[1b] As per section 383(2) of the Insolvency Act 1986, which provides:

'[…] a debt is secured for the purposes of this Group of Parts to the extent that the person to whom the debt is owed holds any security for the debt (whether a mortgage, charge, lien or other security) over any property of the person by whom the debt is owed.'

Lewison LJ in Hughes v Howell [2021] EWCA Civ 1431; [2022] BPIR 135, refers to this section, at paragraph 4.

[2] In Re a Debtor (No 32 of 1993) [1994] 1 WLR 899, Timothy Lloyd QC (sitting as a deputy High Court Judge) said, at 901:

'...on hearing the petition, there must be at least one debt, on which the petition is based, as to which, if it is already due and payable, it has neither been paid nor secured nor compounded for or, if it is a future debt, there is no reasonable prospect that the debtor will be able to pay it when it falls due. Payment is a question of fact, securing or compounding I take to be a matter of agreement between the debtor and the creditor, and the prospects of payment of future debts must be a question of evidence.'

While compounding will occur by agreement, not all securing will occur by agreement. A judgment creditor can apply for, and obtain, a charging order against a judgment debtor's assets, without needing the judgment debtor's consent. Accordingly, it might be said that not all securing will be a matter of agreement between the debtor and the creditor.

[3] Though not strictly speaking relevant to this article at this stage, it is noted that section 271(3) harbours 2 alternative basis for the Court to dismiss the petition.

Subsection 271(3) provides:

'The court may dismiss the petition if it is satified that the debtor is able to pay all his debts or is satisfied-
(a) that the debtor has made an offer to secure ... a debt in respect of which the petition is presented,
(b) that the acceptance of that offer would have required the dismissal of the petition, and
(c) that the offer has been unreasonably refused;' [bold added]

Highlighting these 2 alternatives, Timothy Lloyd QC (sitting as a deputy High Court Judge) in Re a Debtor (No 32 of 1993) [1994] 1 WLR 899 said, at 901:

'If the threshold conditions of subsection (1) are satisfied the court may nevertheless dismiss the petition if it is satisfied that the debtor is able to pay all his debts. Alternatively it may dismiss the petition if an offer within subsection (3) has been made and has been unreasonably refused.'

In Shrimpton v Darbys Solicitors LLP [2011] EWHC 3796 (Ch); [2012] BPIR 631, Richards J heard an appeal by a bankrupt, against his bankruptcy order.

At the first instance bankruptcy hearing, the then debtor ('debtor/bankrupt') had made 2 submissions in opposition the making of a bankruptcy order, that:

(1) there was expectation of income which, if received, would enable him to pay the petition debt (described as the 'prospect of income coming to [debtor/bankrupt] within a reasonable time and enabling him to pay the petition debt' submission (paragraph 22); and

(2) the petitioning creditor has unreasonably refused his offer of security over his property. Focusing on the first submission for present purposes, Richards J said about the relevant law, at paragraph 9:

'So far as the relevance of income expected to be received is concerned, building on the opening words of section 271(3), “The court may dismiss the petition if it is satisfied that the debtor is able to pay all his debts”, a number of decisions have established that the court has a discretion to adjourn a petition for payment, or perhaps even to dismiss it, if there is a reasonable prospect of the petition debt being paid in full within a reasonable period of time. If the court were to dismiss such a petition, it would no doubt wish to be assured to a high degree that payment would be received.'

On the facts, the [debtor/bankrupt] had, at the bankruptcy hearing, relied on income coming to him as commission. His evidence was that:

(1) there was a commission agreement between him and a company, that '...he would receive a commission of three per cent on any contracts introduced by him to that company' (paragraph 22).

(2) there were negotiations or the prospect of a deal between the company and Lockheed Martin, the large US aeronautical company (paragraph 22)

However, dismissed the debtor/bankrupt's appeal on this point. Richards J said, at paragraph 22:

'As the District Judge himself concluded, there was no certainty about any proposed income stream from this source. No contracts were in place between [the company] and Lockheed Martin and there could be no confidence that any such contracts would be in place. It is to be observed that there is no evidence before the court that any contracts have since been put in place. In so far as criticism is made of the District Judge's decision in respect to that issue, his approach was in my judgment, fully justified by the evidence before him.'

[4] In Revenue and Customs Commissioners v Garwood [2012] BPIR 575, [2012] 2 WLUK 837, Chief Registrar Baister considered section 271(1) and (3) in paragraph 20, and the authorities, in paragraphs 21 and 22 of his judgment. In respect to the latter (paragraphs 21 and 22), though these are long passages, for which the Chief Registrar Baister at paragraph 23 provides a helpful summary (quoted in the main body of the article), it is still worth quoting the long passages in paragraphs 21 and 22, in full: 

'[21] The test to be applied was first formulated by Timothy Lloyd QC, as he then was, in Re A Debtor (No 32 of 1993) [1994] 1 WLR 899, at 910 (although the case concerned compounding for the petition debt rather than an offer of security):

‘as being whether a reasonable creditor, in the position of this petitioning creditor, and in the light of the actual history as disclosed to the court, would have accepted or refused the offer. However, I think it has to be borne in mind that there could be a range of reasonable positions on the part of hypothetical reasonable creditors. In order to conclude that the refusal was unreasonable, it seems to me that the court has to be satisfied that no reasonable hypothetical creditor would have refused the offer, and that the refusal of the offer was therefore beyond the range of possible reasonable actions in the context.’

