Costs risk on serving a statutory demand - a cautionary tale from the Court of Appeal

Changes to the Subject Access Code of Practice

In Dunhill v Hughmans (A Firm) [2017] EWHC 2073 (Ch), the Court of Appeal held that the appellant (Dunhill) was entitled to be paid her costs for her successful application to set aside a statutory demand served on her by Hughmans.

 

The Facts

Ms Dunhill originally instructed Hughmans (a law firm) for advice in relation to a family dispute. She terminated their retainer in the belief that they had provided negligent advice causing her losses and refused to pay their fees on the basis of set off and a counterclaim. Hughmans obtained summary judgment against Dunhill for their fees, upon which an earlier stay of proceedings was lifted.

Dunhill appealed against the summary judgment in what transpired to be complex and protracted litigation and requested a further stay. In the meantime, having been notified of Dunhill’s request for permission to appeal but before a further stay was imposed, Hughmans served her with a statutory demand on the basis of their summary judgment.

The summary judgment was ultimately overturned on appeal and Hughmans agreed to withdraw their demand by consent with no order as to costs. Their offer which was rejected by Dunhill. The issue as to costs relating to the application to set aside the statutory demand came before the High Court and subsequently the Court of Appeal.

The Court of Appeal decision

Although not necessary for the determination of the appeal, the Court commented that Hughmans had been entitled to serve their statutory demand upon obtaining summary judgment and the stay being lifted; however, it drew a distinction between ‘entitlement’ and ‘appropriateness’ (which is relevant to the issue of costs). It was also satisfied that Dunhill’s counterclaim was well in excess of the judgment debt and therefore the statutory demand should be set aside (which had already been conceded by Hughmans).

On the issue of costs, the Court of Appeal found that service of the demand by Hughmans following receipt of Dunhill’s request for permission to appeal the summary judgment had been inappropriate. Hughmans had unreasonably opened up “a second front at a time when matters relevant to the judgment debt and counterclaim were already before the Court of Appeal”. By jumping the gun to enforce their summary judgment, rather than allowing the appeal process to run its course, it was inevitable that Hughmans would cause further costs to be incurred. The Court considered that no prejudice would have resulted to Hughmans in awaiting the outcome of the summary judgment appeal process. Dunhill was therefore awarded her costs of the set aside application against Hughmans.

Commentary

This case is a cautionary tale for litigants seeking to pursue payment for a debt which is the subject of an ongoing dispute. The Court of Appeal warned litigants against commencing satellite proceedings prematurely “in circumstances which render almost inevitable the unnecessary expenditure of the parties’ and the court’s time and resources”. This is not new law but a reminder of the basic principle that a statutory demand must be based upon an undisputed debt and, in the circumstances, a request for permission to appeal on the basis of a significant counterclaim was sufficient to classify the summary judgment disputed.

David Steinberg, Partner in the Restructuring & Insolvency team commented: “This is an interesting case and a somewhat surprising judgment, given that the Court of Appeal found that the creditor was entitled to serve a statutory demand when it did so. However,  it is consistent with a line of robust decisions where the courts have resolved to stymie claimants’ efforts to use the statutory demand / winding-up petition route as leverage in wider litigation and to confine this route to clear-cut cases where there is no arguable defence to the claim. The Court of Appeal’s decision in the Dunhill case certainly serves to emphasise that creditors must always tread carefully when serving a statutory demand for a debt in the context of ongoing litigation, as the Court is likely to defer determination of the  insolvency-related process until the main proceedings have been concluded and the underlying dispute is resolved. At worst, prematurely serving a statutory demand or petition in such circumstances could lead to a demand being set aside or petition being dismissed altogether, with a large order for costs against the creditor who was impatient for payment.”

Contact our experts for further advice

David Steinberg, Lucy Walker

Search our site