Bankruptcy Petitions - Petitioner Substitution r.10.27 and Change of Carriage r.10.29

Author: Simon Hill
In: Article Published: Thursday 14 October 2021

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In England and Wales, there should only be one bankruptcy petition against a debtor at any one time. As stated in Re Maud [2020] EWHC 1469 (also known as Edgeworth Capital (Luxembourg) Sarl v Maud)('Re Maud'), by Snowden J, at paragraph 98:

‘Consistent with the principle that a bankruptcy petition is a class remedy, the legislation, rules and court practice are generally based upon the notion that there should only be one petition against a debtor at any one time.'

Re Maud itself was actually an unusual case[1] in that there were two bankruptcy petitions pending against the same debtor; but this situation should arise only rarely. As Snowden J said in Re Maud, at paragraph 98:

‘Bankruptcy petitions can be presented by one or more creditors under section 264(1)(a) of the 1986 Act, and they are required to be presented in a particular court by Insolvency Rule 10.11 so that an attempt to present a second petition should be detected.' [2]

In Robertson v Wojakovski [2020] EWHC 2737 (Ch)('Robertson'), Zacaroli J said, at paragraph 15:

'Where a creditor wishing to pursue bankruptcy proceedings against a debtor discovers that another bankruptcy petition has already been presented, then the usual course is for that creditor to give notice of intention to support the petition (under Rule 10.19) rather than to present its own petition.'

Where there is only one Petition
Where there is only one pending bankruptcy petition against a debtor, the petitioner (whether a single creditor or more) will pursue it in the normal way, perhaps with other creditors appearing as supporting or opposing creditors (as the case maybe). However, there may come a time when the petitioner no longer wishes/cannot continue the petition, no longer seeks a bankruptcy order, or simply does not attend to pursue the petition. At this point, it maybe that one of the supporting creditors will wish to take over the existing petition from the original petitioner.

As Snowden J went on to say in Re Maud, at paragraph 98, in such circumstances:

‘There are … provisions for a supporting creditor to be substituted for the original petitioner under Insolvency Rule 10.27 (e.g. if the original petitioner wishes to withdraw the petition) or for a change of carriage of the petition under Insolvency Rule 10.29 (e.g. if the original petitioner neglects to prosecute the petition).’

This article will consider these two rules - for substitution and change of carriage - notwithstanding the paucity of reported cases in this area[3].

Corporate Insolvency
While not the focus of this article, in corporate insolvency, there is, in respect to winding up petitions, (just) r.7.17 - substitution of creditor or contributory for petitioner[4].

Rule 10.27 - Substitution of Bankruptcy Petitioner

Insolvency Rules 2016, r.10.27 is entitled ‘Substitution of petitioner’ and reads:

‘(1) This rule applies where the petitioner

(a) is subsequently found not to have been entitled to present the petition;

(b) consents to withdraw the petition or to allow it to be dismissed;

(c) consents to an adjournment;

(d) fails to appear in support of the petition when it is called on in court on the day originally fixed for the hearing, or on a day to which it is adjourned; or

(e) appears, but does not apply for an order in the terms of the petition.

(2) The court may, on such terms as it thinks just, substitute as petitioner a person who

(a) has delivered a notice under rule 10.19 of intention to appear at the hearing;

(b) is willing to prosecute the petition; and

(c) was, in the case of a creditor, at the date on which the petition was presented, in such a position in relation to the debtor as would have enabled the creditor on that date to present a bankruptcy petition in relation to a debt or debts owed to that creditor by the debtor, paragraphs (a) to (d) of section 267(2) being satisfied in relation to that debt or those debts.’[5]

Gateways
For r.10.27 to apply, one of the gateway circumstances set out in r.10.27(1)(a) to (e) must exist. The 5 gateways require little explanation as they are self-explanatory.

Eligible to be substitute Petitioner
Where (at least) one gateway circumstance arises, the next issue to consider is whether the applicant (creditor; would-be petitioner; sometimes called 'named person' or 'relevant person') is eligible to be a substitute petitioner, under r.10.27(2). To be eligible, the 3 qualifying criteria set out in r.10.27(2)(a) to (c) must be satisfied. These 3 qualifying criteria are cumulative. For a person to be eligible, all 3 must be satisfied.

Taking these in turn.

