Setting aside statutory demands: Smith v Gregory

Introduction

This case considers the importance of extrinsic evidence in the context of a loan agreement, and how the lines may be blurred between personal loans and loans to a company. A1 was a director of the company, and A2 was his wife. R1 and R2 presented statutory demands to A1 and A2 in relation to a loan that was claimed by A1 and A2 to be a loan to a company, not a loan to them personally. The Court had to consider whether the statutory demands should be set aside.

At first instance, the Judge refused to set aside two statutory demands on the basis they were not disputed on substantial grounds. On appeal, the decision at first instance was upheld.

Facts of the case

A1 and A2 failed to repay a loan of £50,000 made available by R1 and R2. Loan documentation (in the form of a letter signed by A1 and A2) set out that A1 and A2 were the borrowers and that the loan was to be repaid "when [A1 and A2's] business… has the ability to do so, or at a requested date". However, there was a dialogue between the parties over email which A1 and A2 argued demonstrated an intention that the loan was made to A1's company. The loan was also paid from R2 to the company's bank account.

The Appellants argued that there was a substantial dispute in relation to the debt as a result of the extrinsic evidence as to liability for the loan. The Respondents argued that the contemporaneous emails were irrelevant and that the loan documentation constituted the entire contract.

The Court considered whether the Appellants could rely on the extrinsic evidence to either i) show that the loan agreement was not intended to be conclusive as to the terms of the arrangement; or ii) to show that if the evidence was considered as part of the relevant background it demonstrates that the loan agreement would be understood differently. It further found that it was capable of determining these questions as effectively as any Court dealing with a trial of the matter and that the Appellants' argument could not succeed on any reasonable analysis.

As such, the Appellants' argument failed and the decision at first instance (not to set aside the statutory demands) was upheld.

Conclusion

This case highlights that although the test for setting aside a statutory demand on the basis of a disputed debt may, in some circumstances, be considered a "low bar" the Court will not shy away from considering the relevant underlying legal arguments where appropriate.