Delay in Presenting Bankruptcy Petition after Service of Statutory Demand

Author: Simon Hill
In: Article Published: Saturday 11 June 2022

Share

In personal insolvency, where a statutory demand is served on an (alleged) debtor/demandee, and (i) the statutory demand is not met; and (ii) the statutory demand is not subject to an application to set it aside (nor has it been set aside[1]), then the (alleged) creditor/demander is likely to want to present a (creditors) bankruptcy petition, based upon the unmet statutory demand, as soon as possible[2]. However, a demander/would-be petitioner may delay presentation, and this raises an issue: could a demander/would-be petitioner delay so much, such that any bankruptcy petition presented and pursued (founded upon the (unmet) statutory demand), will be liable to be dismissed for the delay? And if so, in what circumstances? This issue/area can be known as 'late presentation of the petition'.

Insolvency Act 1986 and Insolvency Rules 2016

The Insolvency Rules 2016 do not contain an express provision prohibiting the presentation and pursuit of a bankruptcy petition, more than a certain time after the statutory demand. What that there is, is:

(i) the general provision in Insolvency Act 1986, section 266(3), empowering the insolvency court to dismiss a petition (or stay the proceedings), if it appears to it appropriate to do for any reason; and

(ii) a rule requiring a bankruptcy petition to contain an explanation if the bankruptcy petition is presented (i.e. issued) more than 4 months after the statutory demand was served;

When to exercise (i) power and dismiss the petition, is influenced by the existance and  line drawn in (ii).

Insolvency Act 1986 Section 266(3)

Section 266 is entitled 'Other preliminary conditions' and subsection (3) reads:

'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 to 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'

Petition Contents - Explain Greater than 4 month Delay

The Insolvency Rules 2016 r10.7 is entitled 'Contents of Petition' and sub-rule (2) (formerly Insolvency Rules 1986, rule 6.12(7)[3]) reads:

'If the petition is based on a statutory demand, and more than four months have elapsed between the service of the demand and the presentation of the petition, the petition must explain the reasons for the delay.'

As indicated earlier, Insolvency Rules 2016 r10.7, does not expressly prohibit bankruptcy petitions being founded upon statutory demands served more than 4 months earlier. It 'merely' requires the petition to contain an explanation as to why it is presented more than 4 months after the service of the statutory demand.

It seems apparent that : (i) the rules committee/Parliament, considered that delay of under 4 months does not require explanation; whereas (ii) a delay of 4 months or more, does call for an explanation; further (iii) the insolvency court should consider the explanation, and consider whether: (a) it amounts to a 'reason' within section 266(3) and (b) it is appropriate to dismiss (or stay) the petition, as a result. Neither the Insolvency Act 1986, nor Insolvency Rules 2016, provide any more provisions. It has been left to caselaw to address how delay should be addressed.  

Caselaw

There is only one report case which seems to consider this area: Dunbar Assets plc v Fowler [2012] Lexis Citation 108, a decision of Registrar Baister on 5.12.12.

Dunbar Assets plc v Fowler

In Dunbar Assets plc v Fowler ('Fowler'), Dunbar Assets (formerly a bank; creditor/demander) served on 4.7.11 a statutory demand on Mr Fowler (debtor/demandee) founded upon unpaid sums on personal guarantees. Subsequently, Dunbar Assets presented a bankruptcy petition on 26.3.12 against Mr Fowler (i.e. 8 months 22 days later). Mr Fowler opposed the making of a bankruptcy order, on (amongst other things), the ground '...that the petitioning creditor had misled the court about the reason for delaying in presenting its petition for a period greater than four months since service of the statutory demand.' (paragraph 4(b))

Registrar Baister turned to this ground, at paragraphs 31-37 (inclusive)[4], under the subheading 'Misleading the court'. Registrar Baister:

(1) noted the point arose out of the obligation to explain any delay beyond 4 months (paragraph 31);

(2) stated 'As far as I am aware there is no authority on this provision, and I have never heard argument on it before.' (paragraph 32)

(3) reviewed the two leading textbooks in this field, (i) Sealy and Milman's Annotated Guide to the Insolvency Legislation 2012 (15th Edition) - which said nothing about the rule; (ii) Muir Hunter on Personal Insolvency - which did comment on it, as follows:

'7-267 This is presumably designed to give the court some control over the use of the bankruptcy process, and to prevent creditors relying on 'stale' statutory demands; furthermore, Form 6.13A, at statutory note (f), itself requires a statement of 'reasons for the delay and explanations of the circumstances which have contributed to the late presentation of the petition.' In such cases, the debtor's financial position may have subsequently altered, and it might be unfair to allow a petition to be presented against him; alternatively, there may have been lengthy negotiations for payment or compromise of the debt between the creditor and the debtor, and the creditor may wish not simply to obtain a bankruptcy order, but to put further pressure on the debtor to pay or compromise the debt.

7-268 However, the rules do not in fact provide any express sanction to penalise 'the late presentation of the petition', and r. 6.10(3) appears to require the court to seal the copies of the petition as presented to it; no provision is made comparable to the BR 1952 r. 151, which required the Registrar, before sealing the petition, to investigate the statements in it generally. Under r. 6.11(9), however, the court may take objection to the creditor's failure sufficiently to comply with his obligations under r. 6.3(2), as to adequately bringing the demand to the debtor's attention. Further, s. 266(3) does empower the court to dismiss a petition, or to stay proceedings on it, where there has been a contravention of the Rules, 'or for any other reason'. There is no Rule requiring a petition to be presented within four months, but the staleness of the demand on which it is founded might be regarded by the court as falling within 'any other reason'. No similar sanction is applied to a petition based not upon a statutory demand but upon an unsatisfied execution.'[5]

(4) said 'I can think of no other purpose' to the obligation to provide an explanation, other than '...to prevent a petitioner from relying on a stale statutory demand...' (paragraph 36), as contended for in Muir Hunter.

