In the recent judgment of the ECSC in the matter of Sumner Group Mining Limited v Zica S.A (BVIHC (Com) 2020/0171, Walkers successfully represented the respondent in defending an application to set aside a statutory demand. Jack J provided helpful guidance on the legal principles in circumstances where it is alleged that a statutory demand had been served improperly for a collateral purpose.

The applicant sought to set aside a statutory demand on the basis of either:

  1. there was a substantial dispute as to the debt owing (pursuant to section 157(1) of the Insolvency Act 2003); or
  2. in the alternative, that substantial injustice would be caused "for some other reason" (pursuant to section 157(2)(b) of the Insolvency

The applicant argued that the same considerations apply to setting aside a statutory demand to the Court's ability to refuse to appoint a liquidator where the appointment is not made for a proper purpose.

This case, we believe, is the first decision where the Court has held that it is not open to a party to run issues of alleged improper purpose at a statutory demand set aside application. The Judge held that the proper place for issues of improper purpose to be considered is the substantive hearing for the appointment of a liquidator, at which hearing the Court can take into account the interests of all creditors and take the necessary overview.

The Judge further noted that, in considering issues of improper purpose, he was doubtful as to whether the well-known Sparkasse Bregenz test – that the debtor seeking to resist the insolvency process honestly believed, on grounds that were objectively more than merely frivolous, that there was a reason for not paying an alleged debt, such that the Court saw that there was a question to be decided – was the appropriate touchstone. The Judge noted that where a debt is disputed on substantial grounds, the creditor can bring ordinary Court proceedings to establish it and at that point, the creditor would have to make out its case on the balance of probabilities. But no alternative proceedings are available if a defence of improper purpose is put forward. The hearings in the insolvency proceeding are the only place where such matters would be considered. Accordingly, it seemed to the Judge that an improper purpose ought to have to be considered to a balance of probabilities standard in the insolvency hearings. This higher standard of proof, going beyond a quick and summary basis, and the fact that the establishing of an improper purpose can raise difficult questions of fact, is another reason why the Judge considered that such issues ought to be reserved to substantive winding up proceedings, and why section 157(2)(b) of the Insolvency Act should not be considered to be intended to cover such cases.

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