INTRODUCTION
Bankruptcy proceedings may not be used or threatened for the purpose of obtaining some collateral advantage. This is known as 'the Rule in Bankruptcy'.
The Rule in Bankruptcy ('RIB') applies to both: (1) statutory demands; and (2) bankruptcy petitions.
Violation of RIB may mean that:
(1) the (personal insolvency) statutory demand is liable to be set aside (on an application by the debtor/statutory demandee under r.10.5(5)(d)[1] of the Insolvency (England and Wales) Rules 2016 ('2016 Rules'), for an order setting aside the statutory demand); or, (as the case may be),
(2) the bankruptcy petition should be dismissed (as a exercise of discretion by the Court, pursuant to section 266(3) of the Insolvency Act 1986 ('1986 Act')[2])
Proper Advantages
Legal proceedings should be used to obtain the advantages (remedies/relief) they are designed to bestow/provide. Bankruptcy proceedings are designed to bestow/provide (if the applicable critieria is met) a bankruptcy order (with all that flows from that order). The proper (or lawful) purpose of bankruptcy proceedings is to obtain a bankruptcy order. The concept of the 'proper purpose' for obtaining a bankruptcy order, for a creditor, includes:
(a) so that the creditor might receive his due dividend[3] for the debt he holds, from the bankrupt estate - this is the usual 'proper purpose';
but also, the concept of 'proper purpose' is broad enough to include,
(b) ''the proper administration’ of the debtor's assets within the meaning of that phrase as used by Harman J in the Re a Company No. 001573 of 1983' (Shepherd v Legal Services Commission [2003] BPIR 140, 146-147); an element of which is,
(c) 'the appointment of an objective, independent officer of the court, able to investigate and make a professional and dispassionate assessment of the merits of continuing to pursue (and devote assets to the pursuit of) proceedings, including proceedings against the petitioner himself: that is, or may be, an aspect of the proper administration of the debtor's assets;' (Al Rostamani v Haddad [2025] EWHC 2000 (Ch), paragraph 46.3)[3a]
These are the 'proper advantages' from the bankruptcy process.
Collateral Advantages
The 'proper advantages' from the bankruptcy process are not the only 'advantages' that can arise from threatening or using (both before and after the bankruptcy order) the bankruptcy process. Other, collateral advantages, can be gained. Creditors of the debtor may realise this, and be tempted to threaten or use the bankruptcy process, not to obtain any proper advantage(s) (or at least, not exclusively), but to (also) obtain the collateral advantage(s) too. Threatening or using the bankruptcy process with the purpose of obtaining a collateral advantage will render that purpose, an 'improper purpose' - which can (though might not) render the threatened use/use of the bankruptcy process, an abuse of process/violation of RIB.
Nomenclature
Various words are used to describe the impermissible purpose of seeking to gain some collateral advantage(s) from the threat of, or use of, the bankruptcy process. This impermissible purpose is sometimes called the 'improper purpose', 'ulterior purpose', 'extraneous purpose', 'collateral purpose', 'illegitimate purpose' or 'unlawful purpose'. And sometimes it is the person's 'reason', 'motivation' etc. for using the bankruptcy process. So it might be said that the petitioner has an 'illegitimate motive' or 'ulterior motive', or a 'extraneous reason', for seeking the bankruptcy order. In one early case (re Majory [1955] Ch 600), referred to below, the word 'extortion' as used. For consistency and brevity, in this article, unless quoting from a case, the label 'improper purpose' will be used.
IMPROPER PURPOSE - 2 MAIN AREAS
A creditor might seek to gain some collateral advantage at various stages of the bankruptcy process. In Re Swindon Town Football Co Ltd [2022] EWHC 2071 (Ch) ('Swindon Town'), Deputy ICC Judge Baister said, at paragraph 35:
'...the presentation of a petition by a person who has an undisputed debt will only be an abuse in two situations:
"The first is where the petitioner does not really want to obtain the liquidation or bankruptcy of the company or individual at all, but issues or threatens to issue the proceedings to put pressure on the target to take some other action which the target is otherwise unwilling to take. The second is where the petitioner does want to achieve the relief sought but he is not acting in the interests of the class of creditors of which he is one or where the success of his petition will operate to the disadvantage of the body of creditors" (Maud v Aabar Block Sarl (supra)).' The reference to here is to Maud v Aaber Block Sarl [2015] BPIR 819.
Though referring to 'the presentation of a petition' stage, this would seem to have wider resonance.
Swindon Town therefore identifies two instances of creditors/petitioners seeking to take a collateral advantage, namely, where:
(1) '...the petitioner does not really want to obtain the liquidation or bankruptcy of the company or individual at all, but issues or threatens to issue the proceedings to put pressure on the target to take some other action which the target is otherwise unwilling to take'. The question this invokes, for determination is: does the petitioner genuinely wish to put the debtor into bankruptcy; and
(2) '...the petitioner does want to achieve the relief sought but he is not acting in the interests of the class of creditors of which he is one or where the success of his petition will operate to the disadvantage of the body of creditors' . The question this invokes, for determination is: what are the general body of creditors' interests/relevant class of creditors' interests, and is the petitioner acting contrary to them/to their disadvantage?[4]
KING
This area was recently considered in the case of King v Bar Mutual Indemnity Fund [2023] EWHC 1408 (Ch) ('King'), a decision of HHJ Kelly sitting as a Judge of the High Court, on whether statutory demands should be set aside for violating the RIB.
