Neutral Citation no. NICh 15
Judgment: approved by the Court for handing down
(subject to editorial corrections)
This matter comes before the court by way of an appeal from an order made by the Master (Bankruptcy) on 15 August 2001 whereby the Master ordered that a statutory demand served by the Commissioners of Inland Revenue ("the Revenue") dated 10 February 2000 be set aside provided that a draft for the undisputed portion of the debt in the sum of £44,338.83 be made available to the respondent within 28 days of the date of the order and reserving the costs of the application before the Master to the judge hearing the dispute between the parties.
On the hearing of the appeal before me Mr Robinson appeared on behalf of James Moore ("the taxpayer"), the respondent to the appeal, and Mr Dunford appeared on behalf of the Revenue. Both presented full and able arguments and I am indebted to counsel for the care with which they presented their cases.
The Statutory Demand
The Revenue served on the taxpayer a statutory demand under article 242(1)(a) of the Insolvency (Northern Ireland) Order 1989 demanding payment of the sum of £194,415.47. The particulars set forth in the statutory demand specified arrears of PAYE tax and National Insurance contributions (class 1) and various sums allegedly due by way of interest on arrears of such tax and contributions. According to the statutory demand the interest payable in respect of the arrears of PAYE tax fell due under the Income Tax (Employments) (No 24) Regulations 1993 and in the case of National Insurance contributions under the Social Security (Contributions) Amendment (No 3) Regulations 1993 (SIC). The reference to the latter Regulations was erroneous, the relevant regulations were the No 5 Regulations of that year. The statutory demand did not spell out the rates of interest which varied from time to time throughout the relevant period in respect of which interest was calculated. It appears that the Revenue had intended to serve with the statutory demand a schedule setting out the relevant rates of interests and the dates when the rates changed but this was not served with the statutory demand.
Following receipt of the statutory demand the taxpayer by notice of application dated 30 March 2000 applied for an order setting aside the statutory demand. The grounds on which the applicant claimed to be entitled to the order were described as those set out in the taxpayer's affidavit sworn on 30 March 2000. In that affidavit the taxpayer stated that the demand was disputed. It is better practice for the notice of application to set aside the statutory demand to state clearly the relevant grounds relied upon under the Insolvency Rules.
Following the service of the statutory demand there was a considerable amount of work done in the reviewing of the debt claimed and adjustments were made. The original claim amounted on the face of it to £138,568.90 in respect of PAYE and National Insurance contributions and £55,944.57 for interest. The taxpayer claimed that he should be credited in respect of schedule D Income Tax for the tax years 1995-96 and 1997-98 which could then be set against the Crown's claim for arrears of PAYE and National Insurance contributions and he claimed an entitlement to a credit in respect of the tax year 1997-98 in the sum of £20,804.54. The Revenue has given credit to the taxpayer for various payments reducing the debt in the statutory demand to £54,370.67 in respect of interest and £22,698.58 in respect of PAYE and National Insurance contributions. Of this sum the taxpayer concedes that the sum of £44,338.83 is due being the said sum of £22,698.58 and the sum of £21,640.25 in respect of interest. The taxpayer contends that the Revenue was notified by his accountants three months prior to the issue of the statutory demand that his schedule D liabilities should be deducted from any debt due to the Revenue.
At its heart the real dispute between the parties relates to the Revenue's approach to the calculation of interest allegedly due by the taxpayer. The taxpayer contends that when he made payments to the Revenue on account at a time when he owed arrears of tax and owed current tax liabilities the Revenue should have appropriated the payments to arrears so as to keep down the growing claim for interest due on arrears. On the other hand the Revenue contend that the taxpayer did not appropriate payments to clear the arrears of tax before meeting current liabilities and the Revenue as the creditor in those circumstances was entitled to and did appropriate the payments in the way in which they did even though that resulted in an increased claim for interest on arrears due by the taxpayer.
The Statutory Demand Procedure
Under article 241(2)(a) of the Insolvency (Northern Ireland) Order 1989 ("the 1989 Order") a creditor's bankruptcy petition may be presented to the High Court in respect of a debt only if the debt is a debt which "the debtor appears to be unable to pay or to have no reasonable prospect of being able to pay". Under article 242(1) the debtor appears to be unable to pay a debt if but only if the debt is payable immediately and either the petitioning creditor to whom the debt is owed has served on the debtor a statutory demand in the prescribed form requiring him to pay the debt or compound for it to the satisfaction of the creditor and at least three weeks have elapsed since demand was served and the demand has not been complied with or set aside in accordance with rules of court or alternatively the creditor has obtained a certificate of unenforceability in respect of a judgment debt.