It was adopted and clarified by Lightman J in HM Customs and Excise v Dougall [2001] BPIR 269, at 272:

‘The relevant legal principles governing this case are encapsulated in the judgments of Mr Timothy Lloyd QC, sitting as a deputy High Court judge in a case called In Re a Debtor (No 32 of 1993) [1994] 1 WLR 899 and of Robert Walker J in Commissioners of Inland Revenue v The Debtor, Re a Debtor (No 6349 of 1994) [1996] BPIR 271. The relevant principles are as follows. First, the test of unreasonableness is whether a[...]reasonable creditor1 in the position of the petitioning creditor and in the light of the actual history as disclosed to the court could have reached the conclusion that the petitioning creditor reached. There may be a range of reasonable positions on the part of the hypothetical reasonable creditors and a rejection of an offer by the petitioner is only to be categorised as unreasonable if no reasonable creditor would have refused the offer and accordingly the refusal is beyond the range of reasonable responses to it. Secondly, the test is objective, namely the response of the hypothetical reasonable creditor. The court is not limited to considering the considerations that were taken into account by the petitioning creditor himself when he refused to agree to the offer. The court must look at all the relevant factors and decide what are the relevant factors and what impact those relevant factors would have on the hypothetical reasonable creditor. The third proposition is that the debtor must be full, frank and open and provide all the necessary information to enable an informed decision to be made by the creditor.’

[22] That passage was referred to by Henderson J in Ross & Holmes v Commissioners for HM Revenue and Customs [2010] EWHC 13 (Ch), [2010] BPIR 652, [2010] 2 All ER 126. He added further guidance derived from the foregoing authorities and from the judgment of Robert Walker J, as he then was, in Inland Revenue Commissioners v A Debtor [1995] BCC 971:

‘[44] I have already set out in [31] above the helpful summary of the relevant legal principles given by Lightman J in HM Customs and Excise v Dougall [2001] BPIR 269 at 272. There are, however, some further points which can usefully be gleaned from the authorities.

[45] First, in Re a Debtor (No 32 of 1993) [1995] 1 All ER 628, [1994] 1 WLR 899, Timothy Lloyd QC held that the district judge had erred in attaching little significance to the past history of offers and payments in that case. He said ([1995] 1 All ER 628 at 639, [1994] 1 WLR 899 at 910): “It seems to me that the past history would be of substantial relevance to the hypothetical reasonable creditor when deciding whether or not to accept an offer or rather to press for a bankruptcy order.” Having commented that there was “a good deal of justification” for describing the debtor’s attitude as one of prevarication and delay, the deputy judge said again that in his view “the hypothetical reasonable creditor, on the facts of this case, might well be influenced, in deciding whether to accept the offer or to press for a bankruptcy order, by the unsatisfactory record of the debtor’s past dealings” (see [1995] 1 All ER 628 at 640, [1994] 1 WLR 899 at 910-911).

[46] It follows from these observations, with which I respectfully agree, that the Registrar in the present case cannot in my judgment be criticised for having had regard to the history of the matter as a factor which a reasonable creditor would have taken into account in deciding whether or not to accept the offer of security. Of course it is true that the purpose of such an offer is to guarantee that payment will be made in full at a future date, but in the light of a history of default, partial payments and promises which come to nothing, there comes a time when a reasonable creditor may prefer to press for an immediate bankruptcy order. That is particularly so where, as in the present case, the debtor appears to have ample assets to meet his debts, with the consequence that the making of a bankruptcy order is still likely to lead to full recovery for the creditor, albeit at a considerably greater cost to the debtor (because of the costs of the bankruptcy, and the forced realisation of assets by the trustee).

[47] Secondly, and following on from the point which I have just made, in IRC v Debtor [1995] BCC 971 at 974, Robert Walker J said that it seemed to him reasonably clear:

“that in considering an offer a creditor is entitled to have regard to his own interests (so long as they are his interests as a creditor, and not in some other capacity so as to bring in collateral considerations). The creditor is not required to balance his interests against those of the debtor, or to take a chance, or to show patience or generosity, even though some creditors might do so. As Lord Phillimore put it in [Viscount Tredegar v Harwood [1929] AC 72 at 82, [1928] All ER Rep 11 at 15], acting reasonably is not the same as acting justly, fairly or kindly. That was a landlord and tenant case but this point at least is of general application.”

