Adjourn for Time To Pay - Bankruptcy Hearing

Author: Simon Hill
In: Article Published: Wednesday 08 November 2017

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1. Where a creditors bankruptcy petition is well founded upon a sufficient unsecured debt (whether a judgment debt or a sum ordered to be paid, or non-set off debt (admitted or undisputable), or otherwise), and the proper procedure for bring the petition has been completed, the judgement debtor/respondent to the petition will have only a limited selection of grounds upon which he/she can resist the Bankruptcy Court adjudicating the judgment debtor as bankrupt.

2. This article will consider one ground for resisting the petition, namely, that the judgment debtor anticipates being able to pay off the sum founding the petition within a reasonable period of time. Readers should note that: (1) this article is part of a series of free-standing articles available on bankruptcy hearings; (2) the governing Insolvency Rules changed on 6th April 2017. Prior to that date, the Insolvency Rules 1986 applied, since then, the Insolvency Rules 2016 (SI 2016/1024) apply; readers will need to bear this in mind when considering older authorities; (3) debtors bankruptcy petitions now operate under a new separate scheme (see ss. 263H-263O of the Insolvency Act 1986); creditors are not involved in the presentation of the debtors bankrtupcy petition before the adjudicator (see Budniok v Adjudicator, Insolvency Service [2017] EWHC 368 (Ch), Registrar Baister, paragraphs 65-67)

The Governing Law

3. The Insolvency Rules 1986 provided in Rule 6.25(1), that the Court may at a bankruptcy hearing make a bankruptcy order where satisfied of certain conditions. Rule 6.25(1) read:

On the hearing of the petition, the court may make a bankruptcy order if satisfied that the statements in the petition are true, and that the debt on which it is founded has not been paid, or secured or compounded for.’

This has been superceded by Insolvency Rules 2016, Rule 10.24. Rule 10.24 (1) reproduces almost the exact wording:

'On the hearing of the petition, the court may make a bankruptcy order if satisfied that the statements in the petition are true, and that the debt on which it is founded has not been paid, or secured or compounded.'

4. Section 266(3) of the Insolvency Act 1986 provides:

The Court has a general power if it appears to it appropriate to do so, on the grounds that there has been a contravention of the rules or for any other reason, to dismiss a bankruptcy petition or stay proceedings on such a petition, and where it stays proceedings on a petition, it may do so on such terms and conditions as it thinks fit.’

5. Arden J in Westminster City Council v Parkin [2001] BPIR 1156 said at 1157B, that this ‘…gives the court an unusual but general power where there has been a contravention of the Rules or ‘for any reason’ to dismiss a petition or to stay proceedings on a petition.

6. In the recent case of Edginton v Sekhon [2015] EWCA Civ 816, the Court of Appeal found the power to adjourn a bankruptcy petition for time to pay, is in CPR r.3.1(2)(b), which reads: “Except where these Rules provide otherwise, the court may … (b) adjourn or bring forward a hearing.” (see Edginton, paragraphs 14 and 15). Separately, it can be noted that Rule 6.29, entitled ‘Adjournment’ provides ‘(1) If the court adjourns the hearing of the petition, the following applies’ before noting certain procedural requirements, thereby envisaging that a bankruptcy petition may be adjourned by the Court.

7. A convenient point to start with a review of the case law, is the case of Eberhardt v Mair [1995] 1 WLR 1180. In that case, Evans-Lombe J said at 1187:

‘On the hearing of the petition the court has a discretion whether or not to make a bankruptcy order or whether to adjourn the petition for further evidence etc. Where, however, the petitioner has complied with rule 6.25(1) by establishing the facts alleged in the petition and by proving that the petitioning debt remains outstanding the court should not adjourn the petition save for good cause such as the real anticipation of payment in the immediate future or the real prospect of either of the parties being able to adduce further relevant evidence…’

8. The purpose underlying this power to adjourn, is to avoid injustice. Evans-Lombe J in Eberhardt said at 1186:

…as rule 6.25(1) makes plain the making of a bankruptcy order is a matter of discretion. It has long been established that the bankruptcy court has a power and indeed a duty to ensure that a bankruptcy is not instituted in circumstances which amount to injustice…’

9. The basic test to be applied, when considering an application to adjourn for time to pay, was succinctly set down by Harman J in Re: Gilmartin [1989] 1 WLR 513. At 516, he said:

‘The registrar observed that a petitioning creditor is entitled to be paid his debt in full on the hearing of a petition unless it is adjourned on the ground that there is a reasonable prospect of him being paid within a reasonable time. In the circumstances of this case I think he was correct to take that as the basic test…

10. This Gilmartin decision was then relied upon in Re Micklethwait [2003] BPIR 101 and Harrison v Seggar [2005] EWHC 411 (Ch).

