"Pay without set-off or counterclaim" provision fails to prevent statutory demand being set aside.
Garrow v Society of Lloyd's (Judgment October 13, 1999)
Lloyd's served a statutory demand on Garrow in respect of an undisputed judgment debt. Garrow was also party to a class action against Lloyd's alleging fraudulent misrepresentation. If successful, the likely damages would exceed the amount of the judgment debt. He applied to have the statutory demand set aside on these grounds.
Garrow's contract with Lloyd's provided that sums were due "...in all respects free and clear from any set-off, counterclaim or other deduction on any account whatsoever...". It went on to provide that, in connection with his obligation to pay, no cause of action could accrue in favour of Garrow and that he was prohibited from issuing any proceedings himself, until he had paid all sums due under the contract.
The Court of Appeal had already taken the view in July 1997 (Lloyd's v Lyon) that this very clause prevented disgruntled Names alleging a claim for misrepresentation against Lloyd's from withholding payment. Lloyd's argued that this approach could be logically extended to the hearing of an application to set aside a statutory demand.
The Insolvency Rules 1986 provide that a statutory demand may be set aside if the debtor appears to have a counterclaim, set-off or cross demand of at least the amount of the debt underlying the demand. This test is refined by a 1987 practice note of the Bankruptcy Court, which states that a statutory demand would normally be set aside if the debtor's claim presented a genuine triable issue. Significantly, in a case such as this, where the statutory demand resulted from a judgement debt, the question of whether or not the debtor could have raised his claim in the proceedings in which the judgement was obtained is expressed not to matter.
Relying on these provisions, the Court of Appeal took the view that the clause in the contract would not be fatal to an application to set aside. In addition, even it were assumed that Mr Garrow's application amounted to the issue of proceedings or the assertion of a cause of action, the hearing of the application was not "in connection with" his obligation to make the payments, but rather it related to the wider scheme of his potential bankruptcy. As a matter of construction therefore, the setting aside of a statutory demand was not a matter catered for by the contract.
Comment
This case is of interest to lenders generally as "no set-off or counterclaim" is a standard provision to be found in nearly all financing agreements. Whilst this sort of wording is ineffective once an individual becomes bankrupt (section 323 of the Insolvency Act 1986) or a company goes into liquidation (Rule 4.90 of the Insolvency Rules 1986), it has been upheld as drafted outside these contexts. This case would appear to extend the bankruptcy exception to a statutory demand on an individual. Whether the same would be true for a statutory demand on a company, or in a case where the statutory demand set-aside is specifically covered by the underlying contract, remains to be seen.
This note is intended to provide general information about some recent and anticipated developments as of the date at the head of this note, which may be of interest. It is not intended to be comprehensive nor to provide any specific legal advice. It will not necessarily be updated and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained.
If you would like further information or specific advice, please contact Tony Evans at Macfarlanes London Office.