[48] In the same case, the judge made some pertinent comments about the position of the Revenue, which had refused an offer of a third charge over the debtor’s house to secure a debt of about £36,000. The house was worth around £150,000, but was subject to first and second charges totalling about £80,000 and there was evidence that enforcement by sale would probably be difficult and protracted: see in particular [1995] BCC 971 at 976. The judge doubted (differing on this point from Timothy Lloyd QC) whether there could be any strong presumption that large and impersonal creditors, such as the insurance company in Re a Debtor (No 32 o f 1993) [1995] 1 All ER 628, [1994] 1 WLR 899 or the Revenue, are unlikely to act unreasonably. As he said ([1995] BCC 971 at 974):

“Large and impersonal bodies are much less likely to act unreasonably from motives of personal vindictiveness ... but bureaucratic inflexibility can sometimes produce an impersonal sort of oppression. On the other hand, large organisations constantly have to take decisions affecting large numbers of debtors (whether they are taxpayers, borrowers or trade debtors) and they can sensibly do so only by delegating the decisions to be made in accordance with coherent in-house policies.”

[49] After setting out the factors which weighed both for and against the taking of security, Robert Walker J (at 976) stated his conclusion:

“Having looked at the rival submissions in some detail I remind myself that the crucial question is: am I satisfied that the Revenue has acted unreasonably in rejecting the offer? The Revenue is, as Mr Tidmarsh says, under a statutory duty to collect tax (and interest on tax) that is due but unpaid. The officials of the Revenue concerned with collection ought not (and therefore are, on the face of it, unlikely) to refuse an offer which increases the likely net recovery to public funds. But the Revenue is, on the face of it, the best judge of what internal costs and diversion of resources may be involved in accepting security in a case like this. Without going back on what I have said about the possibility of institutional oppression, I see no real evidence of it in this case. At worst some officials have been careless and imprecise in explaining the Revenue’s position.”

Bearing in mind the range of reasonable positions open to the hypothetical creditor, the judge held, reversing the decision of Mr Registrar Rawson, that the Revenue had not gone outside that range and acted unreasonably.

[50] Thirdly, the decision of Lightman J in HM Customs and Excise v Dougall [2001] BPIR 269 is of interest because one of the arguments advanced by the debtor was that the Commissioners operated a rigid institutional policy of conceding nothing to a debtor who had defrauded them. The judge (at 273) said that it was clear to him that the Commissioners did not regard themselves as bound to adhere to any rigid policy, and they viewed the debtor’s proposal on its merits, as they were obliged to do. He then referred to certain aspects of the evidence which supported this conclusion, and continued (at 274):

“I should, however, add, that even if I had held that there was a rigid policy which constrained the [Commissioners] in regard to the proposal made, I would not have regarded that as a matter of any significance for this simple reason: the exercise required, as I have already said, is an objective valuation of the offer and subjective considerations which operated on the mind of the creditor are not matters of any weight.”

[51] This last point is a significant one, because like the Registrar I find it disturbing that Mr Ross and Mr Holmes were repeatedly told that it was the policy of HMRC not to accept security in the form of legal charges over land. A variety of explanations for this policy were given, but its existence was never denied, and consistently with its existence there is no indication that the security offered by Mr Ross and Mr Holmes was ever considered on its merits. In the course of the hearing Mr Lopian told me, on instructions, that despite all appearances to the contrary in the present case HMRC do not, in fact, have a rigid policy, and all offers of security are (or should be) considered on their merits. I do not doubt that Mr Lopian’s instructions were to this effect, but I have to say that there is no evidence in the present case of the application of a flexible policy of that nature, and there is instead every indication that the offer of security was rejected out of hand without any serious consideration. I think it is regrettable, to say the least, and especially so in view of the comments made by Robert Walker J in IRC v Debtor [ 1995] BCC 971, that if HMRC do have a coherent in-house policy in this area, effective steps have apparently not been taken to ensure that it is known to, and applied by, the enforcement officers who actually deal with debtors. In the circumstances, it is not surprising that Mr Ross and Mr Holmes gained the firm impression that their offer of security was for all practical purposes ignored. Furthermore, there is in my judgment a real risk of institutional oppression if a rigid policy is unthinkingly applied, and debtors are fobbed off with inadequate or generalised justifications for the policy.

Henderson J in Ross & Holmes v Commissioners for HM Revenue and Customs turned to the HMRC's justification for refusing the debtor/respondents' offer of security, and whether the 5 reasons HMRC tendered, were sound reasons:

[52] It is worth at this point making some brief comments on the justifications proffered by Mr Webber in his witness statement. First, it is said that HMRC are not prepared to accept legal charges ‘as there is no guarantee as to when payment will be forthcoming’. That is of course true, but the purpose of security is normally to ensure that payment in full will be made when the security is realised, and it will often be the case that the prospects of obtaining payment in full are far less certain if the offer is refused and a bankruptcy order is made. Secondly, it is said that immediate settlement of the debt is required “to maintain the flow of funds to the exchequer”. But where enforcement proceedings have reached the stage of an offer of security, the debtor will long since have failed to settle his taxation liabilities when they fell due, and the issue is rather how to maximise the likely net recovery to public funds (as Robert Walker J said at 976). The third reason is that HMRC do not have the resources to act as mortgagees and to administer the sales of mortgaged property. This, by contrast, appears to me to be a highly material consideration, and in my view debtors cannot reasonably complain if in the general run of cases HMRC decline to incur such responsibilities. Their primary function, after all, is to collect tax, not to act as an institutional lender. The fourth reason is that Mr Ross and Mr Holmes had already had plenty of time to raise money on the security of their properties. This, too, was in my judgment a relevant consideration, and it formed part of the history which, as the deputy judge said in Re a Debtor (No 32 o f 1993) [1995] 1 All ER 628, [1994] 1 WLR 899, the creditor is entitled to take into account. Finally, it is said that it would be unfair to other taxpayers who pay their taxes on time if HMRC were to accept legal charges in the present case. This seems to me a bad reason. In general, fairness to other taxpayers will best be achieved by adopting the policy which is best calculated to maximise the net recovery to public funds. It seems to me fanciful to suppose that acceptance of the charges offered by Mr Ross and Mr Holmes, over a substantial portfolio of properties, would somehow have encouraged other taxpayers not to pay their taxes on time, or penalised them for doing so.''