Rules 6.001 to 6.006 of the Insolvency Rules (Northern Ireland) 1991 ("the Insolvency Rules") are the relevant rules relating to statutory demands and applications to set aside. Rule 6.001(4) provides:
"(4) If the amount claimed in the demand includes –
(a) any charge by way of interest not previously notified to the debtor as a liability of his, or
(b) any other charge accruing from time to time,
the amount or rate of the charge must be separately identified, and the grounds on which the payment of it is claimed must be stated."
Under rule 6.005(1) on receipt of an application under rule 6.004 the court may, if satisfied that no sufficient cause is shown for it, dismiss it without giving notice to the creditor. Under 6.005(4) the court may grant the application if:
"(b) the debt is disputed on grounds which appear to the court to be substantial or …
(d) the court is satisfied on other grounds that the demand ought to be set aside."
The Impact of the Convention on the Statutory Demand Procedure
If a statutory demand is not set aside the creditor is free to petition for the adjudication of the debtor. Rule 6.005(6) provides:
"If the court dismisses the application, it shall make an order authorising the creditor to present a bankruptcy petition either forthwith or on or after a date specified in the order."
While there is some conflict of authority whether the debtor on the hearing of the petition is able to raise again the same objection to the debt if he has been unsuccessful in setting aside the statutory demand it appears that the prevailing view is that he cannot reopen the issue. In Brillouet v Hachette Magazines Limited decided in 1991 but reported (1996) BPRI 518 Vinelott J held that the principle of res judicata precluded the debtor raising the same point on appeal. A different view was taken by Evans-Lombe J Eberhardt v Mair  1 WLR 1180.
If the debtor cannot reopen the issue determined on its application to set aside the statutory demand then the effect of the application to set aside the statutory demand is to determine the liability of the debtor to meet the debt.
While the refusal of an application to set aside a statutory demand does not give rise to a judgment and therefore does not of itself determine the bankrupt status of the debtor it is an essential and preliminary step on the way to that adjudication which determines the status of the debtor. If at the hearing of the petition the debtor is legally precluded from raising again the issue of the status of the demand then the refusal of the application to set aside the debt is determinative of an issue between the parties and therefore falls within article 6 of the ECHR.
Even if the court were not precluded in law from revisiting issues addressed at the application to set aside the statutory demand the outcome of that application would substantially weaken the ability of the debtor to persuade the court that the debt is not due. The efficacy of the statutory demand procedure would be considerably weakened if the court, on the hearing of the bankruptcy petition, were free to disregard the outcome of the statutory demand procedure.
Thus, once it becomes clear that the statutory demand procedure leads to a conclusion that determines substantially or completely the question whether the debt claim is due, article 6 of the Convention is engaged. That Convention right involves a right to a fair trial which carries with it a right to equality of arms, a right to have a fair hearing and so forth.
A right to a fair trial does not mean that in every case a litigant is entitled to a plenary hearing. Where a party either as claimant or as respondent clearly has no case fairness may demand that his opponent be spared the wasted cost and endeavour in taking the matter to a plenary hearing. Thus, for example, applications for summary judgment or applications to dismiss claims as vexatious or as an abuse of process may fairly be granted if it can be demonstrated that the proceedings may fairly be concluded at that stage.
Prior to the Human Rights Act 1998 the courts had decided that under the new insolvency law a robust approach should be adopted to construing statutory demands and alleged defects therein. Under the prior bankruptcy law the courts dealt with defects in statutory demands with strictness. In Re A Debtor (Lancaster No 1 of 1987)  1 WLR 271 ("the Lancaster case") the debtor was served with a statutory demand. The creditor appears to have accepted that the statutory demand was perplexing but contended (as the court accepted) that the debtor was in no way misled by the statutory demand. Under the previous bankruptcy legislation bankruptcy notices were frequently set aside as being perplexing. The Court of Appeal held that the debtor's attempt to rely on the wide ground set out in the equivalent of rule 6.005(4)(d) on the ground that the demand was perplexing failed for such "other grounds" as specified in (d) must be of the same degree of substance as those set out in (a), (b) and (c).