The Facts
In King, the Kings (3 people) were ordered to make a payment on account of costs, at the same time as a detailed assessment of costs was ordered (following the Kings claim for unlawful means conspiracy being struck out). The beneficiary (the receiving party) of the interim payment on account of costs ('IPOAOC') order, a barrister, assigned the benefits of that IPOAOC order, to the Bar Mutual Indemnity Fund ('BMIF') (which is the insurer for all barristers). BMIF served statutory demands on the Kings, each statutory demand founded upon non-payment of the IPOAOC order. The Kings applied for an order, setting aside the statutory demands. Among the various grounds upon which the Kings sought to have the statutory demands set aside (one of which, they were successful on), was that the statutory demand had been issued/served for an improper purpose - that RIB had been/was being violated. The collateral advantage BMIF were alleged to be seeking to gain (and so had an 'improper purpose' in seeking to gain), was the 'stifling'[5] of a (professional negligence claim) claim the Kings said they had against one of BMIF's insured.
Applicable Legal Principles
Under the subheading 'Applicable legal principles', the Judge in King helpfully went through some of the authorities in this area, from paragraphs 126 to to 134:
'126. Bankruptcy proceedings may not be used or threatened for the purpose of obtaining some collateral advantage ("the Rule in Bankruptcy"). In re Majory [1955] Ch 600, a creditor agreed that a debtor could pay off his debt in instalments if the latter also paid his costs. The debtor later contended that this was an extortion. In a crucial passage the court said:
"(1) There is no such hard and fast rule as Mr. Duveen suggested, namely, that any arrangement or agreement made by a petitioning creditor with his debtor, after the institution or under the shadow of bankruptcy proceedings, whereby the creditor is able to get more than that "to which he was legally entitled" (that is, more than he could have recovered at law at the time of the bankruptcy proceedings being started or threatened) amounts to extortion in bankruptcy law notwithstanding the absence of any mala fides or anything amounting to oppression in fact. In our judgment, the decision in In re Bebro involves necessarily the rejection of such proposition.
"(2) There is equally no rule that extortion has in bankruptcy law a special and artificial significance divorced altogether from the ordinary implication of the word.
"(3) The so-called "rule" in bankruptcy is, in truth, no more than an application of a more general rule that court proceedings may not be used or threatened for the purpose of obtaining for the person so using or threatening them some collateral advantage to himself, and not for the purpose for which such proceedings are properly designed and exist; and a party so using or threatening proceedings will be liable to be held guilty of abusing the process of the court and therefore disqualified from invoking the powers of the court by proceedings he has abused.
"(4) On the other hand, having regard to what Jenkins LJ called "the potent instrument of oppression" which bankruptcy proceedings (with their potential consequences upon property and status) provide, the court will always look strictly at the conduct of a creditor using or threatening such proceedings; and if it concludes that the creditor has used or threatened the proceedings at all oppressively, for example, in order to obtain some payment or promise from the debtor or some other collateral advantage to himself properly attributable to the use of the threat, the court will not hesitate to declare the creditor's conduct extortionate and will not allow him to make use of the process which he has abused.
"(5) In every case it is a question of fact in all the circumstances of the case whether there has been, in truth, extortion."
127. In In Re Maud [2015] EWHC 1626 (Ch) Rose J said that the Rule in Bankruptcy was triggered in two situations:
"In the light of these authorities I conclude that the pursuit of insolvency proceedings in respect of a debt which is otherwise undisputed will amount to an abuse in two situations. The first is where the petitioner does not really want to obtain the liquidation or bankruptcy of the company or individual at all, but issues or threatens to issue the proceedings to put pressure on the target to take some other action which the target is otherwise unwilling to take. The second is where the petitioner does want to achieve the relief sought but he is not acting in the interests of the class of creditors of which he is one or where the success of his petition will operate to the disadvantage of the body of creditors. It is also clear from those authorities, and as a matter of common sense, that the jurisdiction of the court to dismiss a petition based on an undisputed debt on the grounds of collateral purpose must be exercised sparingly. Bankruptcy proceedings cannot be allowed to become the forum for a detailed investigation into past and present relationships or an exploration of what the petitioner hopes to gain from the insolvency of the company or individual, in financial or personal terms and a consideration of whether those hopes are legitimate or not."
128. The facts of Maud are complicated. For present purposes it suffices to note that Rose J dismissed the argument on the bases that: (1) the respondents did want to bankrupt the applicant because it was the applicant's bankruptcy that triggered the 'collateral' advantage; and (2) "it has not been suggested that the bankruptcy would damage the prospects of Mr Maud's other creditors. There is no reason to suppose Mr Maud's Ramblas shares will be sold under the pre-emption provisions of the Ramblas articles of association at less than their proper price. Those monies will then be available for the general body of Mr Maud's creditors".