Criteria (a) - Notice of an Intention to Appear the Hearing
The applicant/would-be petitioner must have delivered a r.10.19 notice of an intention to appear at the hearing;

Insolvency Rules 2016, r.10.19 is entitled ‘Notice by persons intending to appear’ and reads:

‘(1) A creditor who intends to appear on the hearing of the petition must deliver a notice of intention to appear to the petitioner.

(2) The notice must contain the following

(a) the name and address of the person, and any telephone number and reference which may be required for communication with that creditor or with any other person (also to be specified in the notice) authorised to speak or act on the person’s behalf;

(b) the date of the presentation of the bankruptcy petition and a statement that the notice relates to the matter of that petition;

(c) the date of the hearing of the petition;

(d) in the case of a creditor, the amount and nature of the debt due from the debtor to the creditor;

(e) whether the person intends to support or oppose the petition;

(f) where the person is represented by a solicitor or other agent, the name, postal address, telephone number and reference number (if any) of that person and details of that person’s position with or relationship to the creditor; and

(g) the name and postal address of the petitioner.

(3) The notice must be authenticated and dated by the person delivering it.

(4) The notice must be delivered to the petitioner or the petitioner’s solicitor at the address shown in the court records.

(5) The notice must be delivered so as to reach the petitioner (or the petitioner’s solicitor) not later than 4pm on the business day before that which is appointed for the hearing (or, where the hearing has been adjourned, for the adjourned hearing).

(6) A person who fails to comply with this rule may appear and be heard on the hearing of the petition only with the permission of the court.’

The Court can waive this requirement, as indicated in Islandsbanki HF v Stanford [2019] EWHC 595 (Ch); [2019] BPIR 876 (‘Islandsbanki’), where HMRC sought to be substituted for a bank (Islandsbanki HF) as petitioning creditor. ICC Judge Jones said, at paragraph 92

‘HMRC is identified as a supporting creditor on the list before me but it would be right if necessary in any event to waive the requirement of delivery of a notice of intention to appear in the circumstances of HMRC's existing petition and the procedure to date.’

Criteria (b) - Express a willing to prosecute the petition
The applicant/would-be petitioner must express a willingness to prosecute the petition if they are substituted in as petitioner. A simple statement in Court, that the applicant/would-be petitioner is so willingness, should be sufficient for this.

Criteria (c) - Could have Presented Petition Originally
The applicant/would-be petitioner must be able to demonstrate that, on the date the original petition was presented, they could have properly presented their own petition.

Three observations:

(1) The date used is the date the original petition was presented, not the date of the substitution hearing. In contrast, the equivalent rule in corporate insolvency, r.7.17 of the Insolvency Rules 2016, uses the date of the hearing of the application for substitution[6]; and

(2) applicant/would-be petitioner will need to served, suitably prior to the original petition presentation date, a statutory demand or have a return of the enforcement officer or enforcement agent;

(3) an example of the Court applying Criteria (c), albeit where the point had been conceded, can be found in Islandsbanki, where ICC Judge Jones said, at paragraphs 92 and 93:

‘In the circumstances of my decision that Islandsbanki HF was not able to rely upon the purported execution of its judgment debt, it was right to substitute HMRC as a creditor whom it was accepted without issue was able to present a petition at the date of presentation of Islandsbanki HF's petition.

The requirements of Rule 10.27 of the Rules were met.’[7]

Contents of Order for Substitution
Where the Court determines that it should substitute in the applicant/now substitute petitioner, r.10.28 of the Insolvency Rules 2016 sets out what the order for substitution must contain. r.10.28 is entitled ‘Order for substitution of petitioner’ and reads:

‘(a) identification details for the proceedings;

(b) the date of the hearing of the petition;

(c) the name of the original petitioner;

(d) the name of the person who is willing to prosecute the petition (“the named person”);

(e) a statement that the named person meets the requirements of rule 10.27(2);

(f) details of the statutory demand or return of the enforcement officer or enforcement agent;

(g) the following orders–

(i) that upon payment by the named person of the statutory deposit to the court the statutory deposit paid by the original petitioner to the court be repaid to the original petitioner by the official receiver,

(ii) that the named person be substituted as petitioner in place of the original petitioner and that the relevant person may amend the petition accordingly,

(iii) that the named person must within five business days from the date of the order file a copy of the amended petition together with a statement of truth verifying the amended petition,

(iv) that at least 14 days before the date of the adjourned hearing of the petition the named person must serve upon the debtor a sealed copy of the amended petition,

(v) that the hearing of the amended petition be adjourned to the venue specified in the order, and

