Stopping Bankruptcy — recent case law
A long form article about interesting ideas raised by recent case law on opposing bankruptcy.
How clients are made bankrupt
Creditors can make someone bankrupt (petition) for debts of £5,000 or more. Petitions can be presented to court after service of a statutory demand or failed enforcement of a judgment. Section 267 of the Insolvency Act 1986 (IA 1986) says a petition must be:
- For a liquidated sum (so the value must be known)
- For a debt payable immediately or at some certain point
- For unsecured debt
- There must be no reasonable prospect for the debt to be paid
- There must be no application to set aside a statutory demand
If the debt is ‘secured’ s.269 of the IA 1986 requires a creditor to give up its security for the benefit of all creditors. Alternatively, the creditor can petition for any unsecured amount only (the amount of debt above the value of security). The petition must estimate the value of the security. Under s.383 IA 1986 security includes mortgages, liens, charges and any other security ‘over property.’
The statutory demand (‘the demand’)
The demand must include the details in Insolvency Rule 10.1. A creditor must show that the client is unable to pay, or has no reasonable prospect of paying under s.267(2)©.
If the debt is immediately payable the creditor must give 21 days for a client to pay, secure or compound the debt under s268(1)(a) IA 1986.
If the debt is payable in future but the creditor thinks there’s no reasonable prospect of payment being made, the creditor must give the client 21 days to show they can settle the debt when due under s268(2) IA 1986.
Applications to set aside a demand are free and made on form IAA. They should be submitted to the court with insolvency jurisdiction where the client lives within 18 days of the date of service of the demand. The grounds are found in Insolvency Rule 10.5(5).
The petition
If a client doesn’t set aside or pay, the creditor can present a petition within four months under Insolvency Rule 10.7(2). If there’s a delay without explanation the court can stay or dismiss the petition under s.266(3) but that’s rare.
Under Insolvency Rule 10.18 opposing the petition is free. Applications must be sent to court five days or more before the hearing using form Bank-6. A copy must be served on the creditor at the same time.
Recent case law
Opposing a petition or setting aside a demand requires a case by case assessment. Advisers should use second tier consultancy. If clients can afford it, they should get legal advice. Where a home is at risk legal aid may be available. Here are some recent developments.
Is the debt immediately due?
In Martin v McLaren Construction Ltd [2019] EWHC 2059 Ch Martin set aside a demand based on a £7,000,000 guarantee. The demand was made under s.268(1)(a) so the debt had to be ‘immediately payable’. The guarantee required McLaren to serve a final notice but they hadn’t done so. The court set aside the demand as the contractual notices hadn’t been served. The guarantee wasn’t immediately payable.
The court had discretion under Insolvency Rule 10.5(d) to ignore this error but decided not to. McLaren hadn’t followed the primary legislation (s.268(1)(a) IA 1986) so the error couldn’t be overlooked.
Always check if default notices, contractual notices and any other statutory notices have been served.
If the creditor has security
The requirement for secured creditors to give up security, or petition for the ‘unsecured’ element of a debt recognises that bankruptcy is an action on behalf of all creditors. Insolvency rule 10.1 says a demand should list the security, it’s value, the full debt, but only demand the value of the debt minus the value of security.
In Promontoria (Chestnut) Ltd v Bell and another [2019] EWHC 1581 Ch Promontaria didn’t list their business mortgage in the demand. The Bells also gave a guarantee to repay business debt up to £170,000. The demand didn’t give the value of the property or give up the security for all creditors. Promotoria had not complied with the rules so the court set aside the demand.
Security must be listed (Insolvency Rule 10.1). The court won’t overlook errors in the demand that are also requirements of the IA 1986 (in this case in s269 IA 1986).
Can you get other creditors on side?
The views and treatment of all creditors are important.
In Digby-Rogers v Speechly Bircham LLP [2019] EWHC 1568 (Ch) over 87% (by value) of the creditors opposed the petition. Digby-Rogers hoped to receive a payment for introducing an investor to a business opportunity. This would pay his debts in full. Despite little chance of success the Court decided the wishes of supporting creditors outweighed those of the petitioning creditor and adjourned.
Supporting creditors might help. It’s relevant at petition stage as creditor support is not grounds to set aside a statutory demand. Their support will only help to delay so any plan must ultimately succeed.
Pointless petitions
Some clients just don’t want to go bankrupt. A creditor petition removes that choice and in the case of Lock v Aylesbury Vale District Council [2018] EWHC 2015 (Ch), a DRO might have been suitable.
Aylesbury presented a petition for £8,000 of unpaid council tax and recorded that Lock had no assets. They speculated that Lock might have inherited £3,000 in 2009 so petitioned for her bankruptcy.