129. The standard of proof to show a breach of the Rule in Bankruptcy is high. In In re Amalgamated Properties of Rhodesia (1913) Ltd [1917] 2 Ch 115 Sargant J said:
"the petitioners, as judgment creditors for this very large sum, are prima facie entitled ex debito justitiae to a winding up order, and it seems to me to be impossible to displace that prima facie position without the very strongest proof that the petition is being improperly made use of for some ulterior motive".
130. A mixed motive on behalf of the petitioner does not amount to abuse of process. In Hicks v Gulliver [2002] BPIR 518, H sought to have the bankruptcy petition filed by G dismissed because she said it was designed to stifle her claim against another party in related litigation. HHJ Weeks QC rejected the argument, holding that even though stifling may have been the effect of the petition, it was plain that G just wanted to be paid the costs or some part of them. He said:
"…The sole argument presented to me on behalf of Mrs Hicks on this appeal is that under subs (3) of s 266, which I have read, the application should have been dismissed as an abuse of the court's process because the intention of the petitioners was to stifle the proceedings against Mr Gosland and that that is not a legitimate purpose…
"…if the presenter of a petition has two purposes, one of which is the lawful purpose of seeking to obtain a dividend in the bankruptcy, a second purpose, however important that might seem to the presenter, is insufficient to justify stigmatising the petition as an abuse of the court's process. […] I think I am bound to hold that if at least one genuine purpose of the petitioner is to obtain a dividend in the bankruptcy if one is forthcoming, that is sufficient to justify the presentation of a petition …
"Furthermore, I am not entirely satisfied that the stifling of an action in itself is an illegitimate purpose. It may well be legitimate for a creditor to take the view that the debtor ought not to be spending his money – or what is his money until the bankruptcy order is obtained – on an action which has no prospect of success and which may result in an entirely unjustified increase of the liabilities which will compete with the petitioning creditor eventually when the bankruptcy petition is presented" (emphasis added).
131. That said BMIF fairly took me to the decision of Snowden J in re Maud [2016] EWHC 2175 (Ch) which made it clear that a court must be realistic about what the petitioning party actually wanted:
"It also appears that a petitioner who has more than one objective or purpose in presenting and pursuing a petition may be able to avoid a finding of abuse of process if one of his purposes is legitimate, even though that is not his principal purpose. However, as regards the decision in Hicks v Gulliver, I would observe in passing that I do not think that it can be the law that just because a petitioner can say that one of its purposes is to obtain a dividend (however small) on its debt in the bankruptcy, its petition cannot be an abuse of process, no matter what its other purposes might be. As I observed in argument, and none of the counsel who appeared before me disagreed, the effect of a petitioner who is seeking a winding-up or bankruptcy order with the illegitimate purpose of obtaining a benefit for himself at the expense of the other creditors may well be merely to reduce, rather than eliminate altogether, the dividend payable on the unsecured debts in the bankruptcy. Such a case may be no less an abuse of the collective process because the petitioner can say that he would (in addition to obtaining the singular benefit for himself at the expense of the other members of the class) also wish to receive the (reduced) dividend on his debt" (emphasis added).
132. Jones v Sky Wheels Group [2020] EWHC 1112 (Ch) is another decision of Snowden J. A statutory demand was set aside by a judge on the basis that "the situation has been manipulated to enable [the creditor] to obtain a bankruptcy order which would avoid him potentially facing the unfair prejudice proceedings from [the debtor]". Counsel criticised this as being too general and vague a concern but Snowden J upheld the decision on appeal.
133. The creditors had earlier stated a clear intention to pursue damages for the non-payment of debt. At some point they then chose "instead to go down the path of bankruptcy proceedings", and there was "no credible explanation" for this other than the fact that it became apparent to them that the debtor was serious about bringing an unfair prejudice claim. Snowden J concluded:
"In the absence of any other coherent explanation, I am driven to the same conclusion which Judge Watkin reached, namely that Company's decision to change tack and commence bankruptcy proceedings was driven by a desire to bankrupt Mr. Jones in order to forestall his threatened Section 994 Petition against Mr. Schofield. Consistent with the approach of Nicholls LJ in Re a Debtor , Judge Watkin concluded - and I believe she had ample basis for concluding - that this rendered it unjust for Mr. Jones to face the consequences of bankruptcy proceedings before his Petition could be heard, so that it was appropriate for her to exercise her discretion under IR 10.5(5)(d)".
134. Snowden J also made it clear that the Rule in Bankruptcy can be considered in a rule 10.5(5)(d) set aside application:
"I also consider that Judge Watkin's conclusion could have been justified by analogy to the principles which apply when the Court is considering, under its inherent jurisdiction, whether a bankruptcy petition is an abuse of process. Bankruptcy proceedings are a class remedy, and even if a statutory demand is served in respect of a debt that is otherwise undisputed, if the bankruptcy process is being used to enable the petitioner to achieve an illegitimate purpose to the detriment of the class of creditors, this will constitute an abuse of the process of the court"
Other Authorities
Though not referred to King, it is helpful to also quote from two other Re Maud judgments of Snowden J:
(1) In Re Maud [2020] EWHC 974 (Ch), the 'April Judgment', Snowden J said, at paragraphs 137 to 141:
‘137. As I held in the First Judgment, the basic principles of law which apply to the question of whether a bankruptcy petition is an abuse of process are those set out by Rose J in paragraph [29] of her judgment refusing to set aside Edgeworth's statutory demand,
"29. In the light of these authorities I conclude that the pursuit of insolvency proceedings in respect of a debt which is otherwise undisputed will amount to an abuse in two situations. The first is where the petitioner does not really want to obtain the liquidation or bankruptcy of the company or individual at all, but issues or threatens to issue the proceedings to put pressure on the target to take some other action which the target is otherwise unwilling to take. The second is where the petitioner does want to achieve the relief sought but he is not acting in the interests of the class of creditors of which he is one or where the success of his petition will operate to the disadvantage of the body of creditors."