To deprive an alleged debtor of an opportunity to litigate his dispute a fair statutory demand procedure requires that the creditor spells out clearly and accurately what his debt is, establishes that the debt is due and gives the debtor a full opportunity to show cause why in the interests of fairness and practice he should have the opportunity to defend the claim by litigation.
In summary judgment applications to the plaintiff must show that the defendant has no arguable case. In an application to set aside regularly obtained judgments the test appears to be whether the defendant in the interests of justice should be permitted to defend the action. In either set of proceedings it is clear that if a defendant has in reality no defence to the plaintiff's claim allowing the defendant to defend would be unjust to the plaintiff. Refusing leave to defend would not be unjust to the defendant since it would merely delay the enforcement of the plaintiff's indisputable right and send to trial an indefensible case.
Although at first sight the wording of rule 6.005 and some decided cases may suggest that a debtor served with a statutory demand bears a heavier burden than is borne by a defendant in summary judgment applications or applications to set aside judgment and that an onus of proof is thrown on him, in reality the test applicable should be no different. This is particularly so in the light of article 6 and in the light of the severe consequences flowing from a decision not to set aside a statutory demand. A close analysis of Re A Debtor  1 WLR 271 shows that on the facts of that case the court concluded that the debtor knew full well what the creditor's claim was and that the debtor had no answer to it. As Nicholls LJ pointed out in that case:-
"Had the debtor been perplexed on some point which actually affected what he did after he was served with the statutory demand he or the solicitor who on his behalf made the application to set aside the statutory demand would surely have approached the bank for clarification. Instead, this point, of the debtor genuinely being misled and perplexed, was not even taken before the deputy registrar or the judge."
On the facts of that case the court concluded that the justice of the case did not require that the statutory demand be set aside. One must bear in mind the concluding remarks of Nicholls LJ in his judgment at 280:
"The new statutory code affords the court a desirable degree of flexibility when confronted with an application to set aside a statutory demand containing one or more defects. But this is not to be taken by banks or others as a charter for the slipshod preparation of statutory demands. The making of a bankruptcy order remains a serious step so far as a debtor is concerned, and the prescribed preliminaries are intended to afford protection to him. If a statutory demand is served in an excessive amount or is otherwise defective, the court will be alert to see whether those mistakes have caused or will cause any prejudice to the debtor. In the present case no prejudice has resulted or will result, and hence it is right that the statutory demand should be allowed to stand. But if there had been prejudice, the bank would only have had itself to blame it the court had set aside the statutory demand."
Determination of the Application
The thrust of Mr Robinson's attack on the statutory demand was that the debt claimed in the statutory demand was grossly inflated compared to what the Revenue is now seeking, that the demand did not spell out with clarity the basis of the Revenue's computations, that it failed to specify the relevant rate of interest and how the interest claims were computed and that it failed to specify the correct statutory basis on which the interest claims on the National Insurance contributions were calculated. It was further argued that the Revenue had failed to respond to requests by the taxpayer for a detailed computation of the claims. The particulars of the claim have only emerged in the affidavit evidence which has been protracted. Counsel correctly argued that the statutory demand procedure is intended to be a quick, short and simple procedure to deal with cases of undisputed and indisputable debts. The present application has taken a long time to resolve and has led to the exchange of voluminous and complex affidavits.
Mr Robinson further contends that there is a triable issue between the parties on whether the Revenue was correct in law in appropriating the sums received as they did. While accepting that as a general proposition a creditor may appropriate payments received from a debtor as it sees fit in the absence of a direction by the debtor, in this case the debtor argues that he was precluded from appropriating because the Revenue state that certain payments were to be appropriated to current liabilities. Mr Robinson contends that this is a relevant factor which may mean that as a matter of law the general principle does not apply.
It is true that the statutory demand procedure is intended to be a short and quick procedure in clear-cut cases. It is not designed to be a form of trial of a dispute between parties nor is it intended to have the attributes of ordinary litigation. There is no procedure for amendment of a statutory demand which is not in itself a court proceeding and there is no mechanism for seeking particulars, discovery or serving interrogatories. Had the statutory demand in this case started as a specially endorsed writ it would have been an unsatisfactory pleading, as Mr Dunford was bound to concede.
