TV Edwards recently acted for an individual who received a statutory demand for approximately £600,000 from a lender that also held security over the individual’s property.
The matter raised an important question: can a secured creditor use the statutory demand and bankruptcy process where it already has security for the debt?
Can a secured creditor serve a statutory demand?
Yes. The Insolvency (England and Wales) Rules 2016 expressly contemplate a statutory demand being served by a creditor who holds security for the debt. However, the creditor must deal with that security properly in the demand. (Insolvency (England and Wales) Rules 2016, rule 10.1(9))
Where security is held, the demand must specify:
- the full amount of the debt;
- the nature of the security;
- the value which the creditor places on the security at the date of the demand; and
- the amount claimed after deducting the stated value of the security from the full debt. (Insolvency (England and Wales) Rules 2016, rule 10.1(9)(a)–(b))
The creditor should therefore not simply present the full secured balance as though no security exists. The demand must distinguish between the total debt and the amount said to remain unsecured after the creditor’s valuation of the security. (Insolvency (England and Wales) Rules 2016, rule 10.1(9))
The prescribed contents of an individual statutory demand are strict. The general rule allowing immaterial departures from required document contents does not apply to the contents prescribed by rule 10.1. (Insolvency (England and Wales) Rules 2016, rule 1.9(2))
When can the demand be challenged?
A debtor may apply to set aside a statutory demand within 18 days from the date of service. Once the application is filed, time for complying with the demand stops running, subject to any order made by the court. (Insolvency (England and Wales) Rules 2016, rule 10.4(1), (2) and (5))
A security-related challenge may arise where the creditor has not complied with rule 10.1(9), or where the value of the security equals or exceeds the full amount of the debt. (Insolvency (England and Wales) Rules 2016, rule 10.5(5)(c))
Where the creditor has disclosed the security but has undervalued it, the court may permit the demand to be amended rather than automatically setting it aside. (Insolvency (England and Wales) Rules 2016, rule 10.5(7))
A debtor may also seek to set aside a demand where the debt is genuinely disputed on substantial grounds, where there is a counterclaim, set-off or cross-demand equal to or exceeding the debt, or where other grounds justify setting it aside. (Insolvency (England and Wales) Rules 2016, rule 10.5(5))
What happens if the creditor presents a bankruptcy petition?
The security position remains important if the creditor later presents a bankruptcy petition.
A secured debt may form the basis of a bankruptcy petition if the creditor states that it is willing to give up the security on the making of a bankruptcy order for the benefit of all bankruptcy creditors.
Alternatively, the creditor may retain its security but must make clear that the petition is not based on the secured part of the debt and must state the value of the security at the date of the petition. (Insolvency Act 1986, section 269(1))
In practical terms, the creditor has two main routes:
- Surrender the security: the creditor gives up the security for the benefit of the bankruptcy creditors and petitions on the debt as an unsecured creditor. (Insolvency Act 1986, section 269(1)(a))
- Retain the security: the creditor values the security and relies only on the alleged unsecured shortfall. (Insolvency Act 1986, section 269(1)(b))
A secured creditor petitioning on an alleged shortfall must be careful when valuing the security.
The creditor may only revalue the security with the trustee’s agreement or the court’s permission.
The trustee may also be entitled to redeem the security at the stated value or require the secured property to be offered for sale. (Insolvency (England and Wales) Rules 2016, rules 14.15, 14.17 and 14.18)
What if the secured asset is being sold?
A secured creditor is not necessarily prevented from enforcing its security because bankruptcy proceedings are contemplated or commenced. Bankruptcy does not affect a secured creditor’s right to enforce non-possessory security. (Insolvency Act 1986, section 285(4))
A secured creditor may:
- rely on the realisation of its security;
- value the security and prove for an anticipated shortfall;
- realise the security and then prove for any remaining shortfall; or
- surrender the security and prove for the whole debt as an unsecured creditor. (Insolvency (England and Wales) Rules 2016, rule 14.19; Insolvency Act 1986, section 305(2)
Where the secured asset is being sold, the sale proceeds will affect the amount of any genuine shortfall. Once the security is realised, its value may be adjusted and any excess or insufficient insolvency dividend corrected. (Insolvency (England and Wales) Rules 2016, rules 14.19(1)(a) and 14.41)
The sale of the secured asset does not automatically invalidate a previously served statutory demand. However, if the creditor wishes to continue towards bankruptcy, it must still identify and rely on a properly calculated unsecured amount.
Why early advice matters
Statutory demands are subject to short time limits. A debtor should urgently establish:
- whether the creditor holds security;
- whether the demand identifies the nature and value of that security;
- whether the amount demanded deducts the stated security value;
- whether the debt or valuation is disputed; and
- whether there is any counterclaim, set-off or cross-demand.
The central question is not simply whether the creditor is secured. It is whether the creditor has properly dealt with the security and accurately identified any genuine unsecured balance.
TV Edwards advises individuals in relation to statutory demands, bankruptcy petitions, secured lending disputes and claims arising from the enforcement of security.
How Can We Help?
Need advice on a statutory demand?
If you have received a statutory demand or bankruptcy petition, seek legal advice promptly as strict time limits apply. Our experienced Dispute Resolution team can advise you on your options. Contact us on 020 3440 8000 or email adam.haffenden@tvedwards.com.
Disclaimer: The information on the TV Edwards website is for general information only and reflects the position at the date of publication.