As to the extent to which the hypothetical reasonable creditor is taken to have the actual characteristics of the petitioning creditor, Henderson J in Ross & Holmes v Commissioners for HM Revenue and Customs said:

'[53] A related question is how far the hypothetical reasonable creditor should be taken to have the actual characteristics of the petitioning creditor. This is not a question which has been much explored in the authorities, but it seems to me that the test only makes sense if the hypothetical creditor is regarded as having at least the main characteristics of the petitioning creditor and as standing in his shoes. Thus Timothy Lloyd QC formulated the relevant test as being “whether a reasonable creditor, in the position of this petitioning creditor, and in the light of the actual history as disclosed to the court, would have accepted or refused the offer” : see [1995] 1 All ER 628 at 639, [1994] 1 WLR 899 at 910, followed by Lightman J in HM Customs and Excise v Dougall [2001] BPIR 269 at 272. Accordingly, in the present case the hypothetical creditor must in my view be regarded as a national revenue authority in the same position, and subject to the same constraints, as HMRC, and the test has to be applied in the light of the actual history as set out in the evidence before the court.’

Note: the '1' in the above extract is a footnote reference in the judgment of Chief Registrar Baister in Garwood. The footnote reads 'I have here corrected an obvious error. The text of the judgment actually reads: ‘whether an unreasonable creditor...’ [bold added]. Clearly the test relates to the hypothetical reasonable creditor, not the hypothetical unreasonable creditor.

[5] In Revenue and Customs Commissioners v Garwood [2012] BPIR 575, [2012] 2 WLUK 837, Chief Registrar Baister said, at paragraph 23 (with cited authorities):

'(1) the starting point is to ask whether a reasonable hypothetical creditor in the position of the petitioning creditor would accept or refuse the offer, bearing in mind, however, that there could be a range of reasonable positions which such a creditor could adopt (Timothy Lloyd QC at 447G);

(2) the test is objective (Robert Walker J at 974A; Lightman J at 272G);

(3) it is necessary to consider the extent to which the reasonable hypothetical creditor may be taken to have the characteristics of the petitioning creditor (Henderson J at para [53]);

(4) the court must look at the position at the date of the hearing (Timothy Lloyd QC at 447D);

(5) the court is not limited to considering the matters taken into account by the petitioning creditor when the offer of security was refused; it must look at all the relevant factors and their impact on the reasonable hypothetical creditor (Lightman J at 272G-H);

(6) that includes the history (Henderson J at para [45]);

(7) the debtor must be full, frank and open in providing the necessary information to enable the creditor to make an informed decision (Lightman J at 272H);

(8) a rigid institutional policy of rejecting offers to secure could be a relevant consideration, since the reasonable hypothetical creditor was obliged to consider an offer on its merits (Lightman J at 273 referred to the creditors’ viewing the proposal on its merits ‘as they were obliged to do’; cf Robert Walker J’s reference to ‘bureaucratic inflexibility’ which could give rise to ‘an impersonal sort of oppression’ at 974G and Henderson J at para [51]); ‘coherent in-house policies’, however, are not necessarily wrong;

(9) a creditor is entitled to have regard to his own interests and is not obliged to ‘take a chance, or to show patience or generosity’ (Robert Walker J at 974; Henderson J at para [47]);

(10) the costs and resources implications for the creditor are a ‘highly material consideration’ (Robert Walker J at 976; Henderson J at paras [49] and [52]).'

The authorities referenced are:

(1) Commissioners of Inland Revenue v The Debtor, Re A Debtor (No 6349 of 1994) [1996] BPIR 271, [1996] BCC 971, ChD (Robert Walker J);

(2) Re A Debtor (No 32 of 1993) [1994] 1 WLR 899, [1995] 1 All ER 628. [1994] BCC 438, ChD (Timothy Lloyd QC sitting as a Deputy High Court Judge);

(3) HM Customs and Excise v Dougall [2001] BPIR 269, ChD (Lightman J);

(4) Inland Revenue Commissioners v A Debtor [1995] BCC 971, ChD (Robert Walker J);

(5) Ross & Holmes v Commissioners for HM Revenue and Customs [2010] EWHC 13 (Ch), [2010] BPIR 652, [2010] 2 All ER 126, ChD (Henderson J).