The court dismissed the petition using discretion under s.266(3) IA 1986. Normally, the defendant has to show they’ve no assets to settle debts and costs. However, the council had proved that for her. They didn’t argue any other good reasons so bankruptcy was pointless.
Many councils have ‘last resort’ policies. Speculating on assets isn’t enough. It’s likely clients on benefit income in social housing (like Lock) won’t have assets. Creditors should make proper enquiries, especially if they have knowledge of the client’s circumstances.
If the client has a dispute over liability
Wagner v White [2018] EWHC 2882 (Ch) shows it’s hard to dispute liability in bankruptcy.
Wagner’s mobile app venture went into administration and assets were sold. Lenders chased personal guarantees by statutory demand. Wagner argued that he’d agreed guarantees on the promise of investment. He claimed there’d been a conspiracy to make the business fail so assets could be bought cheaply out of administration.
His application to set aside the demand failed. Set asides applications must have a real chance of success at trial and this one didn’t. Strong evidence is essential.
London Borough of Tower Hamlets v Naris [2019] EWHC 886 (Ch) shows it’s unlikely that previous judgments will be reconsidered.
Naris said his defence against £75,000 of council debt had never been heard. He appealed to the valuation tribunal (VTE) late, so the appeals were dismissed. He accepted he owed £9,000.
Regulation 49 of the Council Tax (Admin and Enforcement) Regs 1992 (CT Regs) says a liability order creates a bankruptcy debt. The Court upheld previous case law saying they’d not ‘go behind’ a judgment debt where there has been a judicial process. Despite Naris’ arguments not being considered by the VTE there had still been a judicial process through the magistrate’s court. The court added that even if a judicial process hadn’t been followed, Naris accepted he owed £9,000 and that’s enough to be made bankrupt.
A judgment or order granted in the absence of any defence is still a judicial process. Setting aside a demand on this basis will probably fail. Challenges should be raised pre-court. Appeal or Alternative Dispute Resolution options should be used in time.
Under reg.36A of the CT Regs 1992 councils can quash liability orders. This valuation tribunal (VTE) decision (para 22–26) shows councils should delay liability order hearings if the VTE is considering a case. If a council pursues bankruptcy whilst an appeal about liability is in process, this might be a good reason to set aside a demand under Insolvency Rule 10.5(5).
Bad service of the demand
Canning v Irwin Mitchell LLP [2017] EWHC 718 (Ch) shows it’s worth checking how the demand was served.
Irwin Mitchell posted a demand at Canning’s business address in Bodmin having failed to serve in person. Canning lived in Southend and the business never opened. The High Court found the creditor hadn’t done ‘all that was reasonable’ to serve the demand (Insolvency Rule 10.2) and dismissed the petition.
The Insolvency Practice Direction (paras 11.2–12.7 of the current version) were critical. Irwin Mitchell hadn’t tried all the suggested steps in the practice direction. They could have arranged service through Canning’s solicitors. Advisers should check how a demand was served. Where personal service was not made were the steps in para 12.7 of the practice direction followed?
A word of warning though. In Gate Gourmet v Morby [2015] EWHC 1203 (Ch) Morby’s friend took the petition and binned it! The court found the petition was personally served as Morby was there and could have taken it out of the bin. In Ardawa v Uppal [2019] EWHC 456 (Ch) Uppal hadn’t served properly. However Ardawa misled Uppal about his address. The court used discretion to allow the bankruptcy order. It’s important to look at the conduct of both parties. Has the client done anything to avoid service?
Unreasonable refusal of an offer
There’s a legacy of bad outcomes for defendants in recent years. The bar is high when arguing the creditor has unreasonably refused an offer under s.271(3) IA 1986.
In Finnan v Finnan [2019] Sean offered offered further shares in the family business to Stephen. This was additional to charges that already secured the debt on property. This didn’t offer any more security than Stephen already had. Refusing this offer wasn’t unreasonable.
The courts need a strong offer to be put forward where funds are ready and security is free from other interests.
In Cooke v Dunbar Assets Plc [2016] EWHC 579 (Ch), Cooke offered to secure debt of £750,000 on his £175,000 interest in his matrimonial home. Cooke argued this was all he had so any ‘hypothetical creditor’ would accept. They’d be better off than making him bankrupt.
Cook lost. It was a low offer and his wife might refuse to sell. Dunbar would then need an order for sale which a court might not grant.
In Day v Refulgent [2016] EWHC 7 (Ch) Day appealed against a bankruptcy order for £30,000 legal costs. Day argued he’d arranged to sell two properties to a third party who’d give £35,000 up front. This was on the basis that Refulgent would release the properties from a freezing order they held. Refulgent’s solicitors asked for evidence of the third party’s solvency which wasn’t given. They agreed Day could vary the freezing order but he didn’t apply. Despite a possible solution there were too many issues so the petition was allowed.