…
139. As I indicated in my First Judgment, however, Rose J's statement of the second situation requires two points of further explanation. The first is that it will be an abuse of process if, even though the petitioner wants a bankruptcy order to be made, recovering its debt through the bankruptcy process is no part of its purpose. The example of that type of abuse in the authorities is the Irish case of McGinn v Beagan [1962] IR 364 which concerned the long-running personal feud between the town clerk of the Castleblayney Urban District Council and a town councillor. The town clerk took an assignment of debts owed by the councillor, and petitioned for his bankruptcy. The judge found, as a fact, that the town clerk did not have the purpose of recovering any money, but was motivated by the sole purpose of making the councillor bankrupt and unseating him from the town council.
140. As I indicated in my First Judgment, however, McGinn v Beagan was highly unusual because there was an express finding that the petitioner was not using the bankruptcy process to find assets which could be made available for creditors or to get payment. I expressed the view that in a commercial setting it is likely to be difficult to establish on the facts that a petitioner is not seeking to receive some payment on the debt which he is owed.
141. The second point which I explained in my First Judgment is that a petition will not be an abuse of process if, in addition to wishing to receive a dividend on his debt in the bankruptcy together with other creditors, the petitioner has a collateral purpose which is not shared with the other creditors, but which will not cause them any detriment if achieved. In essence that is the position which Rose J reached at the hearing before her when she concluded that Mr. Maud had not established that triggering the preemption provisions in relation to Mr. Maud's Ramblas shares would result in loss to his creditors, because a fair price would be paid for them under the mechanism in Ramblas' Articles of Association.’
(2) In Re Maud [2020] EWHC 1469 (Ch), Snowden J considered whether he should reconsider the analysis in his April Judgment ‘…in light of the new materials placed before me relating to the Interest Claim’ ( paragraph 27), at paragraphs 30-31 (subparagraph numbers are (1) 2. 2. 2. in original - oddly) (June 2018 judgment is unavailable).
‘...[the debtor's barrister's] ... submitted that the correct approach in law was as follows,
“(1) a petitioner abuses “the process of the court in seeking a bankruptcy order or a winding-up order for a purpose which is contrary or alien to the nature of the class remedy that he is purporting to invoke” (para 115 of the Appeal Judgment);
2. a petition will not be an abuse of process, however, if in addition to wishing to receive a dividend on his debt in the bankruptcy together with other creditors, the petitioner has a collateral purpose which is not shared with the other creditors but which will not cause them any detriment if achieved (see para 82 of the June 2018 Judgment);
2. however, if a creditor has such a collateral purpose which would operate to the detriment of the class, he cannot save his petition by protesting that he would still wish to receive a dividend upon his debt in the bankruptcy, because the effect of his achieving his collateral purpose would be to reduce that dividend for all creditors (see para 83 of the June 2018 Judgment); and
2. a petition would be an abuse of process if it was being pursued, not to recover the petition debt at all, but solely for an extraneous purpose, even though that did not harm the interests of creditors (see para 84 of the June 2018 Judgment).”
31. That approach was consistent with the analysis of the authorities by Rose J when refusing to set aside Edgeworth’s statutory demand (for which Mr. Maud was refused permission to appeal by Gloster LJ). It was also essentially the test that I applied in my [April Judgment]: see paragraphs 137-141.’
Snowden J concluded, at paragraph 39, that there was no ‘...realistic prospect of a successful appeal on the basis that I applied the wrong legal test in determining whether the Edgeworth Petition was an abuse of process.’
SPECTRUM
What Snowden J said in Re Maud [2020] EWHC 1469 (Ch) is particularly illuminating about mixed purposes - the middle ground, so to speak on the spectrum of purposes (motivations). To elaborate, clearly, there is spectrum as to what is motivating, what is driving, the statutory demander / would-be petitioner / petitioner to seek a bankruptcy order. At one end will be a 'sole proper purpose' (for which use of the bankruptcy process cannot be impugned), and at the other end, 'sole improper purpose' (which will render use of the bankruptcy process, an abuse of process, even though achieving that 'improper purpose' would not harm the interests of the general body of creditors of the debtor; e.g. McGinn v Beagan [1962] IR 364). The middle ground is the part between these two extremes. In this middle ground, there is a varied mix of 'proper purpose(s)' and 'improper purpose(s)'. What mix will render use of the bankruptcy process an abuse of process. What mix will not, is addressed by Snowden J in Re Maud [2020] EWHC 1469 (Ch)
Where there are mixed purposes for use of the bankruptcy process, the key seems to be about whether (any of) the improper purpose(s) will, or will not, cause any detriment to the general body of unsecured creditors of the debtor, if that improper purpose is achieved. Where there would be detriment from (any of) the improper purpose(s), this will taint everything, and render use of the bankruptcy process, an abuse of process. Conversely, where there would not be detriment from (any of) the improper purpose(s), the improper purposes will not taint everything, and so use of the bankruptcy process, will not be rendered an abuse of process.