[6a] Similarly, in Sahota v Singh [2018] EWHC 2646 (Ch), Carr J said that '...the approach to be adopted in relation to such cases under s.271(3) of the Insolvency Act...' (paragraph 11) has been considered in detail by Chief Registrar Baister in HMRC v Garwood [2012] 2012 BPIR 575 and that the Chief Registrar had '...helpfully summarised the relevant propositions...' (paragraph 11) before setting some of the Chief Registrar's Garwood propositions (oddly, it was some rather than all; he set out 7 of the 10 propositions, presumably taking the view the other 3 were not relevant).

[6b] In Hughes v Howell [2021] EWCA Civ 1431; [2022] BPIR 135, after noting it was 'pertinent to the present case' (paragraph 8), Lewison LJ said, at paragraph 8:

'It is based on a judgment of Robert Walker J in IRC v A Debtor [1995] BCC 971 and that of Henderson J in Ross and Anor v HMRC [2010] EWHC 13 (Ch), [2010] 2 All ER 126. In my judgment, it is a sound point.'

[7] There are a few points to make here:

(1) First, a note. The '1' in the quoted passage is because an obvious error has been corrected in the quotation. Lightman J actually said '...whether an unreasonable creditor...' but that is clearly a mistake. It should read 'reasonable creditor' rather than 'unreasonable creditor. This error has been picked up and pointed out judicially. Chief Registrar Baister in Revenue and Customs Commissioners v Garwood [2012] BPIR 575, [2012] 2 WLUK 837 ('Garwood') pointed out the error, and adopted the practice of quoting it with the error corrected, but using a footnote to point this out. In Garwood, Chief Registrar Baister's footnote reads: 'I have here corrected an obvious error. The text of the judgment actually reads: ‘whether an unreasonable creditor...’. See also paragraph 31 of Ross & Holmes v Commissioners for HMRC [2010] EWHC 13 (Ch); [2010] BPIR 652.

(2) Secondly, the first formulation of the hypothetical reasonable creditor test was made in Re a Debtor (No 32 of 1993) [1994] 1 WLR 899 ('Re a Debtor 32'), wherein Timothy Lloyd QC (sitting as a deputy High Court Judge) said, at 910, the appropriate test was:

'whether a reasonable creditor, in the position of this petitioning creditor, and in the light of the actual history as disclosed to the court, would have accepted or refused the offer.'

He continued, at 910:

'However, I think it has to be borne in mind that there could be a range of reasonable positions on the part of hypothetical reasonable creditors. In order to conclude that the refusal was unreasonable, it seems to me that the court has to be satisfied that no reasonable hypothetical creditor would have refused the offer, and that the refusal of the offer was therefore beyond the range of possible reasonable actions in the context.'

So it was Re a Debtor 32 that first formulated it (HMRC v Garwood [2012] BPIR 575, paragraph 20), with Lightman J in HM Customs and Excise v Dougall [2001] BPIR 269 adopting and clarifying it (HMRC v Garwood [2012] BPIR 575, paragraph 21).

(3) As will be apparent, it would be wrong to:

(a) approach the matter on the basis that there can only be one course (i.e. decision) that can reasonably be taken (910). There is likely to be a range of decisions which a hypothetical reasonable creditor could take; and/or

(b) ask what the petitioner creditor did in fact subjectively consider, and to then only take into account what the petitioning creditor did in fact take into account in reaching his decision. The hypothetical reasonable creditor is not so limited in what he may consider.

Rather, '...what the court has to consider is whether the reasonable creditor would have considered any of these matters and if so whether it would have come to any particular conclusion' (910)

As an aside, to help the deputy High Court Judge determine what the range of responses a hypothetical reasonable creditor might reasonable take to the offer, the deputy High Court Judge found it of assistance, that is, appropriate:

(a) '... to start from the premise that a creditor such as the [petitioning creditor Commercial Union], with extensive dealings with professional men such as the debtor ..., and no doubt with much experience of bad debts such as that on which the petition is based, is relatively unlikely to adopt an attitude which no reasonable creditor would adopt.' (911)

(b) to look for whether there was evidence '...of motives of oppression or other ulterior purpose, which could well arise in the case of a less commercial creditor' (911)

(4) Henderson J in Ross & Holmes v Commissioners for HMRC [2010] EWHC 13 (Ch); [2010] BPIR 652, quoted the extract (as part of larger extract) from Lightman J's judgment in HM Customs and Excise v Dougall [2001] BPIR 269, ChD, at 272, and said that it was a 'helpful summary of the relevant legal principles' (paragraphs 44 and 31)

[8] Subsection 271(3) provides (so far as presently material):

'The court may dismiss the petition if it ... is satisfied-
(a) that the debtor has made an offer to secure or compound a debt in respect of which the petition is presented,
(b) that the acceptance of that offer would have required the dismissal of the petition, and
(c) that the offer has been unreasonably refused;' [bold added]

Consequently, the Court is empowered to dismiss a bankruptcy petition, where there is an offer: (1) to secure the debt; or (2) to compound the debt, if the other 2 conditions ((b) and (c)) in section 271(3) are satisfied. Note:

(1) even where the 3 conditions are satisfied ((a), (b) and (c)), the court still retains a discretion (though the word 'may') whether or not to dismiss the petition. It does not have to dismiss the petition (though it is hard to see what reason there might be for not dismissing the petition, assuming no other creditor sought to be substituted as the petitioning creditor - see point (2)(b) below).

