Bankruptcy - Statutory Demands, Petitions and Annulment - Same Disputed Debt Test?

Author: Simon Hill
In: Bulletin Published: Sunday 24 May 2020

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Where an alleged creditor seeks to make an alleged debtor bankrupt, the alleged debtor can object on the basis that the alleged debt is genuinely disputed (in essence, claiming ‘he is not my creditor’) either (i) when applying for an order setting aside any statutory demand served (should he elect to make such an application), or (ii) at the hearing of the bankruptcy petition itself. When deciding when to deploy the objection, at (i) or (ii)[1], the alleged debtor may be concerned to know whether the Court requires the creditor’s status as creditor to be established to the same 'level of substantiality'[2] (i.e. degree of certainty), or whether the test, the 'height of the hurdle'[3], is lower at one stage than the other. In a separate scenario, where a bankruptcy order has been made, and the bankrupt applies for an order annulling the bankruptcy order, the issue may arise as to whether the Court applies the same disputed debt test as at (i) and (ii)?

These questions were considered, and the position reaffirmed, in the case of Go Capital Limited v Jagdeep Singh Phull [2020] EWHC 1235 (Ch) (‘Go Capital’), a decision of Chief Insolvency and Companies Court Judge Briggs ('Chief ICCJ Briggs'), handed down on 13.5.20.

Before considering the facts and decision of Go Capital, it is useful to note some relevant provisions:

(1) Where an application is made for an order setting aside a statutory demand, Insolvency Rules 2016 r.10.5 applies; r.10.5(1) reads:

The court may grant the application if

(a) the debtor appears to have a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt specified in the statutory demand;

(b) the debt is disputed on grounds which appear to the court to be substantial;

(c) it appears that the creditor holds some security in relation to the debt claimed by the demand, and either rule 10.1(9) is not complied with in relation to it, or the court is satisfied that the value of the security equals or exceeds the full amount of the debt; or

(d) the court is satisfied, on other grounds, that the demand ought to be set aside.

(2) At the hearing of a bankruptcy petition, section 271(1) of the Insolvency Act 1986 applies, which reads:

‘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.

As there is an incorrect reference to section 271(4) in the Go Capital judgment, section 271(4) is quoted (so it can be discounted):

‘In determining for the purposes of this section what constitutes a reasonable prospect that a debtor will be able to pay a debt when it falls due, it is to be assumed that the prospect given by the facts and other matters known to the creditor at the time he entered into the transaction resulting in the debt was a reasonable prospect.’

(3) On an application for an order annulling a bankruptcy order, section 282 of the Insolvency Act 1986 applies, wherein section 282(1) reads:

‘The court may annul a bankruptcy order if it at any time appears to the court

(a) that, on any grounds existing at the time the order was made, the order ought not to have been made, or

(b) that, to the extent required by the rules, the bankruptcy debts and the expenses of the bankruptcy have all, since the making of the order, been either paid or secured for to the satisfaction of the court.’

While not addressed in Go Capital it is noted here that there is jurisdiction under section 375 of the Insolvency Act 1986, to rescind a bankruptcy order (see Yang v Official Receiver [2017] EWCA Civ 1465).

The Facts

In Go Capital, the alleged creditor served a statutory demand on the alleged debtor. No application was made for an order setting the statutory demand aside. The alleged creditor presented a bankruptcy petition. At the hearing of the petition, the alleged debtor denied that any sum was due from him to the alleged creditor - the petition basis, that the alleged debtor had guaranteed the debt owed by the principal debtor to the alleged creditor. Disputing his liability, the alleged debtor argued that:

(1) the purported liability was based on a sham transaction;

(2) the alleged debtor's signature had been forged; and

(3) the ‘guarantee’ was not in the form of a deed and no consideration had moved from the alleged creditor to the alleged debtor for it. The ‘guarantee’ therefore created no obligation upon the alleged debtor to pay the alleged creditor.

Same Test - Is there a Genuine Dispute?

Chief ICCJ Briggs addressed the issue, at paragraphs 24 to 26:

‘Section 271(4) (sic) of the Insolvency Act 1986 provides that no bankruptcy order may be made on a creditor's petition unless the court is satisfied (1) the debt in respect of which the petition has been presented was payable at the date of the petition or has subsequently become payable and (2) the debt has not been paid secured or compounded for. In this matter a statutory demand has been served but no application was made to set it aside. Consequently, no decision was made under r10.5 of the Insolvency Rules 2016 on the merits of the case. One of the grounds to set aside a statutory demand under the rule is if the debt is disputed on grounds which appear to the court to be substantial.