ADDITIONAL OBSERVATION
In the author's view, the analysis in this area would be assisted by focusing on means and ends. What are purposes which are means to an end, and what are purposes which are ends in themselves.
Update - IPS Law
In IPS Law LLP v Safe Harbour Equity Distressed Debt Fund 3 LP [2024] EWHC 2663 (Ch), Deputy ICC Judge Curl KC touched on this area, in paragraphs 107-108[6].
Update - Al Rostamani
ICC Judge Greenwood in Al Rostamani v Haddad [2025] EWHC 2000 (Ch ('Al Rostamani') considered this area, from paragraphs 36 to 46[7]. At paragraph 46, the Judge gave a summary (paragraph 46.6 is really a separate point):
'46. In summary, by reference to those authorities, of particular relevance to the present case:
46.1. the starting point is that as between unpaid creditor and debtor, the creditor is prima facie entitled ex debito justitiae - as a matter of right - to a bankruptcy order;
46.2. if however, insolvency proceedings are not being pursued for a proper purpose, the court may hold that they comprise an abuse of the court’s process, and an order might be refused;
46.3. the concept of proper purpose is broad enough to include the appointment of an objective, independent officer of the court, able to investigate and make a professional and dispassionate assessment of the merits of continuing to pursue (and devote assets to the pursuit of) proceedings, including proceedings against the petitioner himself: that is, or may be, an aspect of the proper administration of the debtor's assets;
46.4. it is not necessary that the petitioner’s principal purpose is a proper purpose – his principal purpose may be to secure a benefit peculiar to himself;
46.5. the petitioner’s motives are irrelevant;
46.6. in any event, separately, the court retains a discretion not to make an order, including, exceptionally, in circumstances where it would be “pointless” to do so, because the debtor has no assets – albeit a debtor faces a “heavy burden” persuading a court not to make an order on that basis.'
SIMON HILL © 2023*
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, or the Copyright holder. No attempt has been made to provide an exhaustive review/account of the law in this area. *Copyright is owned by Barrister Search Limited.
[1] In personal insolvency, a (natural person/individual) debtor who is served with a statutory demand can apply to have that statutory demand set aside. Where such an application is made, the court has jurisdiction to make the set aside order where r.10.5(5) of the 2016 Rules is satisfied. That rule prescribes four instances where the court may grant such an application. R.10.5(5) reads:
'(5) 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.'
A set aside application can be seen as subject to a two stage process under r.10.5(5) of the 2016 Rules:
(1) Gateway stage - is a ground established under one of the 4 gateways, that is, under one or more of r.10.5(5)(a) to (d) inclusive; and, if yes
(2) Discretionary stage - arising from the word 'may' - should the Court accede to the application and grant a statutory demand set aside order?
See Chief ICC Judge Briggs in Lyons v Bridging Finance Inc [2023] EWHC 1233 (Ch) for some recent discussion on r.10.5(5) of the 2016 Rules.
[2] 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.’
As Arden J in Westminster City Council v Parkin [2001] BPIR 1156 ('Parkin') said at 1157B, 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.’
Peter Smith J in Re Micklethwait [2003] BPIR 101, at paragraph 6 described the power set out in the section as ‘quite unfettered’, and at paragraph 9 said ‘…the power can be exercised if the making of a bankruptcy order might cause an injustice.'
[3] Arguably, a proper subsidiary to this/sub-aspect this, is a wish for the debtor/debtor's affairs to be investigated by a trustee in bankruptcy, so that the bankrupt estate may have all the assets/value it ought to have, in it (e.g. through legal mechanisms/procedures like claims for antecedent voidable transactions, extortion creditor bargains, through to, for instance, income payment orders).
[3a] Seemingly, this is not the same as seeking purely/directly to stifle a claim the debtor (purportedly) has, without consideration for whether its pursuance is depleting the debtor's already depleted assets. In other words, the purpose needs to be attached to stopping unwarranted depleted of the debtor's assets, with stifling the claim being a means to that end.
[4] For an example of (an analogous corporate insolvency) case focusing:
(1) not on the question: ‘does the petitioner genuinely wish to wind up this company?’ (in personal insolvency terms: ‘does the petitioner genuinely wish to put the debtor into bankruptcy?'); but rather, on
(2) 'for what purpose does the petitioner wish to wind up this company?’ (in personal insolvency terms: for what purpose does the petitioner wish to put the debtor into bankruptcy?',
see Re a company [1983] BCLC 492, wherein Harman J said, at 495:
“The question.. is not ‘does the petitioner genuinely wish to wind up this company’...It would be hard for me to find that this petitioner, which has taken all regular steps to prosecute its petition and which plainly has reasons to desire the winding-up of this company...does not in truth desire to wind up the company. In my judgement the true question is ‘for what purpose does the petitioner wish to wind up this company’. A judge has to decide whether the petition is for the benefit of the class of which the petitioner forms a part or is for some purpose of his own. If the latter, then it is not properly bought.'