(2) not all offers to compound will come within 'offer to ... compound a debt' within section 271(3)(a). In Re A Debtor (No. 2389 of 1989) [1991] Ch. 326, Vinelott J said, at 333-334:

'In my judgment...a proposed voluntary arrangement is not to be treated as an offer to each creditor capable of being accepted or refused by the petitioning creditor within the meaning of section 271(3).'

However, 'offer to ... compound a debt' within section 271(3)(a) is not narrower than the ordinary language of the section. In Re a Debtor (No 32 of 1993) [1994] 1 WLR 899 ('Re A Debtor 32'), Timothy Lloyd QC (sitting as a deputy High Court Judge):

(a) rejected the creditor's argument that '...the offer could not be within the section in respect of present debts unless either it reduced the total petition debt to less than £750 or it fell within the case of an offer to each of several creditors' (905)

(b) said, at 905-906:

'Of course if there are several creditors wishing to use the bankruptcy procedure, in practice the debtor has to come to terms with each of them, or another will be substituted as petitioning creditor. But if a debtor has only the one creditor seeking to use the bankruptcy procedure, I see no reason in principle why he should not be able to make an offer to that one creditor which would come within section 271(3). Clearly an actual composition with that creditor results in the dismissal of the petition under section 271(1) in the absence of another supporting creditor who wishes to be substituted.'

(c) said section 271(3) should be construed on the ordinary language of the section (906). That he was (906):

'...unable to accept [counsel for the creditor's] arguments as being sufficient to give the words used in the section a special limited meaning narrower than that which they would bear on the ordinary meaning of the words.'

(4) found (906), that on the facts in Re A Debtor 32, the offer made, was within section 271(3).

[9] The full reasoning of Timothy Lloyd QC (sitting as a deputy High Court Judge) in Re a Debtor (No 32 of 1993) [1994] 1 WLR 899, is as follows, at 910-911:

'In that regard, I consider that the petitioning creditor's criticisms of the attitude adopted on behalf of the debtor as being a tale of prevarication and delay, while perhaps over severe, have a good deal of justification. It may be that the debtor was doing his best to reach an accommodation which would be acceptable to his creditors, and that the several changes of professional advisers handling the dealings with the petitioner - one of them at a moment which gave the debtor a tactical advantage by necessitating an adjournment of the hearing of the petition - arose for reasons which cannot fairly be laid at the door of the debtor. However, it seems to me that it is incumbent on a debtor, if he wishes his proposals to be looked at with sympathy, to be full, frank and open with his creditors in respect of his statements of his position, and the record of this debtor is not all that satisfactory. Despite what I have said earlier about the ability of the creditor to investigate and challenge the specific evidence of means and so on in relation to the actual proposal, it seems to me that the hypothetical reasonable creditor, on the facts of this case, might well be influenced, in deciding whether to accept the offer or to press for a bankruptcy order, by the unsatisfactory record of the debtor's past dealings. In that context, it also seems to me that the hypothetical reasonable creditor might well regard it as relevant that, whatever the eventual outcome of the bankruptcy, in financial terms for the creditors, a bankruptcy order would at least result in a full investigation, fuller than could be achieved by inquiries on behalf of the creditor on an ad hoc basis.'

The Court in Ross & Holmes v Commissioners for HM Revenue and Customs [2010] EWHC 13 (Ch), [2010] BPIR 652 ('Ross') made clear that a Court can take into account, as a factor, the history of the matter between the debtor and petitioning creditors. Henderson J in Ross held that the:

'...Registrar in the present case cannot in my judgment be criticised for having had regard to the history of the matter as a factor which a reasonable creditor would have taken into account in deciding whether or not to accept the offer of security.'

Later, Henderson J went through the justifications put forward by HMRC, for why it had not been unreasonable when it refused the debtors' offer to secure the petition debt. HMRC had said, as one of its justifications, that the debtors' had already had plenty of time to raise money on the security of their properties. As to this, Henderson J said, at paragraph 52:

'This..was ...a relevant consideration, and it formed part of the history which, as the deputy judge said in Re a Debtor (No 32 of 1993) [1995] 1 All ER 628, [1994] 1 WLR 899, the creditor is entitled to take into account.'

The history of the debtor's actions/statements and his interactions with the creditor, will be scrutinised. There must also be some discernment between different categories (motivation, culpability, seriousness etc) In Revenue and Customs Commissioners v Garwood [2012] BPIR 575, [2012] 2 WLUK 837, Chief Registrar Baister drew distinctions, when looking at the history (of delay and disorder), between:

(1) prevarication vs error of judgment, around sale of the property (paragraph 29);

(2) signs of incompetence vs fraud (paragraph 30)

[10a] In Hughes v Howell [2021] EWCA Civ 1431; [2022] BPIR 135, Lewison LJ considered the uncertainty in the value of the property over which the debtor offered security (testimentary 20% residual legacy (then limited to the ancillary right to have the deceased's estate administered) in an unadministered estate). At paragraph 19, Lewison LJ said:

'Its value would depend on how much was received from [the debtor's] aunt's house and when.'