In Guinan III v Caldwell Associates [2004] BPIR 531, ChD Neuberger J (as he then was) held that there is no distinction between the test to be applied whether on an application to set aside a statutory demand, or on the hearing of a petition, or on an application to annul on the ground that it ought not to have been made. The test is whether there is a genuinely disputed debt. Neuberger J's reasoning is as follows [16]:

"I turn then to what at least to my mind is the central point in the case, which is whether or not Mr Caldwell has an arguable case. In this connection it is I think common ground, and consistent with what was said by Laddie J in para [60] of his judgment in Everard v The Society of Lloyd's [2003] EWHC 1890 (Ch), [2003] BPIR 1286, that:

"The court's assessment of the seriousness of the challenge should [not] differ from one stage to the other."

In other words, if there is what he called "a genuine triable issue" then, whether it is raised at the statutory demand stage, the petition stage, or the annulment stage, it is an equally valid point. However, as I mentioned, that is not the end of the matter in this case, because, even if there is a genuine triable issue, that does not automatically mean that I should annul the bankruptcy; I still have a discretion. But, subject to that, as I think [Counsel for the Petitioner], albeit sub silentio has accepted, the test is the same: is there a genuine dispute?”.

Decision on the Facts

On the facts in Go Capital, the Court found there was no substantial dispute on (1) sham, but did find a substantial dispute on whether the alleged debtor’s signature on the guarantee was forged (2), and a substantial dispute that the document was not a deed and no consideration was given and so no binding obligation arose to bind the alleged debtor (3). Chief ICCJ Briggs concluded, in Go Capital, at paragraph 48:

‘At the hearing of a bankruptcy petition the court may make an order for bankruptcy 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. I am not satisfied that the statements in the petition are true. There is at best a substantial dispute as to whether the debt claimed on the petition is due and at worst there is no debt. There is a substantial dispute regarding the signature of the Debtor and there is no contractual obligation for the debt stated on the petition.

Legal History

While Go Capital affirms the position, those interested in legal history may be interested to note that the law was not always so settled - the annulment stage might have had a different test to: (i) the statutory demand; and (ii) the petition stages. In Flett v. HMRC and Daly [2010] BPIR 1075; [2010] EWHC (Ch) ('Flett'), Mr Anthony Elleray QC (sitting as a deputy High Court judge) '...held that, on an application to annul, the burden of proof was on the debtor to demonstrate that, on the balance of probabilities, he did not owe the petition debt. It was not enough for a debtor to say at the time of an application for annulment that he had an arguable defence to the petition debt; he had to establish that he did not in fact owe the money.' (paragraph 17 of Re Payne [2015] B.P.I.R. 933 ('Payne')). This directly conflicted with the earlier Guinan III v Caldwell Associates [2004] BPIR 531 ('Guinan') judgment of Neuberger J (which had not, regrettably, been cited to Mr Anthony Elleray QC in Flett). In Payne, John Males QC (sitting as a deputy High Court judge) had to resolve the conflict, holding, at paragraphs 21-24:

'...I consider that I should adopt the approach taken by Neuberger J in Guinan.

First, while it does appear that the point was not argued by the parties in Guinan, so far as I can see the same applies to Flett. Secondly, neither Guinan nor Everard is referred to in the judgment of Mr. Elleray QC. Thirdly, the decision of Neuberger J drew on the reasoning of Laddie J in Everard. While I accept that Everard concerned a narrower point, it seems to me that what Laddie J said in that case in paragraph [60] was sound in principle and applies equally to the issue before me. He said “there is every reason why the height of the hurdle the debtor has to negotiate should be substantially the same at whichever stage he mounts his challenge” and there is “no reason why the debtor's challenge should have to reach a different level of substantiality when he challenges the debt … at the petition stage”. I respectfully agree. Fourthly, I agree with [Counsel for the Respondents] that what Mr Elleray QC says is ambiguous. Mr Elleray said “It may not be enough … for a debtor to say at the time of an application for an annulment: I had an arguable defence … ” I have added the emphasis because, as [Counsel for the Respondents] argued, Mr Elleray seems not to have been entirely sure of the position. Fifthly, the application of different tests to the different stages could, as [Counsel for the Respondents] argued, produce strange results. This case illustrates that very point in that the application of different tests to the same basic issue might lead to [the 1st Respondent Statutory Demandee] succeeding in setting aside the statutory demand, but [the 2nd Respondent Bankrupt] failing to set aside the bankruptcy order.

As to [Counsel for Appellant Petitioning Creditor's] points about the order operating against the world and the effect of the passage of time, in the case of an application to annul the Court has a discretion in that “The Court may annul … ”. If the passage of time or the operation of the order against third parties was shown in a particular case to have caused the sort of practical problems which [Counsel for Appellant Petitioning Creditor] referred to in her oral argument, then that is a matter which I expect that the Court would bear in mind in exercising its discretion and which might incline the Court against making an order.