So what is a good offer? In Re Garwood [2012] HMRC refused an offer to secure over £95,000 on Garwood’s interest in a property. The joint owner was bankrupt, had left the property and there was already an order for sale. After attracting buyers Garwood could raise enough to pay HMRC. This was better than a forced sale. There were no big obstacles so the petition was dismissed. The court outlined ten(!) principles for considering refusal of offers, paraphrased as:
- (The court must) consider ‘reasonable hypothetical creditors’ being in the same position as HMRC. They can consider if they are a similar type of creditor (e.g. are they a public creditor?)
- Look at the position at the start of the hearing including the history, matters taken into account by the creditor, and other developments
- The creditor is allowed to consider its policies, interests and costs. Rigid policies to refuse are not wrong but may not be reasonable
- The client must be open and give the creditor enough information to decide whether to accept an offer
So an offer must be evidenced. As far as possible, it should be free from barriers like joint owners unwilling to sell or unresolved negotiations. The test is that no reasonable creditor would refuse the offer.
The court must use its discretion properly
Despite the above cases (Garwood aside), the recent case of Ndyabahika v Hitachi Capital UK Plc [2021] EWHC 633 (Ch) offers a bit more hope. Ndyabahika didn’t make an offer to repay the petition debt until three weeks before the hearing. The offer was refused by Hitachi. In court, she supplied no evidence to show that her offer was realistic, nor did she oppose the petition in the proper way as per Insolvency Rule 10.18. Ndyabahika’s offer of £168 per month would clear the debt within 3.5 years, and she could sell her home as an alternative. The County Court gave the bankruptcy order, but this was set aside on appeal.
The High Court decided that the creditor was ‘put on notice’ of opposition given the late negotiations. Opposed petitions should be transferred to the nearest specialist court and this would have achieved a short adjournment for Ndyabahika to gather evidence. Procedure aside, personal circumstances such as Ndyabahika’s illness and return to work were relevant and the County Court had overlooked this. Additionally a house sale would have paid the debt at that point secured by a charging order. Proper use of discretion would have led to a short adjournment by the County Court rather than a bankruptcy order.
You can read our full write up on Adviser Online.
Bankruptcy as a debt collection tactic
There’s an argument that bankruptcy is a ‘class action’ to release property for all creditors. If enforcing a judgment would recover the debt then bankruptcy is wrong. However, unless the debt is disputed, the courts won’t see bankruptcy as an abuse.
In Sell Your Car With Us Ltd v Sareen [2019] EWHC 2332 (Ch) Sareen wound up Sell Your Car who owed him £30,000. After dismissing Sell Your Car’s counterclaim, Judge Burton said:
‘…an unpaid creditor of even a substantial and prosperous company, whose debt is not disputed, is entitled to petition for its winding up. I do not therefore accept the Applicant’s contention that insolvency proceedings should not be used as a method of debt collection.’
If the creditor is FCA regulated, CONC 7.3.14R and 7.3.15G might help. Combined, they say a firm shouldn’t make someone bankrupt without considering other options. They must act proportionately. The FCA’s principles for business are important. Principle 6 is cited in CONC 7 as being breached where firms act unfairly. Principle 5 might apply by comparison to fairer creditors.
Warning on costs
Amin v London Borough of Redbridge [2018] EWHC 3100 (Ch) (about a rescinded bankruptcy) is a warning that success might be expensive. Amin was made bankrupt for council tax debts. He’d delayed disputing them and raised various unsuccessful arguments at trial. He was found not liable and the bankruptcy rescinded, but was left with costs to pay for extending the case unnecessarily.
Summing up and five themes
Stopping bankruptcy is hard. Be realistic. These cases might give you some good ideas but every case turns on its facts. You’ll have to read the cases in full before using them.
There are some themes:
- Raise disputes quickly. The courts aren’t likely to revisit judgments or orders. Where appropriate use complaints, ombudsmen, appeals, and defend money claims
- When making offers, make sure the money is there to pay. If offering security, it’s better if it’s free from barriers to sale
- Check technicalities. Was the demand served properly? Is the creditor secured? Is the debt due immediately if s268(1)(a) IA 1986 is the basis of the demand? Does the demand contain everything it should under insolvency rules?
- Saying bankruptcy isn’t fair isn’t enough. Use rules, codes and creditor policies to back this up. The argument might still fail so prepare clients
- Stick to court rules and deadlines as this can help when relying on the court’s discretion
Graham O’Malley is a Debt Expert in the Expert Advice Team at Citizens Advice. Article updated on 30th March 2021.