Lewison LJ then said, at paragraph 19:

'The uncertainty relating to both the value and timing of the security would undoubtedly be something that the hypothetical creditor would bear in mind.'

In Sahota v Singh [2018] EWHC 2646 (Ch)('Sahota'), 2 debtors were made bankrupt. They appealed to Carr J against their bankruptcy order. There were 3 grounds of appeal, that the first instance judge had wrongly dealt with: (1) unreasonable refusal of offer of security; (2) set off; and (3) oppression.

Focusing on (1) for present purposes; the debtors argued, on the appeal before Carr J, that the first instance judge had been wrong to find that a hypothetical reasonable creditor could have refused the offer of security made by the debtors, to the petitioning creditor (petitioner).

The property offered as the security, was an offer to assign, from one of the debtor's sons, to the petitioner, the benefit (the obligee end) of part of a debt (in the form English Court costs orders (paragraph 10)), owed by a third party (the 'Third Party') to one of the debtor's sons (paragraph 3). Problems with the security included:

(1) the Third Party was the Petitioner's spiritual leader;

(2) the Third Party lived in India; in the event of non-payment, enforcement proceedings would have to be brought in India;

(3) the debtor's son had not himself initiated enforcement proceedings against the Third Party, during the interim c.6 years (c.15.4.11 at the latest (paragraph 10)) since the costs orders were made.

In refusing appeal on this ground, Carr J in Sahota:

(1) firstly, recorded, at paragraph 18, that the first instance judge had reasoned/held as follows:

"What the court has to decide is whether the offer that has been made, namely offering an assignment which would, in order to produce the funds which are being offered, require enforcement proceedings to be brought against the party where the original beneficiary of the order has not sought to do so himself, whether that offer is reasonably or unreasonably refused. I have come to the decision that it is not unreasonably refused, that it would require litigation proceedings to be undertaken by others which have not been commenced by [the proposed equitable assignor/one of the debtor's son] himself. In the circumstances, and I fully understand why he wishes to offer an assignment of the order in his favour to his father and to his uncle, but simply because he wishes to spare them the effect of non-payment of the cost orders against them does not, in my view, constitute an unreasonable refusal on the part of [the Petitioner] to refuse to undertake steps to recover money that [the proposed equitable assignor/one of the debtor's son] himself has not pursued."

(2) secondly, said, at paragraphs 21 to 22:

'In my view, the assessment of the appellant's offer of security was a multi-factorial value judgment....'

And that,

'...In my view, [the first instance judge] was entitled to consider the practicalities of enforcement of a debt in a foreign jurisdiction which the creditor in that jurisdiction himself had chosen not to pursue. She was entitled to consider that a reasonable creditor would have refused that offer of security and the factors to which she referred in her judgment were all relevant to her assessment of the reasonableness of the offer.'

For completeness, it is noted that, at paragraph 23, Carr J said:

'I can well understand a perception on the part of the appellants that it is unfair that on the one hand [the Third Party] should apparently be able to avoid or refuse to pay an order of costs but on the other hand, they are required to pay an order for costs. However, it is important to remember that the debt with which I am concerned is not owed to [the Third Party] The petitioners are separate parties and it is not an answer to say that [the Third Party] has not paid his debt.'

Similarities can be drawn between evaluating the reasonableness of a refusal of an: (1) offer of security; with (2) offer to compound; both face the same test, as prescribed by section 271(3) of the Insolvency Act 1986. Though Allen v Haringey LBC [2017] EWHC 2664 (Ch) is a permission to appeal case (so should not usually be referred to), it can be noted that Norris J refused the bankrupt permission to appeal, including on the ground that the first instance judge fallen into error in relation to her determination that the (then) debtor's offer to compound the remaining petition debt, had been unreasonably refused.

The debtor owed £3,988 to the Petitioner (local authority) by the time of the hearing. This was below the bankruptcy threshold but the Court did still retain jurisdiction to impose a bankruptcy order nothwithstanding (see Lilley v American Express Europe Ltd [2000] BPIR 70). The debtor's offer to compound (which the Petitioner had refused) was that the debtor do pay the Petitioner £500 per month, until the Petition debt was discharged. The first instance judge considered the history of the matter (16), including that: (1) debtor seemed to have an annual salary of £15,500 odd (before deduction of tax)(paragraph 13); (2) the debtor was not paying the current year's council tax; (3) the debtor's mortgage absorbed about two-thirds of the debtor's available income (paragraph 17); (4) after the mortgage instalment and £500 were deducted, the debtor '...would be left with almost nothing on which to live on' (paragraph 17). The first instance judge '...noted also that a petitioning creditor was not obliged to be patient or generous and that these were long outstanding debts in respect of which [the debtor] had given no explanation in evidence as to why they had not been paid.' The first instance judge said that '[the debtor's] difficult financial circumstances, he was not able to pay the debt within a reasonable period, even though he was apparently the owner of two properties which provided a source of funds to which he could have had resort and to which resort could be had in a bankruptcy. In the circumstances, she decided to make a bankruptcy order' (paragraph 18)

As stated, Norris J refused permission to appeal on this ground, finding a challenge to this decision, did not have a real prospect of succeeding (paragraph 20).