11. Peter Smith J in Re Micklethwait [2003] BPIR 101, at paragraph 10 said:

‘…where there is a valid debt and the correct formalities have been complied with, generally that will lead to the making of an order. A petition in those circumstances will generally only be adjourned for a short time, if there is a reasonable prospect of the debtor in effect coming to terms with the petitioner, by paying the debt and thus removing the petition — see Re: Gilmartin [1989], 1 WLR 513. …I stress that I have used the word ‘generally,' because the exercise is a discretionary one to be exercised in the circumstances in each case and according to the particular facts of each case.’

12. In Harrison v Seggar [2005] EWHC 411 (Ch), Blackburne J said at paragraph 7:

‘A petitioning creditor has a prima facie right to obtain a bankruptcy order on, as this was, a duly presented petition where the liability of the debtor for the petition debt is, as it is here, clearly established. Equally, the Court hearing the petition has a discretion to adjourn the petition for payment if, but only if, there is a reasonable prospect of the petition debt being paid in full within a reasonable time. See Re. Gilmartin [1989] 1 WLR, 513 at 516, and much subsequent authority to a similar effect. There must be credible evidence to support such a prospect if the Court is to grant an adjournment for payment.’

13. In Ross v Revenue and Customs Commissioners [2010] 2 All E.R. 126, after approving of the principles expounded in Harrison and Gilmartin, Henderson J identified that the first question was:

‘…whether there was credible evidence … to establish a reasonable prospect that the petition debts would be paid in full within a reasonable time…’

14. What are ‘reasonable prospects’ and ‘within a reasonable time’ depends on many factors. In Ross, Henderson J was moved to say, on the facts of the case before him, at 73:

‘In the context of the long-drawn out history of the petitions, and the adjournments which had already been granted, it seems to me that a reasonable time for payment in full of the petition debts could have been no more than a further two or three months at the most….In view of the past history of delay and broken promises, it was in my judgment appropriate to take a fairly hard line and to accord priority to HMRC's undoubted prima facie right to obtain bankruptcy orders over protestations that a further adjournment might finally yield the payment in full which had so signally failed to materialise in the past. Furthermore, the court would in my opinion have been justified in harbouring a suspicion that the predominant purpose of the adjournment, from the debtors' point of view, was to enable them to realise their assets at a time of their choosing in a difficult property market.'

15. Speaking of the registrar’s first instance decision, Henderson J in Ross gave an illustrative analysis as to whether or not certain factors ought to be material. At paragraph 74, Henderson J said:

‘…he was…right to have regard to the history of delay by the debtors in dealing with their tax affairs, the history of broken promises, and the history of the petition itself. I would, however, respectfully question the relevance of the two final matters to which he referred, namely the fact that the intervention (which gave rise to the terminal losses and the error or mistake claims) was not brought about by any act of HMRC, and the principle that taxpayers must pay their tax as and when it falls due. The fact that the intervention was external and had unexpected results was, if anything, a factor which told in favour of granting extra time for payment, although it was also relevant to bear in mind that four months had already elapsed since it took place. The principle that taxpayers must pay their tax as and when it falls due, although undoubtedly correct, was in my view completely irrelevant to the question whether these defaulting taxpayers should be granted a final opportunity to pay the petition debts in full within a reasonable time.’

16. In Dickins v Inland Revenue [2004] B.P.I.R. 718, Hart J dismissed an appeal against a bankruptcy order, one ground of the appeal was that, having found against the debtor on all other points, the Registrar should have acceded to the application that the petition be adjourned for 14 days to allow the debtor to pay the petition debt.

17. Hart J stated at paragraph 21 that the decision ‘whether or not to make the bankruptcy order on 5th March 2004 or to allow a further adjournment, was a matter which was, in the true sense, within the discretion of the Registrar.’

18. Hart J was critical of the debtor having made his application for an adjournment, at the last minute, unsubstantiated by proper financial evidence. Hart J said at paragraph 19:

‘The matter appears simply to have been left to 5th March when the debtor, as it seems to me, took the risk that the mere assertion by his counsel that money would be forthcoming within the next 14 days would be accepted at face value, and the court would be prepared to allow the petition simply to be adjourned to see whether or not that was the case.'

19. Hart J continued at paragraph 21:

‘The debtor had plainly taken the risk, having regard to the evidence, which he on legal advice had chosen to put before the court, and the evidence which he had chosen not to put before the court as to his means and ability to pay, that a bankruptcy order might be made be made that day’

20. Clearly advanced notification that a time to pay adjournment will be sought, both to the Court, and to the petitioning creditor, will avoid some of this criticism. Notification ought to be contained in the debtor’s formal notice of opposition [1];formerly required by Rule 6.21 (Form 6.19) of the Insolvency Rules 1986 (now r.10.18 of Insolvency Rules 2016). On the facts of Dickins however, no formal notice of opposition was filed and served by the debtor - so this opportunity was missed. However it was the overall lack of advance notification that mattered; the failure to fulfil the Rule 6.21 formality per se had ‘no substantive effect’ (paragraph 19).