(vi) that the question of the costs of the original petitioner and of the statutory deposit (if appropriate) be reserved until the final determination of the amended petition;

(h) the venue of the adjourned hearing; and

(i) the date of the order.’[8]

Prospect of Undisputed Supporting Creditor being Substituted for Petitioner

It is worth noting that in one particular set of circumstances, the mere prospect of a supporting creditor being substituted for an original petitioner can have an affect on the Court's approach to the petition, pre-substitution. Where a debtor admits it has no defence to the petition founded upon the original petitioner's debt or (in the event of substitution) the supporting creditor's/would-be petitioner's debt, but the debtor seeks an adjournment of the petition for time to pay the original petitioner's debt, on the basis there is a reasonable prospect of it paying the original petition debt within a reasonable period of time (but it admits it has no similar prospect with the supporting creditor's/would-be petitioner's debt), this would justify the Court refusing the debtor's application for an adjournment. In Robertson, Zacaroli J set out the law as follows, at paragraph 15:

'If a debtor was able to pay the petitioning creditor, but not the supporting creditor, then the inevitable result of an adjournment to allow payment to be made to the former would be that the supporting creditor would apply to be substituted at the adjourned hearing. At that point (assuming there was no other defence as against the supporting creditor) a bankruptcy order would likely be made because the debtor could not pay the newly substituted petitioning creditor. Such an outcome would conflict with the class nature of bankruptcy, as it would result in payment in full to one creditor in preference to the supporting (and any other) creditor. In the event that a bankruptcy order was indeed made on the adjourned hearing, the payment made to the petitioning creditor would itself constitute a void disposition, unless consented to or ratified by the court, under s.284 of the Insolvency Act 1986. For these reasons, I consider that in order to justify an adjournment of the petition in this case, [the debtor] would need to provide credible evidence of his ability to pay within a reasonable time both the petition debt and the debt due to the supporting creditors.'[9]

It might be said that this broad statement requires some refinement - since a payment made to the petitioning creditor is not always void - if it is paid to the petitioning creditor direct from a third party, not via the debtor, it does not at any point form part of debtor's estate, and so is not vulnerable to later being rendered void; see Re Hood; Hood v JD Classics Ltd [2020] EWHC 3232 (Ch)

Rule 10.29 - Change of Carriage - Carriage of the Petition in place of the Petitioner

Insolvency Rules 2016, rule 10.29 is entitled 'Change of carriage of petition' and subrules (1) to (5) read:

'(1) On the hearing of the petition, a person who has delivered notice under rule 10.19 of intention to appear at the hearing, may apply to the court for an order giving that person carriage of the petition in place of the petitioner, but without requiring any amendment of the petition.

(2) The court may, on such terms as it thinks just, make a change of carriage order if satisfied that

(a) the applicant is an unpaid and unsecured creditor of the debtor; and

(b) the petitioner either–

(i) intends by any means to secure the postponement, adjournment, dismissal or withdrawal of the petition, or

(ii) does not intend to prosecute the petition, either diligently or at all.

(3) The court must not make such an order if satisfied that the petitioner’s debt has been paid, secured or compounded by means of

(a) a disposition of property made by some person other than the debtor; or

(b) a disposition of the debtor’s own property made with the approval of, or ratified by, the court.

(4) A change of carriage order may be made whether or not the petitioner appears at the hearing.

(5) If the order is made, the person given the carriage of the petition is entitled to rely on all evidence previously provided in the proceedings.'

Gateway - Positive and Negative Requirements
For a r.10.29 change of carriage order to be available, the applicant (called the 'relevant person')/circumstances must cumulatively satisify r.10.29 (1) and (2), and not satisfy (3). In addition, it is made clear that the attendance of the original petitioner at Court does not bar a change of carriage order being made.

Unamended Petition - Original Petition Debt continues to Found it.

|n the event that the application for a change of carriage order is successful, the Petition will not be amended (by contrast, the petition is typically amended under r.10.28 (g)(ii) after substitution occurs under r.10.27). Consequently, the applicant/relevant person will, following the change of carriage order, be pursuing the original petition - as founded upon the original petitioner's debt. To be clear, the applicant/relevant person will not be pursuing the petition on the applicant/relevant person's debt. This is why: (a) subrule (5) entitles the applicant/relevant person to rely upon evidence already within the petition proceedings - evidence which will relate to the original petition debt; and (b) no change of carriage order can be made when the original petition debt has, in effect, been met - as per subrule (3). An original petition debt that has already been secured, compounded, or paid off (by a non-potentially void payment[10]), cannot result in a bankruptcy order under section 271(1) of the Insolvency Act 1986[11]. See Chadwick J in Re Purvis [1997] 3 All E.R. 663 as against Laws LJ and Jonathan Parker J in Smith v Ian Simpson & Co [2001] Ch. 239 in the Court of Appeal.

