Liquidated debts – The importance of being liquidated and undisputed

read time: 8 mins

It is well established that a petition issued with a view to bankrupting an individual must be based on an unsecured debt that is “liquidated”. Conversely despite a limited change in the rules during the pandemic, it is possible to issue a petition against a company based on an “unliquidated” debt.

In all cases, petitions should not be used to where the debt claimed is the subject of a genuine triable issue and/or valid cross claim/set off.

What exactly does that mean in practice, especially in the context of seeking a recovery pursuant to the terms of a personal guarantee. In light of recent cases (some of which we address in our article “Liquidated debts – Recent Authorities”), we revisit the requirements and general principles regarding recovery of liquidated debts by way of statutory demand and petition.

A liquidated debt

To be a liquidated debt, the debt must be either 

a. for an amount which is certain and defined, where both the creditor and debtor are in agreement on its value (Hope v Premierpace (Europe) Ltd [1999] BPIR 695), or,

b. the value is capable of being ascertained in accordance with a contractual formula/machinery for calculating the debt owed (McGuinness v Norwich and Peterborough Building Society [2011] EWCA Civ 1286).

When considering a guarantor’s liability under a personal guarantee, careful consideration must be given to the terms of the guarantee.  Generally, only liabilities characterised as  “conditional payment obligations” or a “concurrent liability” create a debt capable of forming the basis of a petition. Further consideration of the nature of personal guarantee liability is considered further in our article "Liquidated debts - personal guarantees".

Accordingly, claims for damages in tort, misfeasance and breach of fiduciary duties are not “liquidated” debts, and payments should not be demanded by petition, or therefore statutory demand. In such circumstances, the creditor should first apply for judgment by issuing a claim form.

Absence of a dispute or cross claim

a. Dispute

Even if a debt can be properly classified as “liquidated” debt, it should not form the basis of any petition if it is disputed on “genuine” and “substantial” grounds. The test in respect of individual and corporate debtors is largely the same: there exists a genuine dispute as to the debtor’s liability to pay the debt; there exists a genuinely triable issue.

In Crossley-Cooke v Europanel (UK) Ltd [2010] EWHC 124 (Ch) Mr Justice Roth confirmed the question is whether the debtor “has raised a genuine triable issue or whether what he says can be dismissed as virtually incredible”. The test applied by the court when faced with a contested petition, in practice, is relatively low.

By way of example, in Black v Sale Service and Maintenance Ltd [2018] EWHC 1344 (Ch) the existence of a previous payment by the guarantor, which was returned for amounting to a ‘void disposition’ under the Insolvency Act 1986, was held, on appeal, not to be conclusive evidence of a lack of dispute.

However, the authorities are clear: the court should be alive to ensure that spurious claims and “clouds of objections” are not used to try to support any application, rather there must be sufficient evidence to persuade a court that there is a genuine dispute. In short, the court should not simply dismiss a petition because an objection it raised, as far as possible, it should consider whether the objection has foundation.

The test applied by the court is similar to that applied on summary judgment applications. Where there is an issue of construction on a contract i.e. a “short point” and the court has before it all the material required to resolve the construction dispute, the court should “grasp the nettle” and decide the point.

On construction of contracts generally, the court is required to identify the objective meaning of the language used by the parties to express their agreement. The court must look both to the language of the agreement and (depending on the formality, drafting quality and contractual terms as a whole) to a varying extent the wider context. If there are rival meanings, the court should assess which meaning is most consistent with business common sense. The court must however recognise that the parties might not have been able to achieve precise terms, and that one party should not be relieved of the consequences of a bad bargain because, in retrospect, it is an unwise agreement.

Once it is established that there are substantial grounds for disputing the claim, the court should not go on to consider the prospects of success of either party to the dispute. Instead, the dispute should be resolved outside the scope of insolvency proceedings by the court or, if appropriate, arbitration. In such circumstances, the general principle as regards cost is likely to apply, and in the absence of misconduct on the part of the debtor, the creditor is likely to face an order for adverse costs.

Cross claim or right to set-off, or, for individual debtors, a cross demand

The debt should not be the subject of a genuine counterclaim or to set-off, which equals or exceeds the amount of the debt. Where there is an alleged cross claim, mutuality is required. 

There are two further distinct defences:

  • For corporate debtors, a defence of reasonable excuse for non-payment of the debt demanded, such as where the company is prohibited by law from paying the sum due.
  • For individual debtors, a defence in the form of a cross demand, which has a wider meaning than a counterclaim or set-off; a procedural or jurisdictional relationship is not required, only the existence of a demand by the debtor on the creditor.

And finally, there should be an absence of circumstances which would allow the court to thwart the creditor’s action. In Jones v The Sky Wheels Group Ltd ([2020] EWHC 1112), a case involving an individual debtor, Snowden, J engaged the residual provision provided at 10.5(5) of the Insolvency (England and Wales) Rules 2016 to set aside a statutory demand served on a debtor where the purpose of the statutory demand was to frustrate the debtor’s petition (for unfair prejudice) presented under Section 994 of the Companies Act. The court ruled that : “Bankruptcy proceedings are a class remedy, and even if a statutory demand is served in respect of a debt that is otherwise undisputed, if the bankruptcy process is being used to enable the petitioner to achieve an illegitimate purpose to the detriment of the class of creditors, this will constitute an abuse of the process of the court."

Our comment

Given debtors are increasingly demonstrating a level of knowledge in responding to statutory demands/petitions and are more likely to engage solicitors in order to assist in defending such action, when looking to recover a debt by way of statutory demand/petition, prior to advancing any recovery steps, it is prudent to complete a full review:

  • A creditor presenting a statutory demand or petition against an individual should be satisfied the debt is liquidated.
  • When looking to recover sums from directors, check the basis of the claim. A claim under a guarantee may be for a liquidated sum. The wording of the guarantee must carefully be checked. Claims from overdrawn directors loan account, misappropriation of company funds, misfeasance, breach of duty – are more likely to be claims for damages, properly advanced by applying for a judgment.
  • Proper consideration should be given to known counterclaims/rights of set-off or disputes before issue statutory demands or petitions. Issuing a statutory demand or petition in the face of genuine counterclaims may be a false economy.
  • Even if there is no indication the debt will be disputed, it is prudent to ensure your house is in order before issuing. Whilst the threshold for establishing a debt is disputed is low, there is a real risk the Court will find in favour of the debtor, especially where the debtor is an individual. It is important any petition is supported by contemporaneous evidence and that there are no gaps in the creditor’s narrative, or that they are ‘plugged’. A poor paper trail increases the risk of the court finding that the matter should be tried, especially where witness evidence is key.
  • All legal proceedings carry risk and where matters rest on contractual construction, or classification of a liability success is never guaranteed. Always consider the end goal, and the risk of not being successful.
  • The impact of the forthcoming extension to the fixed recoverable costs regime, which may reduce recoveries even in successful litigation. This may lead to increased abuse of petition proceedings.

Statutory demands and petitions are often seen as an easy option. Whilst a very useful tool in the armoury, abuse can carry significant consequences, and adoption of the incorrect procedure can be a false economy. We are experienced in assessing the issues in hand and working with both creditors and debtors in advancing or defending petition proceedings.

For more information, please contact Nikki BrastockChloe Waul, or another member of our Restructuring & Insolvency team.

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