Back to Basics - Disputes Series

In summary:

• A creditor can, under section 155 of the BVI Insolvency Act (the Act), serve a statutory demand requiring payment of a liquidated sum exceeding US$2,000. The debtor would then have 14 days within which to apply to set aside, or 21 days to satisfy, the demand.
• If a statutory demand is not satisfied and either (i) an application to set aside the demand is not filed within 14 days (a deadline which is not capable of extension), or (ii) the set aside application is unsuccessful, then the debtor is presumed to be insolvent under section 8(1)(a) of the Act. A creditor may then petition for the company’s winding up on that basis.
• The Court has no jurisdiction to extend the period for applying to set aside a statutory demand. However, a failure to make that application is no longer regarded as being terminal to the Court’s ability to consider any defences or cross-claims which might have been raised in response to the statutory demand upon the hearing of the application for the appointment of liquidators: Trade and Commerce Bank v Island Properties SA and Jacob Ungar (BVIHCVAP2009/0012), followed in China Minsheng Banking Corp., Ltd., Hong Kong Branch v Tai Feng Investments Limited (BVIHCM2023/0271).
• An application to set aside a statutory demand will succeed if the Court is satisfied that there is a genuine and substantial dispute as to whether or not the debt is owing (section 157(1) of the Act). This is the most common ground for setting aside a statutory demand, and the threshold for establishing such a dispute is relatively low; the applicant need only show that the dispute, or the basis for the dispute, is not frivolous, hopeless or thoroughly bad.
• In the alternative, the Court has the discretion to set aside a statutory demand if it would cause substantial injustice, either because the demand is defective or, more broadly, for the lesser used “some other reason” (section 157(2) of the Act).
• Despite often being used tactically as a pre-cursor to winding up proceedings, issuing a statutory demand is not a formal pre-requisite under the Act. This, combined with the relatively low threshold to be met on a set aside application, means that a creditor who wishes to serve a statutory demand should plan their next step carefully to avoid being left exposed to a tactical application to set it aside. In particular, before serving a demand, consideration should be given to the facts of the case, including the underlying debt and any defences or grounds upon which the debtor may rely to challenge the statutory demand, to ensure that taking this step is likely to have the desired outcome.

A statutory demand can sometimes be a helpful tool to encourage payment of an outstanding debt, but it is by no means a silver bullet. They should be treated with caution and the advantages analysed carefully, given the process can be derailed and undermined, with a costs order made against the creditor, if the debtor successfully argues that the demand should be set aside.

If you have any questions in relation to serving or defending a statutory demand in the BVI, please contact the authors Andrew Willins and Fay O’Halloran.