21. A further consideration, was the collective nature of insolvency proceedings, at paragraph 20:

'The Registrar was plainly influenced against taking such a course by the consideration that the presentation of a bankruptcy petition is in principle a class action and not a mere debt collection procedure, and that this particular petition had been before the court on a number of occasions, and that he would [sic] was not prepared to allow the court's lists to be used simply for the purposes of investigating the debtor's ability to pay. As he pointed out, the debtor had a remedy in that event, namely to seek an annulment of the order under section 28.21(b).’

22. A similar, last minute, poorly evidenced application was made in Darbyshire v Turpin [2013] EWHC 954, and similarly, the appeal by the debtor against a refusal to adjourn to allow time to pay, was dismissed (however the appeal was allowed on other grounds). Arnold J said at paragraph 34:

‘The request was only raised in the skeleton argument and neither there or anywhere else did [the debtor] provide any indication of his ability to pay the petition debt if an adjournment were granted.’

23. Turning to the decision of the Court of Appeal in Edginton v Sekhon [2015] EWCA Civ 816, this case is important for a number of reasons.

24. Firstly, as mentioned earlier, the Court identified that the Court’s jurisdiction to adjourn for time to pay is from CPR r.3.1(2)(b)).

25. Secondly, the Court in Edginton sought to explain the conceptual differences between insolvency proceedings and an ordinary civil action, as thereby grounding a somewhat separate approach to adjournments in insolvency proceedings. The Court said at paragraphs 16 and 17:

'First, insolvency proceedings are class actions designed to secure distribution of an insolvent's assets pari passu between all his creditors. They are not merely a debt collection process. The primary purpose of the proceedings is to enable an independent person to ascertain and preserve the debtor's assets and to achieve that pari passu distribution.

Second, the presentation of a petition has the effect that any disposition of property made without the consent of the court by a person who is subsequently adjudicated bankrupt is void: see Insolvency Act 1986, section 284. Accordingly, delay in dealing with a petition is liable to have adverse consequences for creditors generally: see In re A Debtor (No 72 of 1982); Ex p Mumford Leasing Ltd v The Debtor [1984] 1 WLR 1143 applied in Judd v Williams [1998] BPIR 88.’

26. Thirdly, this conceptually different background was used to explain the practice that had evolved in relation to the granting of bankruptcy petition adjournments, where the debtor asks for time to pay. The Court said at paragraphs 18 to 20:

‘The starting point is that, if the petitioning creditor establishes that the statutory conditions are fulfilled, he is prima facie entitled to a bankruptcy order…The court, of course, has the power to adjourn the petition, but the practice is to do so only if there is credible evidence that there is a reasonable prospect that the petition debt will be paid within a reasonable time.

If the debtor does not produce any evidence of his ability to pay, he takes the risk that the court will not accept his bare assertion as to his means and ability to pay...

A decision whether or not to grant an adjournment is, of course, a discretionary case management decision and, consequently, the judge's exercise of his discretion in this case cannot be impugned on appeal except on the usual grounds for impeaching a judicial exercise of discretion.’

27. Fourthly, the Court of Appeal re-emphasised that the timing of the application to adjourn for time to pay, can materially affected the merits of the application itself. It rejected the argument that the fact that ‘the application for an adjournment was made at the very last minute is an irrelevant consideration…’ The Court said, at paragraph 22 to 25:

‘Delay is inimical to all forms of litigation and especially so in a collective enforcement process such as insolvency. In my judgment, the judge was entitled to take into account the very late stage which the application was made. Even in ordinary civil litigation, late applications are frowned upon, as are applications for adjournments which delay the final resolution of the case.

[the debtor] must have known that when the petition was listed for hearing, the expectation of [the petitioning creditors] and indeed the court would be that it would be finally disposed of at that hearing. The costs order on which the petition is based … had … remained unpaid for three years.

In addition, the modern litigation culture is to avoid surprise applications, so the fact that [the debtor’s] application came out of the blue was also relevant in the judge's exercise of his discretion.

During the course of his submissions to the judge, [the debtor] could have said that, in the event that the judge was against him on the substantive defence, he would ask for an adjournment in order to pay the petition debt and costs, but he did not. I do not consider that we should give any encouragement to tactical decisions of that sort.’

28. Fifthly, the Court also rejected at paragraphs 26 to 30 the submission that this ‘long-standing practice’ was wrong where the petition debt was modest and the debtor was a solicitor. The Court held that it was not wrong for a Judge to require ‘evidence of ability to pay. Even in the case of a modest debt owed by a professional person, without knowing about the overall liabilities, no court can be confident that the debt will, in fact, be paid within a reasonable time.’ It was merely speculation to suggest that, ‘…without knowing anything about either his assets or his other liabilities’, the Court should have found that it was ‘inconceivable’ that the debtor would have been unable to pay the debt within a reasonable period of time.