Contents of Change of Carriage Order

As to the contents of any change of carriage order, r.10.29(6) provides:

'(6) The change of carriage order will contain

(a) identification details for the proceedings;

(b) the date of the hearing of the petition;

(c) the name of the person who is willing to be given carriage of the petition (“the relevant person”);

(d) a statement that the relevant person is a creditor of the debtor;

(e) the name of the original petitioner;

(f) a statement that the relevant person has applied for an order under this rule to have carriage of the petition in place of the original petitioner;

(g) the order that the relevant person must within a period which is specified in the order serve upon the debtor and the original petitioner a sealed copy of the order;

(h) the order that the further hearing of the petition be adjourned to the venue specified in the order;

(i) the venue of the adjourned hearing;

(j) the order that the question of the costs of the original petitioner be reserved until the final determination of the petition; and

(k) the date of the order.'

SIMON HILL  © 2021

BARRISTER

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.

[1] Islandsbanki HF v Stanford [2019] EWHC 595 (Ch); [2019] BPIR 876 (‘Islandsbanki’) is another unusual case where a single debtor faced multiple bankruptcy petitions. In Re Maud [2020] EWHC 1469 ('Re Maud') it was 2 bankruptcy petitions, whereas in Islandsbanki it was 3 bankruptcy petitions. In Re Maud, the petitioners were: (1) an Icelandic bank; (2) HMRC and (3) a company (Shineclear).

[2] However, second (or third etc) petitions are potentially harder to detect in personal insolvency, compared to corporate insolvency, due to the fact that in corporate insolvency there is a requirement to advertise (technically known as notice) whereas no such requirement exists in respect to a personal insolvency petition.

[3] In addition to the authorities referred to this  article, see also Flett v Revenue and Customs [2010] EWHC 2662 (Ch), [2010] BPIR 1075 ('Flett'), a decision of Anthony Elleray QC sitting as a deputy High Court Judge. Note Flett was not applied in Re Payne [2015] EWHC 968 (Ch) in respect to what Flett said about the test to be applied on an annulment application.

[4] In corporate insolvency, there is Insolvency Rules 2016, r.7.17, entitled ‘Substitution of creditor or contributory for petitioner’; which reads:

‘(1) This rule applies where the petitioner

(a) is subsequently found not to have been entitled to present the petition;

(b) fails to give notice of the petition in accordance with rule 7.10;

(c) consents to withdraw the petition, or to allow it to be dismissed, consents to an adjournment, or fails to appear in support of the petition when it is called on in court on the day originally fixed for the hearing, or on a day to which it is adjourned; or

(d) appears, but does not apply for an order in the terms requested in the petition.

(2) The court may, on such terms as it thinks just, substitute as petitioner

(a) creditor or contributory who in its opinion would have a right to present a petition and who wishes to prosecute it.

(b) [omitted]’

For completeness, r.7.18 is entitled ‘Order for substitution of petitioner’ and reads:

An order for substitution of a petitioner must contain

(a) identification details for the proceedings;

(b) the name of the original petitioner;

(c) the name of the creditor or contributory (“the named person”) who is substituted as petitioner;

(d) a statement that the named person has requested to be substituted as petitioner under rule 7.17;

(e) the following orders–

(i) either

(aa) that the named person must pay the statutory deposit to the court and that, upon such payment being made, the statutory deposit paid by the original petitioner is to be repaid to the original petitioner by the official receiver, or

(bb) where the named person is the subject of a notice to the court by the Secretary of State under rule 7.7(2)(b) (notice of alternative arrangements for the payment of deposit) that the statutory deposit paid by the original petitioner is to be repaid to the original petitioner by the official receiver;

(ii) that the named person be substituted as petitioner in place of the original petitioner and that the named person may amend the petition accordingly,

(iii) that the named person must within a period specified in the order file a statement of truth of the statements in the amended petition,

(iv) that not later than before the adjourned hearing of the petition, by a date specified in the order, the named person must serve a sealed copy of the amended petition on the company and deliver a copy to any other person to whom the original petition was delivered,

(v) that the hearing of the amended petition be adjourned to the venue specified in the order, and

(vi) that the question of the costs of the original petitioner and of the statutory deposit (if appropriate) be reserved until the final determination of the amended petition;

(f) the venue of the adjourned hearing; and

(g) the date of the order.'