[5] In King v Bar Mutual Indemnity Fund [2023] EWHC 1408 (Ch)('King'), HHJ Kelly sitting as a Judge of the High Court raised doubts as to whether there was really any stifling to be achieved (as a collateral advantage to BMIF from obtaining the bankruptcy order). The (professional negligence) claims (which are categorised as 'Things in Action') would survive a bankruptcy order, and would be transferred as part of the bankrupt estate, to the trustee in bankruptcy ('TIB'). That TIB would use/pursue those Things in Action himself/herself. The (professional negligence) claims would remain the same through the bankruptcy process. It was (merely) who held them that would change (debtor then TIB). The Judge in King said, at paragraph 141:
'...it is in any event unclear that BMIF would gain any commercial advantage by "stifling" the [professional negligence claims] by forcing bankruptcy. By sections 283 and 436 IA 1986 , the Kings' "property" which would vest in the Trustee in Bankruptcy include "things in action". Even if the Kings were bankrupted, there is no reason to think that a Trustee in Bankruptcy would not bring the [professional negligence claims] if they are as strong and as valuable as the Kings assert.'
[6] In IPS Law LLP v Safe Harbour Equity Distressed Debt Fund 3 LP [2024] EWHC 2663 (Ch), Deputy ICC Judge Curl KC touched on this area, in paragraphs 107-108, where, under the heading 'Abuse of Process', he said:
'107. Finally, [debtor] contended that the petition is an abuse of process, citing Rose J (as she then was) in Maud v Aabar Block SarL [2015] EWHC 1626 (Ch) , [2015] BPIR 845 at [29]. In that case, Rose J concluded that the pursuit of insolvency proceedings in respect of a debt that is otherwise undisputed will amount to an abuse, firstly, where the petitioner does not really want to obtain the liquidation or bankruptcy of the debtor but wishes to put pressure on them to take some other action; or, secondly, where the petitioner does want to obtain that relief but is not acting in the class interest of the creditors.
108. In support of this submission, [the debtor] relies solely on Mr Farnell’s note of the alleged contents of a telephone call made by Mr Serrano to Mr Farnell on 12 June 2023. The note suggests that Mr Serrano threatened Mr Farnell before putting the phone down. Mr Serrano denies threatening Mr Farnell. That evidential dispute cannot be resolved without cross-examination but it does not need to be for the purposes of disposing of this application. Taken at its highest, the alleged contents of the call, although unpleasant and improper, do not begin to disclose a case that the Respondent does not genuinely seek a winding up order for the benefit of the creditors as a class. Animosity between creditor and debtor is far from unusual and does not, in and of itself, support an allegation that the process of the court is being abused.'
[7] In Al Rostamani v Haddad [2025] EWHC 2000 (Ch), ICC Judge Greenwood, at paragraphs 36 to 46, under the heading 'The Relevant Principles', said (Mr Perkins was counsel for the Petitioners; there are a few separate points made about the rule that a bankruptcy order will not be made if to make one would be pointless (i.e. an act of futility)):
'36. The relevant principles were explained by Snowden J (as he then was) in Re Maud [2016] EWHC 2175 (Ch), in summary, as follows.
36.1. Bankruptcy is a “class remedy”, “a “collective insolvency proceeding” or a process for collective enforcement of debts. The purpose of the collective proceeding is for the property of an individual who is unable to pay his debts to be realised under the control of an independent trustee, and, after payment of any debts or liabilities having priority, for the remaining monies to be distributed pari passu to the debtor's unsecured creditors”: [77] (and see [78][82]). Although, as between unpaid creditor and debtor (as in the context of corporate insolvency proceedings) the creditor is entitled ex debito justitiae to an order, that order, if it is to be made, is for the benefit of the class of creditors, such that if a petition is opposed by other creditors, an order may be refused by the court in the exercise of its discretion.
36.2. In addition, separately, a petition might be held to be an abuse of process, where proceedings are not pursued for the purpose for which they were intended. Whereas a finding of abuse is not discretionary, the court’s reaction to such a finding does engage its discretionary powers. In Re Majory [1955] 1 Ch 600 at 623-624, Evershed MR said, “The so-called "rule" in bankruptcy is, in truth, no more than an application of a more general rule that court proceedings may not be used or threatened for the purpose of obtaining for the person so using or threatening them some collateral advantage to himself, and not for the purpose for which such proceedings are properly designed and exist; and a party so using or threatening proceedings will be liable to be held guilty of abusing the process of the court and therefore disqualified from invoking the powers of the court by proceedings he has abused.”
36.3. Having said that, “motive” - “namely subjective reasons such as malice or personal animosity - that cause a petitioner to embrace a purpose, aim or objective in presenting and pursuing a petition, do not make a petition that is not otherwise an abuse of process into an abuse of process”: [93].
36.4. Finally, the court may, “in exceptional cases”, exercise its general discretion to decline to make a bankruptcy order or a winding-up order if it is satisfied that the order will serve no useful purpose because there will be no assets available in the insolvent estate for creditors. Having said that, it “is clear, however, that a debtor faces a heavy burden in persuading the court not to make an order on that basis: see e.g. re Field (a debtor) [1978] Ch 371 at 375, and Shepherd v Legal Services Commission [2003] BCC 728”.