29. Sixthly, the Court highlighted the need for the application to contain a properly formulated proposal for the Court to consider. The Court said ‘…the difficulty for [the debtor] in the present case was that he had no formulated proposal about the time which he considered reasonable or the offer he proposed to make, let alone any evidence in support.’ However the absence of such a formulated proposal (or indeed supporting evidence) is not a bar to a first instance court acceding to the application. At paragraph 32, the Court acknowledged that ‘…an absence of any formulated proposal or evidence…’ might not prevent a Judge from lawfully exercising his discretion in favour of allowing the debtor a short adjournment to pay. However it was impossible to say the converse – that a refusal to adjourn in such circumstances was a wrong exercise of discretion. Earlier, at paragraph 26, the Court said:

‘While I accept that some judges might allow a short adjournment without requiring evidence of the debtor's ability to pay, I do not consider that this court should cast any doubt on the validity of this long-standing practice.’

30. Seventhly, it issued an important, wide ranging and concise Practice Note:

‘Since a petitioning creditor who establishes that the statutory conditions are fulfilled is prima facie entitled to a bankruptcy order, the court's practice is to adjourn the petition in the exercise of its jurisdiction under CPR r 3.1(2)(b) only if there is credible evidence that there is a reasonable prospect that the petition debt will be paid within a reasonable time. If the debtor does not produce any evidence of his ability to pay he takes the risk that the court will not accept a bare assertion as to his means and ability to pay. Since a court's decision whether or not to grant such an adjournment is a discretionary case management decision it cannot be impugned on appeal except on the usual grounds for impeaching a judicial exercise of discretion. Delay being inimical to all forms of litigation, and especially so in a collective enforcement process such as insolvency, a court is entitled to take into account the very late stage of an application to adjourn. It is not wrong for a judge to require evidence of ability to pay: even in the case of a modest debt owed by a professional person, no court can be confident that the debt will be paid within a reasonable time without knowing about the overall liabilities owed…’

31. Edginton has since been affirmed in Day v Refulgent Ltd [2016] EWHC 7 (Ch), [2016] All ER (D) 21 (Jan), a decision of Judge Behrens sitting as a Judge of the High Court. The case of Day illustrates the judicial analysis process required when a debtor presents evidence of supposedly future sources of funds, sufficient to pay off the petition debt. The Court said that each source put forward must be considered both in terms of: (a) whether it amounts to a realistic source of funds; and (b) whether such funds will be made available to the debtor within a reasonable period of time (see paragraphs 58 to 62).

32. Surprisingly, adjourning in order to give the debtor time to pay, appears to have been missed at first instance in Adetula v Barking and Dagenham LBC [2017] EWHC 2279 (Ch), where a bankruptcy order was made at the first hearing, 4 days before a final payment was due to complete the paying off of the petiton debt. Adjourning for time to pay was briefly touched on in Messenger v Revenue and Customs Commissioners [2017] WL 09479189, paragraphs 5 to 8. 

Previous Authorities as Illustrations of how Discretion has been Exercised

33. Each case will have its own unique set of facts. This limits the use that is to be gained from of reference to how the discretion has been exercised in previous cases. Such authorities are not straitjackets as to how the discretion should be exercised - they are illustrative only. Indeed Peter Smith J in Re Micklethwait went further, and stated at paragraph 11:

‘Earlier cases as to when petitions have been adjourned or dismissed under such a discretionary power are of no re-assistance, except in drawing to my attention the fact that I have a discretionary power. It is the facts of each case, which indicate how, if at all, the discretion should be exercised.’

The Debtor Challenging a Refusal to Adjourn

34. Should the Court refuse an application to adjourn, and the debtor appeals that refusal, it is important to note the constraints on the appeal court interfering with the decision of the court below. As has been expressed in various extracts above, the decision whether to adjourn is a discretionary decision. As to the scope for an appeal court to interfere with that exercise of discretion, Lord Woolf MR in Phonographic Performance Ltd v AEI Rediffusion Music Ltd [1999] 1 WLR 1507 set down well-known principles at 1523C-D:

‘Before the court can interfere it must be shown that the judge has either erred in principle in his approach or has left out of account, or has taken into account, some feature that he should, or should not, have considered, or that his decision is wholly wrong because the court is forced to the conclusion that he has not balanced the various factors fairly in the scale.’

SIMON HILL © 2017

BARRISTER

33 BEDFORD ROW

[1] The long name for Form 6.19, under the Insolvency Rules 1986, was 'Notice by Debtor of Intention to Oppose Bankruptcy Petition.

NOTICE: This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.