In this case the court must also bear in mind that the debtor has tendered payment of the sum of £44,338.83. Counsel on behalf of the debtor on instructions indicated that his client was prepared to undertake that in the event of proceedings being issued by the Revenue followed by an order 14 application for judgment the taxpayer would lodge the disputed balance in court or in joint deposit pending the outcome of the claim. These seem to me to be relevant factors to be taken into account when considering the justice of the case whether the debtor should be allowed to litigate the dispute on the balance of the claimed debt. Mr Dunford has not persuaded me that the taxpayer's case is unarguably weak.
Having carefully weighed the able arguments of counsel I consider that the defendant has made out a case for the setting aside of the statutory demand and I so order.
The Form of the Master's Order
As noted the Master in his order set aside the statutory demand "provided that a draft for the undisputed portion of the debt in the sum of £44,338.83 be made available to the respondent within 28 days of the date of this order." As noted earlier the Master directed that the costs of the application be reserved for the judge hearing the dispute between the parties. It appeared to be common case between the parties that the Master did not have jurisdiction to make such an order though it was accepted by the Revenue that the Master could have achieved the same result by different means.
In Re A Debtor  1 WLR 405 Hoffman J held that a statutory demand which demanded an amount greater than that admitted by the debtor to be due (the balance being bona fide disputed) must be set aside because the debt or claim is disputed on grounds appearing to the court to be substantial. Muir Hunter on Personal Insolvency indicates that this decision overlooked the provisions of the English equivalent to our rule 6.022(4) which provides:
"A petition preceded by a statutory demand shall not be dismissed on a ground only that the amount of the debt was overstated in the demand, unless the debtor, within the time allowed for complying with the demand gave notice to the creditor disputing the validity of the demand on that ground; but, in the absence of such notice the debtor is deemed to have complied with the demand if he has, within the time allowed, paid the correct amount."
In the Lancaster case Nicholls LJ considered that the rule made clear that the overstatement of a debt in a statutory demand does not of itself and without more constitute a ground for setting aside a statutory demand. If the debtor pays the admitted amount and the balance is bona fide disputed the bankruptcy petition will be dismissed because the debtor would be deemed to have complied with the statutory demand.
It would be open to the Master where he considers that part of the debt is clearly due but that the balance is bona fide disputed to so indicate to the parties and adjourn giving his ruling on the application to set aside the statutory demand for a time giving the debtor an opportunity to pay the undisputed amount. If so paid the rest of the disputed debt will be left to go to trial and the statutory demand could be set aside. Alternatively the Master would be entitled to refuse to set aside the statutory demand but in making an order under rule 6.005(6) he could specify a later date for the presentation of the bankruptcy petition indicating that if the admitted part of the debt is paid the petition would be dismissed under rule 6.022(4) on the basis that he would have complied with the statutory demand.
The Master's order in this case effectively sought to achieve the same result. The English authorities on whether a conditional order setting aside a statutory demand can be made are in conflict. In Re A Debtor (517 of 1991)  The Times 25 Nov the debtor disputed a statutory demand based on a guarantee the performance of which was intended to have been varied by agreement. Ferris J ordered the statutory demand to be set aside conditionally on his paying the sum demanded into an account in joint names. In another case Re A Debtor (90 of 1992)  The Times 12 July Knox J held that there was no jurisdiction to make a conditional order. He considered that Ferris J's decision was inconsistent with the Lancaster case Knox J held that there was no grey area concerning the extent to which the debt was or was not the subject of substantial dispute such as exists under Order 14 in relation to shadow defences where conditional orders are permissible. Vinelott J followed Knox J in a decision in Re A Debtor (32-SD-91) The Times 3 May 1994. Muir Hunter on Personal Insolvency at paragraph 7.199 considers that the balance of authority now seems to be in favour of that proposition.
For my own part I do not consider that the Court of Appeal decision in the Lancaster case is determinative of the issue. I can see no objection in principle to the making of the type of order made by the Master in this case in an appropriate case though I cannot see how he can leave the question of costs to the judge in the trial of the disputed debt.
For the reasons indicated above I have set aside the statutory demand bearing in mind that the payment of £44,338.83 has been tendered to the Revenue and can now be encashed.