37. As to alleged “pointlessness”, in a subsequent case involving the same debtor, Re Maud [2020] EWHC 974, Snowden J, at [116]-[117], accepted the following propositions: “First, that the court has a discretion not to make an order if to do so would be completely pointless. Secondly, the test is whether there is no possibility of any benefit to creditors. Thirdly, that the impossibility of benefit must be obvious at the petition hearing without any detailed investigation. Fourthly, the concept of benefit includes a reasonable desire on the part of creditors that there should be an investigation by the trustee in bankruptcy.” He also observed that in this context, “the courts will not simply accept an uncorroborated statement by the debtor that he has no assets or that a bankruptcy order would serve no purpose” – to do so would be an obvious invitation to abuse (see Megarry V- C in Re Field [1978] 1 Ch 371 at 375 – “A man may indeed be too poor to be made bankrupt: but the burden of proof is heavy.”).
38. In the context of corporate insolvency proceedings, the question of abuse of process was considered by the Privy Council in Ebbvale Limited v Hosking [2013] UKPC 1. In that case, the company appellant appealed against a winding-up order made against it on the petition of the respondent, Mr Hosking, in his capacity as the trustee in bankruptcy of one Mr Andreas Michaelides.
39. Mr Michaelides had previously owned valuable land in London, which he had purportedly transferred shortly before he was made bankrupt. Mr Hosking began proceedings to establish that the land had belonged beneficially to Mr Michaelides when he was made bankrupt (and so fell into his estate). In the meantime however, it was alleged that the transferees of the land had themselves transferred it to the company. Mr Hosking formed the view that the company was in fact under the effective control of Mr Michaelides, and that the alleged sales were nothing more that attempts to hide his continuing ownership of the land; he procured the transfer to himself of a debt owed by the company to the bank which had lent to the company to enable it to buy the land; on the basis of that debt he petitioned successfully for a windingup order against the company, which was by then the only active defendant to his action in respect of the land. The company argued that Mr Hosking had petitioned for an improper purpose, and that the petition was an abuse of process. Its appeal failed.
40. The Board’s Judgment was delivered by Lord Wilson. At [25] he began with the general proposition that, as stated by Sargent J in In re Amalgamated Properties of Rhodesia (1913) Ltd [1917] 2 Ch 115, “the petitioners, as judgment creditors for this very large sum, are prima facie entitled ex debito justitiae to a winding up order, and it seems to me to be impossible to displace that prima facie position without the very strongest proof that the petition is being improperly made use of for some ulterior motive.”
41. Lord Wilson then referred to various cases in which a petitioner was not in fact seeking to obtain an order, but rather, by the application of pressure, was seeking some other end. However, as he pointed out at [27], those cases were “not in point”, because “Mr Hosking undoubtedly did want — and has continued to want — the winding-up order to be made …”.
42. At [33], Lord Wilson stated the conclusions of the Board as follows:
“(a) It has no view about where the merits of the English action between Mr Hosking and the company lie.
(b) There is no doubt that Mr Hosking's purposes in presenting the petition for the company to be wound up were intimately related to the English action.
(c) It is indeed probably the case that Mr Hosking regarded a winding-up order as likely to be of advantage to him in his capacity as the claimant in the English action as well as in his capacity as the petitioning creditor. For the company's continued defence of the action was leading him to incur very substantial costs in its continued prosecution and was thus generating a potential increase in its total liability to him and a corresponding increase in the risk that such could not be met. In his capacity as claimant in the action Mr Hosking therefore probably considered it advantageous to secure a winding-up order which might lead to his saving of some such costs.
(d) But a winding-up order was also, objectively, likely to be of substantial advantage to him in his capacity as the petitioning creditor; and to secure such an advantage was the other of his purposes. It is not necessary that it should have been his principal purpose: see In re Millennium Advanced Technology Ltd [2004] EWHC 711 (Ch), [2004] 1 WLR 2177 at para 42 (Michael Briggs QC sitting as a deputy High Court judge).
(e) For Mr Hosking, as trustee, was a large creditor of the company; his debt was contingently unsecured and he was not even in receipt of interest. It was in the interests of the insolvent company, and in particular of himself in that capacity, that, before it proceeded, from some source or other, to incur yet further indebtedness with which to fund the maintenance of its defence at a trial estimated to last for seven or eight days, a professional decision should be taken on its behalf about the further conduct of the defence and, in the light of the latter's apparent strength or otherwise, about the terms of any compromise which it would be commercially sensible for it to propose to Mr Hosking.
(f) In its defence of the winding-up petition the company therefore failed to establish that Mr Hosking's petition represented an abuse of the process of the court and failed to displace his entitlement to an order.”
43. In the context of bankruptcy, in Re Maud [2016] EWHC 2175, referred to above at [36], at [90], Snowden J similarly accepted that as long as one of a petitioner’s purposes was proper and legitimate, it was irrelevant that his principal purpose was not.
