served by the defendant, Lerwick Commercial Mortgage Corpn Ltd. The claimant had brought a claim against the defendant for losses caused by an allegedly sub-standard valuation report prepared by the defendant. The claimant entered a judgment against the defendant, which was subsequently set aside and the claimant was ordered to pay costs. The claimant did not pay the costs and this formed the basis of the statutory demand made by the defendant on the claimant. The claimant sought to set aside the statutory demand, claiming that he had a cross-claim equal to or exceeding the admitted sum due. That application was dismissed by the district judge. The claimant appealed, contending that the district judge should have valued his cross-claim at a higher figure.

Rule 6.4 of the Insolvency Rules 1986 provides that the debtor may apply to the court for an order setting a statutory demand aside. Rule 6.5(4) provides: “The court may grant the application if … (d) the court is satisfied, on other grounds, that the demand ought to be set aside.”

Section 267 of the Insolvency Act 1986 provides: “(2) … a creditor’s petition may be presented to the court in respect of a debt or debts only if, at the time the petition is presented— (a) the amount of the debt, or the aggregate amount of the debts, is equal to or exceeds the bankruptcy level … (4) ‘The bankruptcy level’ is £750 …”

NUGEE J said that the district judge should have valued the claimant’s arguable cross-claim at a higher figure, falling short of the debt by between about £690 and £550. That raised a short but not entirely easy point on whether a statutory demand should be set aside where a debtor appeared to have a cross-claim which did not equal or exceed the amount of the demand, but if set against the demand would reduce the balance to below £750. The appropriate course in such a case was not to set aside the statutory demand under the residual discretion in rule 6.5(4)(d). There was no rule that a debt had to be at least £750 before it could be made the subject of a statutory demand. Under section 267(2)(a) it was enough if the aggregate amount of the petitionable debts was at least £750. If that was right, it followed that a statutory demand for a debt of less than £750 was not on that basis alone bad or liable to be set aside under the residual discretion under rule 6.5(4)(d). The demand gave the creditor the ability to use the debt, if the demand was not complied with, as part of the basis for the presentation of a bankruptcy petition and it might be useful for the creditor to be in that position. If there was no suggestion of any other debts, In re A Debtor (Nos 49 and 50 of 1992) [1995] Ch 66 no doubt did suggest that the statutory demand should be set aside, but if there was, the same did not follow. The above analysis dealt with the position where the debt itself was disputed. However in the present case, the debt itself was not disputed but the debtor relied on a cross-claim which did not equal the debt but fell short of it by less than £750. To simplify the facts suppose for example the debt was £4,000 and the cross-claim £3,500. In such a case if the statutory demand was not set aside (and not paid) the creditor would have a petitionable debt. This debt would be for the full £4,000, not for the £500 difference between the debt and the cross-claim (this assumed the cross-claim was not a set-off which would operate as a defence to the debt). This meant the position was not the same as the case where the debt itself was disputed: there the only petitionable debt was the undisputed part, and if this was less than £750 the creditor would have to rely on another petitionable debt to justify presenting a petition. In the case of the debt of £4,000 with a cross-claim of £3,500, the debt of £4,000 would by itself justify the presentation of the petition. (This was so even though the debtor could by paying off only £500 of the demand have put himself in a position to have the demand set aside as his cross-claim would then equal the remaining debt.) If at the hearing of a bankruptcy petition it remained the case that the only claims between the parties were a debt of £4,000 and a cross-claim of £3,500, the court would probably dismiss the petition. Yet what the analysis above showed was that if there were suggestions of other debts owed by the debtor to the creditor, then it could not be said that any petition would inevitably fail. The creditor might very well be in a position to turn his other claims into petitionable debts (by making statutory demands) and hence rely on them in support of the petition. If it could not be said that any petition would inevitably fail, it followed that the court should not set aside the statutory demand under rule 6.5(4)(d). Accordingly the appeal would be dismissed.