Debtor still liable for costs incurred despite error in Statutory Demand and full payment

Debtor still liable for costs incurred despite error in Statutory Demand and full payment

Commercial Litigation and Insolvency solicitor, Chris Adams, takes a closer look at the recent decision in Munshi v Architectural Association.

The background

A Statutory Demand was served on the Debtor, Munshi, by the Petitioning Creditor, Architectural Association, in the form prescribed under the Insolvency Rules 1986.

The Demand contained an error on the first page. It stated the sum claimed was £0. However, full details of the amount claimed, together with interest, had been set out on the second page of the Statutory Demand.

The Debtor paid the debt in full the day before the bankruptcy hearing. At the hearing, the petition was dismissed, but the Judge awarded the Petitioning Creditor its costs in the region of £10,000.

The Debtor appealed the costs order.

The appeal

Munshi claimed she was going through a difficult divorce at the time the Demand was served on her. The debt related to a loan the Petitioning Creditor, her previous employer, had advanced for the Debtor to fund her divorce proceedings. As a result, she did not properly read the Demand and believed it was simply confirming she owed nothing.

So the issue was whether the Demand was defective to the point that it would have been susceptible to being set aside.

Munshi also claimed that the Petition should have been adjourned and not dismissed. However, her appeal was dismissed.

The decision

The first page of the Statutory Demand contained a clear warning of the seriousness of the document served and the likely effect should it be ignored.

The Judge, Jeremy Cousins QC, concluded it was very important that any reasonable objective reading of the document would have led the recipient to realise it contained an error on the first page, and that any reasonable bystander would have appreciated that just over £11,000 was being claimed. The Judge also stated that:

It was no excuse the Debtor was going through a difficult period as she could have sought help.

The Demand was not defective to the point that it would have been vulnerable to being set aside because its meaning, objectively ascertained, was clear.

Costs were incurred by the Petitioning Creditor due to the Debtor’s ignorance of the Demand served upon her.

It would have been no advantage to anyone to have the Petition adjourned, as opposed to dismissed, because this would just increase both parties costs unnecessarily.

What this means for you

This case highlights the impact and effectiveness of a Statutory Demand.

In this case, it not only forced the Debtor to make payment in full on the eve of the bankruptcy hearing, but also ended up with the Petitioning Creditor obtaining a disproportionate costs award.

So this ruling should give Petitioning Creditor’s some comfort that their costs may be recovered from the Debtor.

It will also be welcome news for those instructed to draft Statutory Demands. Because minor defects or mistakes will not necessarily mean the Demand is capable of being defective/challenged and set aside.

But it’s still not clear how far this ‘minor defect’ principle will stretch.

Would it still apply if the Petitioning Creditor mistakenly put the wrong name on the front page of the Demand but made it clear on the second page who was liable for the debt? It seems unlikely.

Need advice? We can help you

Please call Chris Adams on 01482 324252.

Or email cha@gosschalks.co.uk.

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