44. Finally, Mr Perkins placed reliance on the decision of Mr Gabriel Moss QC, sitting as a deputy judge of the High Court in Shepherd v Legal Services Commission [2003] BPIR 140, a case bearing some similarity to that presently before the court. In Shepherd, the debtor appealed unsuccessfully against a bankruptcy order based on costs orders made against him in unsuccessful civil proceedings (in which he had “attempted to pursue potential rights of appeal as far as humanly possible, without any success”) against the petitioner, the Legal Services Commission (“the LSC”).
45. The LSC’s evidence was that the debtor had no assets; his case was that he had a substantial asset, being his claim against the LSC. In that “peculiar situation”, having reviewed the authorities, the deputy judge said as follows (at [2003] BPIR 140, 146147):
“The debtor, not surprisingly, relies on the Ross case [Re Ross (a bankrupt) (No. 2) [2000] BPIR 636] to support his thesis that he should be allowed to conduct his claim against the Legal Services Commission. He is understandably dismayed at the prospect of the alleged cause of action passing to a trustee in bankruptcy. However, it seems to me that on the facts there are fundamental differences between the very special circumstances in Ross and the circumstances of the present case. In the Ross case, Mr Ross appeared to have a perfectly plausible cause of action against the lady of his former acquaintance, whereas in the present case the debtor has so far lost every round in which he has attempted to pursue his alleged cause of action against the Legal Services Commission. On the special facts of the Ross case the bankruptcy appeared to have had the effect, even if that was not the intention or sole purpose, of stifling the proceedings. In the present case, it seems to me that the effect of the bankruptcy is not to stifle any proceedings against the Legal Services Commission if they have any merit; the trustee, as is his duty, will undoubtedly consider the merits of the debtor's claim. If it has merit, he will undoubtedly consider whether or not it will be proper to take proceedings himself, if he is able, or alternatively to assign the alleged cause of action back to the debtor on the basis that a proportion of any proceeds would flow to his creditors. It is of course possible that the Legal Services Commission will be the debtor's only creditor but that is not something of which I can be certain at this stage.
The real question in the present case in this regard appears to be whether it would be sensible to allow the debtor to continue with what so far has been futile litigation creating considerable liabilities for court costs which he has no prospects of paying and thereby causing the Legal Services Commission very considerable loss which it has no realistic prospect of recovering, or allowing an objective and independent officer of the court to consider the matter in a dispassionate way and see whether there can sensibly and properly be brought any further proceedings against the Legal Services Commission. It seems to me that that purpose, which appears to be the purpose for which the Legal Services Commission has brought these bankruptcy proceedings, is a proper purpose because it seeks ‘the proper administration’ of the debtor's assets within the meaning of that phrase as used by Harman J in the Re a Company No. 001573 of 1983 case I have referred to above. It also seems to me that a bankruptcy order is justifiable on the grounds that there is a proper reason other than simply the realisation and distribution of assets, namely an investigation by the trustee of the affairs of the debtor and in particular these very serious allegations against the conduct of the Legal Services Commission. That would seem to be a proper purpose for insolvency proceedings in terms of the approach of Chadwick J in the Bell Group case. Unlike the debtor, the trustee in bankruptcy has statutory powers of investigation, including the ability to ask the court, if appropriate, to require the production of documents and to examine relevant persons on oath. If the trustee, as an objective and independent officer of the court, considers that those steps are necessary to investigate the very serious allegations made by the debtor, then he is able to take those steps whereas the debtor himself cannot.
I am satisfied that in seeking their goal the Legal Services Commission have not acted oppressively in bringing these bankruptcy proceedings. I am also satisfied on the evidence before me and before the learned deputy district judge that there is no case to be made out of an attempt to stifle any future proceedings but merely an understandable attempt to ensure that they are considered by an independent and objective officer of the court.
Accordingly, summarising my conclusions in relation to the question: although there are not likely to be any assets in this case other than the alleged claim against the Legal Services Commission and although the purpose for which the bankruptcy order was sought is not perhaps the typical purpose for which such orders are sought by petitioning creditors, it is nevertheless the case that I am satisfied on the facts before me and in light of the authorities that the bankruptcy order was properly made in the discretion of the deputy district judge.”
46. In summary, by reference to those authorities, of particular relevance to the present case:
46.1. the starting point is that as between unpaid creditor and debtor, the creditor is prima facie entitled ex debito justitiae - as a matter of right - to a bankruptcy order;
46.2. if however, insolvency proceedings are not being pursued for a proper purpose, the court may hold that they comprise an abuse of the court’s process, and an order might be refused;
46.3. the concept of proper purpose is broad enough to include the appointment of an objective, independent officer of the court, able to investigate and make a professional and dispassionate assessment of the merits of continuing to pursue (and devote assets to the pursuit of) proceedings, including proceedings against the petitioner himself: that is, or may be, an aspect of the proper administration of the debtor's assets;
46.4. it is not necessary that the petitioner’s principal purpose is a proper purpose – his principal purpose may be to secure a benefit peculiar to himself;
46.5. the petitioner’s motives are irrelevant;
46.6. in any event, separately, the court retains a discretion not to make an order, including, exceptionally, in circumstances where it would be “pointless” to do so, because the debtor has no assets – albeit a debtor faces a “heavy burden” persuading a court not to make an order on that basis.'