Law Report: Solicitors could serve statutory demand for costs: Re a debtor (no 88 of 1991); Marshalls (a firm) v a debtor - Chancery Division (Sir Donald Nicholls, Vice-Chancellor): 25 June 1992

Section 69 of the Solicitors Act 1974 which prohibits an action being brought to recover costs due from a client to a solicitor within one month from the date on which the bill of those costs was delivered does not prohibit the solicitor from making a statutory demand for the payment of costs within one month since the service of a statutory demand does not constitutute the bringing of an 'action'.

Sir Donald Nicholls V-C allowed an appeal by Marshalls, Godalming, a firm of solicitors, from the decision of Judge Harris who on 28 January 1992 set aside a statutory demand served by Marshalls on Peter Ward, a director of Trafalgar Leasing and Co Ltd. On 30 April 1991 Mr Ward sought legal advice from Marshalls about an order that he attend court for examination by the liquidator of the company.

A summons was issued by agents for Marshalls, seeking disclosure of the liquidator's report. On 8 July the agents successfully applied for an adjournment of Mr Ward's examination to enable evidence to be filed in support of his summons. At the end of July Mr Ward instructed other solicitors.

Marshalls rendered two bills to Mr Ward. The first, dated 8 July, was for an interim payment of pounds 187 plus value added tax. The other, dated 31 July, totalling pounds 1,090 inclusive of vat, was for pounds 400 plus disbursements of pounds 530, of which pounds 500 was for the agent's charges.

No payment was received. A statutory demand dated 15 August for the amounts in the bills was served on Mr Ward on 21 August. There was no response. A bankruptcy petition was issued on 20 September. Judge Harris set aside the statutory demand and dismissed the bankruptcy petition. Marshalls appealed.

Marc Brittain (Marshalls, Godalming) for Marshalls; Angharad Start (Brown Turner Compton Carr & Co, Southport) for Mr Ward.

SIR DONALD NICHOLLS V-C said that under Insolvency Rule 6.5(4) the court had a wide discretion to set aside a statutory demand on an application by the debtor. The principles on which the court should exercise that discretion had been considered in two recent decisions: Re a Debtor (no 1 of 1987) (1989) 1 WLR 271 and Re a Debtor, ex parte the Debtor v Printline (Offset) Ltd (1992) 2 All ER 644. The consequences to which a statutory demand led if not complied with was a presumption that the debtor was unable to pay the debt in question. That, in turn, enabled the creditor to present a bankruptcy petition.

In general the court should exercise its discretion to set aside a statutory demand if, but only if, it would not be just for those consequences to apply in the circumstances. That approach was to be followed where the demand was for an excessive sum. Such a demand would not necessarily be set aside.

Miss Start contended that the demand should be set aside because it fell foul of section 69(1) of the Solicitors Act 1974 which provides that 'no action shall be brought to recover any costs due to a solicitor before the expiration of one month from the date on which a bill of those costs is delivered . . .' It was contended that the demand was premature because it was made and served before the expiration of a month from the 31 July bill.

However, the submission that service of a statutory demand constituted the bringing of an action within the meaning of section 69 could not be accepted. The phrase 'no action shall be brought' was referring to a legal process and used lawyers' language. Traditionally an 'action' was the name given to the legal process initiated by issue of a writ of summons. In the context of section 69 it was not to be construed so narrowly. It would include other forms of civil proceedings, for example, an originating summons.

However, although 'action' was to be construed liberally it was not wide enough to embrace a non-legal process such as a statutory demand. A statutory demand was one of the statutorily prescribed prerequisites to obtaining remedies afforded to creditors by a bankruptcy order.

The demand was not issued by a court. It did have legal consequences for a debtor and it was for that reason that the legislation provided a court process which debtors could invoke in order to have the demand set aside. Despite that framework, Parliament could not be taken to have intended that making a demand was within the scope of the prohibition on commencing actions.

The court, when exercising its discretion to set aside a statutory demand, would have regard to all the circumstances. In the case of a demand for payment of solicitors' costs, one of the circumstances would be the date when the bill was served and the client's attitude towards taxation of the bill. The court was able to give adequate protection to solicitors' clients without straining the language of section 69. Section 69 did not assist Mr Ward.

It was over 10 months since the bills were delivered. Nothing had been paid. The case had the hallmarks of a debtor who was unable or unwilling to make a payment, not of a debtor who genuinely thought or was advised that the amount charged by the solicitors was unreasonable.

The possibility that the amount of the bills might be reduced on a taxation which had still not been initiated was not a sufficient reason in this case for setting aside the demand.

Although the 31 July bill did not comply with section 67 by stating that the sum payable to the agents had not yet been paid, that did not afford Mr Ward a defence in respect of that sum.

There were no sufficient grounds for setting aside the demand. The demand and bankruptcy petition would be restored and the petition remitted to the district judge.