In a way, the offer to compound had little value as it could not be performed by the debtor. A similar analysis is conducted in relation to whether property offered to be subject to security, has any true value.

[10b] See the commentary in footnote 10a above on: (1) Hughes v Howell [2021] EWCA Civ 1431; [2022] BPIR 135 (2) Sahota v Singh [2018] EWHC 2646 (Ch)

[10c] This was legally possible. Lewison LJ in Hughes v Howell [2021] EWCA Civ 1431; [2022] BPIR 135 ('Hughes') addressed this.

Firstly, he went through the law on what, exactly, is a right in/to the testimentary residuary gift from an unadministered Will. At paragraph 14, Lewison in Hughes said:

'14. The law on the rights of a residuary beneficiary in an estate in the course of administration is clearly stated by Viscount Radcliffe in Commissioner of Stamp Duties (Queensland) v Livingston [1965] AC 694. First, when property came to an executor by virtue of his office it came to him in full ownership without distinction between legal and equitable interests. The whole property was his. He held it for the purpose of carrying out the functions and duties of administration, not for his own benefit, and those duties would be enforced upon him by the Court of Chancery. Second, equity did not recognise or create for residuary legatees a beneficial interest in the assets in the executor's hands during the course of administration. The principal right of a residuary beneficiary is a right to compel the due administration of the estate. This statement of principle has never been doubted. Thus in Marshall (HM Inspector of Taxes) v Kerr [1995] 1 AC 148 Lord Browne-Wilkinson said:

"In English law the rights of a testamentary legatee in the unadministered estate of a testator are well settled: see Lord Sudeley and Others v The Attorney-General [1897] AC 11 e [1897] AC 11 […] Livingston […]. […] A legatee's right is to have the estate duly administered by the personal representatives in accordance with law. But during the period of administration the legatee has no legal or equitable interest in the assets comprised in the estate."

15. In addition to a right to compel the due administration of the estate a residuary beneficiary also has an immediate entitlement arising from the terms of the will to have transferred to him at the completion of the administration of the estate such assets (if any) as then form the residue of the estate (Dr Barnardo's Homes National Incorporated Association v Commissioners for Special Purposes of the Income Tax Acts [1921] 2 AC 1, Re Leigh's Will Trusts; Handyside v Durbridge [1970] Ch 277).'

Secondly, Lewison LJ in Hughes considered whether such a right could be made subject to a security/be the subject of a security. Lewison LJ said, at paragraph 16:

'...the definition of property in section 435(1) of the Insolvency Act is extremely widely drawn and includes amongst other things choses in action. Thus it has been held that the right to a residuary beneficiary to compel due administration of an estate falls within that definition, with the consequence that that right forms part of a bankrupt's estate (Re Hemming [2008] EWHC 2731 (Ch), [2009] Ch 313). Since the right is a transmissible right it is capable at least in theory of being the subject matter of security.

17. In Roddick v Gandell (1851) 1 GM & G 763 Lord Truro LC considered how a chose in action might be secured; and formulated the principle as follows:

"An agreement between a debtor and a creditor that the debt owing shall be paid out of a specific fund coming to the debtor or an order given by a debtor to his creditor on a person owing money or holding funds belonging to the giver of the order, directing such person to pay such funds to the creditor, will create a valid equitable charge upon such fund, in other words will operate as an equitable assignment of the debts or fund to which the order refers."

18. The Privy Council approved that formulation in Palmer v Carey [1926] AC 703.'

Thirdly and lastly, Lewison LJ said, at paragraphs 18-19:

'18...In the present case [the debtor] agreed with [petitioning creditors] that part of the debt owing would be paid out of a specific fund coming to [the debtor], ie his share in his aunt's residuary estate, and directed the executors to pay those funds to the [petitioning creditors'] solicitors. I am prepared to accept that that amounted to securing that part of the debt for the purposes of the Insolvency Act 1986.'

The result was that the debtor had offered the creditor security over his right to have his aunty's estate administered (and so over, in a sense, the fruits of the testimentary residuary gift (20% of the residuary estate) the debtor was due) (paragraph 19 of Hughes)

The method by which the security was to be granted, was through what the debtor described as 'irrevocable instructions' (paragraph 10):

(1) The debtor have given:

(a) 'irrevocable instructions' to the solicitors for the executors to his aunty's Will, that (paragraphs 10-11) the solicitors for the executors to his aunty's Will should pay all sums that the debtor was due to receive from this aunty's deceased estate, to the petitioning creditors' solicitors;

(b) irrevocable authority to the petitioning creditors' solicitors, to receive the debtor's share of the estate;

(2) that the petitioning creditors were entitled to receive any interim or final payment out of the estate, that would otherwise have been payable to debtor.