Finally, I struggle to see how, on what will often be a summary procedure which could raise conflicting witness statements (and I appreciate, as [Counsel for Appellant Petitioning Creditor] reminded me, that an application could be made to cross-examine under rule 7.7A(2) of the IR) the Court might actually be able to decide disputed issues on the balance of probabilities.'[4]

Conclusion

Go Capital applies and affirms the position set down by Neuberger J in Guinan and consistent with Laddie J in Everard v The Society of Lloyd's [2003] EWHC 1890 (Ch), [2003] BPIR 1286, that at each of the 3 stages: (i) setting aside a statutory demand, (ii) on the hearing of the bankruptcy petition, and (iii) on an annulment of a bankruptcy order, the degree of certainty that the debt relied upon by the alleged creditor is well founded, is the same. The 'height of the hurdle', the 'level of substantiality' is the same. The debt must not be subject to substantial dispute (be a genuinely disputed debt), for in such circumstances, the alleged creditor's status as creditor is not sufficiently established, for the alleged creditor to initiate and pursue the bankruptcy process. Where the alleged debtor's challenge is successful, the alleged creditor's status as creditor/petitioning creditor '...would be undercut...' to use Marcus Smith J's phraseology in Gertner v CFL Finance Ltd [2020] EWHC 1241 (Ch), paragraph 3(1).

SIMON HILL © 2020

BARRISTER

33 BEDFORD ROW

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] Absent special or exceptional circumstances, arguments cannot be run repeatedly at separate stages of the bankruptcy procedure. See Harvey v Dunbar Assets Plc [2017] B.P.I.R. 450 and Turner v Royal Bank of Scotland Plc (Relitigation) [2000] B.P.I.R. 683, [2000] 6 WLUK 832 ('Turner'). The Turner Doctrine was considered by Marcus Smith J in Gertner v CFL Finance Ltd [2020] EWHC 1241 (Ch) ('Gertner'). In summary, where an application to set aside a statutory demand is made, the debtor will be prevented from running arguments in defence/objection to a subsequent petition, which he: (i) did run on the application to set aside the statutory demand; or (ii) could have run on the application to set aside the stautory demand (though did not). Marcus Smith J said in Gertner, at paragraph 51: 

'...the principle applies both where an argument was run on an application to set aside a statutory demand and where, on such an application, it could have been run.' [underlying in original]

In Coulter v. Chief Constable of Dorset Police (No 2) [2005] EWCA Civ 1113.  Chadwick LJ articulated the principle, at paragraph 22:

"The principle is not based on estoppel, whether of a Henderson v. Henderson nature or res judicata . It goes no further than this: (i) that it is indeed a waste of the court's time and the parties' money to rehearse arguments which have already been run and have failed; and (ii) that, in circumstances where it is desired to run arguments which have not already been run, then, as His Honour Judge Maddocks pointed out in Barnes v. Whitehead, the court will inquire why those arguments were not run at the time when they could, and should have been run." 

Marcus Smith J referred, at paragraph 50 of Gertner, to this passage in Coulter as one of the cases that made clear the true extent of the rule. Marcus Smith J said, to similar effect, is Adams v. Mason Bullock, [2004] EWHC 2910 (Ch) at [29] and EDF Energy Customers Ltd v. Re-Energised Ltd [2018] EWHC 652 (Ch) at [63].

Where no application to set aside the statutory demand is made, the Turner Doctrine has no application on the hearing of the petition. Marcus Smith J in Gertner said, at paragraph 48:

'...given that a debtor is not obliged to challenge a statutory demand... it seems to me to go too far to say that a debtor is precluded from raising a point in objection to a bankruptcy petition simply because he or she could have, but did not, apply to set aside the statutory demand that preceded the petition.'

Later, Marcus Smith J in Gertner said, at paragraph 51:

'...there is nothing to suggest that a debtor who simply declines to make an application, which he or she is under no obligation to make, is by that fact alone precluded from taking a point on the hearing of the petition.'

[2] Laddie J in Everard v The Society of Lloyd's [2003] BPIR 1286; [2003] EWHC 1890 (Ch) used this phraseology, when he said, at paragraph 60: “no reason why the debtor's challenge should have to reach a different level of substantiality when he challenges the debt … at the petition stage”.

Another phrase that might prove useful, is to ask of '...the well-foundedness, or otherwise, of these other grounds...' - as used in a completely different context by Fordham J in Hendron v Bar Standards Board [2020] EWHC 1255 (Admin), paragraph 28.

[3] Laddie J in Everard v The Society of Lloyd's [2003] BPIR 1286; [2003] EWHC 1890 (Ch) used this phraseology, when he said, at paragraph 60: “there is every reason why the height of the hurdle the debtor has to negotiate should be substantially the same at whichever stage he mounts his challenge".

[4] In Re Payne [2015] B.P.I.R. 933, John Males QC (sitting as a deputy High Court judge) concluded, at paragraph 83:

'In summary, my decision is as follows. On the first ground, I follow the approach of Neuberger J (as he then was) in Guinan.'