The ‘218’ notice

Press, 9 February 1983, Page 30

The ‘218’ notice

The Public Issues Committee. of the Canterbury District Law Society, has questioned one point in Small Business Agency advice printed in “The Press" of January 15 in an article on small-businesss survival in 1983. The article said that when owners of small companies received a notice under section 218 of the Companies Act, they should act fast. The next paragraph, returning to the subject of debt in general, suggested that among ploys for firms that were being hard pressed were: to dispute the debt; to get a lawyer to argue it out carefully while watching costs; and if all else failed, to "pay something." The committee says that it is quite correct to say that swift action should be 'taken. However, it would be misleading to suggest that, in the case of a "218 notice," the above ploys should be used.

"The issue of a demand under section 218 is a particular remedy available to a creditor of an incorporated company." says the committee.

“A solicitor involved in the issue of such a notice is under an ethical obligation not to do so if he is aware of grounds upon which the debt, the subject of the notice, is genuinely disputed. Indeed, it is not appropriate for anybody to issue such a notice if they are aware of grounds upon which the debt is genuinely disputed, since in such case non-payment cannot be considered to be due to insolvency but will be because of the dispute.

"Likewise, the Court will prevent the winding up procedure from being abused if there is a genuine dispute as to the debt relied upon. "However, the important point here is that the debt must be disputed on genuine (i.e.. bona fide) grounds. The debtor company cannot simply manufacture such a dispute as a ground for resisting a petition to wind it up. Such a ploy will not succeed.

“Usually, it would be expected that the grounds for the dispute had been notified to the creditor at the time it arose, prior to the issue of the section 218 notice. A solicitor could not be involved in taking instructions from a client to dispute a debt merely as a ploy so as to prevent or delay the winding up of his client company. “The Court may well require the debtor company to file appropriate affidavits to establish the grounds upon which it is claimed that the debt is genuinely disputed. If the Court is not satisfied in this regard then it may well decide to allow the petition to wind up to proceed.

"A company which receives a section 218 notice should immediately either arrange payment or come to a satisfactory arrangement regarding the same with the creditor or else it. should consult its solicitor, particularly if the debt is in fact genuinely disputed. In such case the solicitor can take appropriate action to prevent a winding up petition from being filed or advertised or a winding up order made," >ays the committee.