[5] Section 267 of the Insolvency Act 1986 is entitled 'Grounds of creditor’s petition' and subsection (2), along with subsection (1), read:

'(1) A creditor’s petition must be in respect of one or more debts owed by the debtor, and the petitioning creditor or each of the petitioning creditors must be a person to whom the debt or (as the case may be) at least one of the debts is owed.

(2) Subject to the next three sections, a creditor’s petition may be presented to the court in respect of a debt or debts only if, at the time the petition is presented

(a) the amount of the debt, or the aggregate amount of the debts, is equal to or exceeds the bankruptcy level,

(b) the debt, or each of the debts, is for a liquidated sum payable to the petitioning creditor, or one or more of the petitioning creditors, either immediately or at some certain, future time, and is unsecured,

(c) the debt, or each of the debts, is a debt which the debtor appears either to be unable to pay or to have no reasonable prospect of being able to pay, and

(d) there is no outstanding application to set aside a statutory demand served (under section 268 below) in respect of the debt or any of the debts.'

[6] Insolvency Rules 2016, r.7.17 provides:

(2) The court may, on such terms as it thinks just, substitute as petitioner

(a) creditor or contributory who in its opinion would have a right to present a petition and who wishes to prosecute it.’

The key phrase being ‘…would have a right to present a petition…’. Quite why there is a difference of approach as to the relevant date, as between personal insolvency and corporate insolvency, is unclear.

[7] By way of background, in Islandsbanki HF v Stanford [2019] EWHC 595 (Ch); [2019] BPIR 876, Islandsbanki HF had presented and was pursuing a bankruptcy petition against the debtor Mr Standford. However, ICC Judge Jones determined that ‘…Islandsbanki HF was not able to rely upon the purported execution of its judgment debt’ (paragraph 92). A decision unsuccessfully appealed before Fancourt J in Islandsbanki HF v Stanford [2019] EWHC 1818 (Ch) and the Court of Appeal in Islandsbanki HF v Stanford [2020] EWCA Civ 480.

[8] The formalities and steps in r.10.28(g) do not always have to be applied. In Islandsbanki HF v Stanford [2019] EWHC 595 (Ch); [2019] BPIR 876, ICC Judge Jones made the substitution and went on simply to make the bankruptcy order. ICC Judge Jones said, at paragraph 93:

The requirements of Rule 10.27 of the Rules were met. I decided HMRC's petition should stand as the amended form of the Islandsbanki HF petition. There was no point in requiring actual amendment, verification or re-service. There was no point in adjourning the petition. The papers were in order and these are main proceedings. HMRC asked for a bankruptcy order and one was made in the exercise of the court's discretion at 15.39.’

[9] In Robertson v Wojakovski [2020] EWHC 2737 (Ch), Zacaroli J summarised his conclusion, at paragraph 42:

'...even if the petition debt itself could be repaid within a reasonable period, I conclude that inability to repay the debt owed to the supporting creditors within a reasonable time would justify the refusal of an adjournment of the petition in order to afford [the debtor] time to pay.'

[10] This relates to whether, in the event of a bankruptcy order being made on the original petition, the payment will be void or not:

(i) An (unapproved by the court and unratified by the Court) payment made from the debtor's estate to the original petitioner, after the date of the original petition was presented, will be void from the moment the bankruptcy order is made;

Whereas:

(ii) An approved by the court or ratified by the Court payment made from the debtor's estate to the original petitioner, after the date of the original petition was presented, will not be void upon the bankruptcy order being made;

(iii) a payment made by a third party using the third party's own money, to the original petitioner, after the date of the original petition was presented, will not be void upon the bankruptcy order being made. See Re Hood; Hood v JD Classics Ltd [2020] EWHC 3232 (Ch) for discussion and detail on this point.

[11] Section 271 of the Insolvency Act 1986 is entitled 'Proceedings on creditor’s petition' and provides:

'(1) The court shall not make a bankruptcy order on a creditor’s petition unless it is satisfied that the debt, or one of the debts, in respect of which the petition was presented is either

(a) a debt which, having been payable at the date of the petition or having since become payable, has been neither paid nor secured or compounded for, or

(b) a debt which the debtor has no reasonable prospect of being able to pay when it falls due.'