(5) analysed whether the the debtor/respondent Mr Fowler had '...suffered any prejudice as a result of the further delay' (paragraph 36) after the 4 months had expired;

(6) opined that, where: (i) there are serious abuse (i.e. delay beyond 4 months) and (ii) this resulted in prejudice to the debtor/respondent, leading to circumstances which were unfair to the debtor/respondent, the insolvency court could dismiss the petition under section 266(3). Registrar Baister said, at paragraph 37:

'The sub-rule itself does not provide for any sanction, although I have no doubt that the court could deal with any serious abuse that did result in prejudice to a debtor by dismissing a petition presented in circumstances that did give rise to unfairness to the debtor by using the power given by section 266(3) Insolvency Act 1986 by exercising its general control of proceedings or perhaps even by using the powers given to it by section 363(1) Insolvency Act 1986.'

On the facts, Registrar Baister refused to dismiss the petition under section 266(3). He held that '...it cannot be said to be a mischief requiring dismissal of the petition in the particular circumstances of this case' (paragraph 36) and that 'There is nothing in the circumstances of this case that would warrant the exercise of such power or control' (paragraph 37). He reached this conclusion through a number of steps:

(1) he recorded Mr John Duffy's (for Dunbar Assets) explanation that the delay (which must related to the period past 4 months) was '...as a result of the time required to further investigate the properties ('Properties')...including the appointment of an internal chartered surveyor...In addition, there have been investigations regarding title tissues relating to the Properties...All of these actions have taken time but have been necessary to establish the value of the Properties.' (paragraph 33). He further recorded that Mr Fowler alleged that this explanation was misleading and untrue (paragraph 34)

(2) he resolved the clash of evidence between Mr Duffy and Mr Fowler (where there had been no oral evidence/cross examination of either (as it would have been disproportionate)), be resorting to certain presumptions (which without making any findings of fact). Registrar Baister (had to) presume[6] that: (i) Mr Fowler's assertion about Mr Duffy's explanation were correct; but that (ii) these inaccuracies were made 'bona fide and without any intention to mislead the court' (paragraph 35)

(3) while having regard to the '...gap ... just under eight months, almost double the time mentioned in sub-rule (7)' (paragraph 36)

(4) on prejuduce, he opined 'It cannot be said that Mr Fowler has suffered any prejudice as a result of the further delay as a result of the passage of a further four months or thereabouts:' (paragraph 36); this was because Mr Fowler '...does not say he has suffered any prejudice, and plainly much of the time was taken up by the settlement negotiations to which I have referred, so Mr Fowler must have contemplated the possibility of a petition being presented throughout the whole of the period between service of the demand and presentation of petition, including the 'extra' four months. The statutory demand cannot be said to be 'stale' in the sense that Mr Fowler was lulled into any false sense of security about his position as a result of the delay in presenting the petition.' (paragraph 36)

He concluded, in essence therefore, that while there was no accurate explanation for the delay, the lack of any prejudice to the debtor/respondent Mr Fowler, meant that the petition did not warrant being dismissed under section 266(3).

Conclusion

In personal insolvency, the insolvency court can, under section 266(3) of the Insolvency Act 1986, dismiss a petition for any 'reason'. Where a bankruptcy petition is presented more than 4 months after the service of the statutory demand, Insolvency Rules 2016 r10.7 requires the petition to contain an explanation for the delay. The insolvency court may, in light of this explanation (if any), exercise its power under section 266(3) to dismiss the petition, where the circumstances warrant it. The insolvency court will, amongst other things, look at the length of the delay (post 4 month), the explanation for it and whether that explanation is accurate, and further, whether and if so, what prejudice the debtor/respondent has suffered, as a result of the (post 4 months) delay. Where: (i) there is serious abuse (i.e. delay beyond 4 months) and (ii) this resulted in prejudice to the debtor/respondent, leading to circumstances which are unfair to the debtor/respondent, the insolvency court could dismiss the petition under section 266(3).

SIMON HILL © 2022

BARRISTER

33 BEDFORD ROW

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

[1] The statutory demand has not been set aside, whether because:

(i) the debtor/demandee issued no application for an order setting aside the statutory demand, under Insolvency Rules 2016, r.10.4; or

(ii) the debtor/demandee issued an application for an order, setting aside the statutory demand, under Insolvency Rules 2016, r.10.4, but that application was unsuccessful.

Note, where an application to set aside a statutory demand is dismissed (which will be at a hearing pursuant to Insolvency Rules 2016, r.10.5), the insolvency court dismissing the set aside application must make an order in accordance with Insolvency Rules 2016, r.10.5(8)(This rule was formerly Insolvency Rules 1986, r.6.5(6)). Insolvency Rules 2016, r.10.5(8) says:

'If the court dismisses the application, it must make an order authorising the creditor to present a bankruptcy petition either as soon as reasonably practicable, or on or after a date specified in the order.'

As to the what date ought the insolvency court select, as the date upon/from which a bankruptcy petition may be presented, see:

(i) Everard v Lloyds [2003] BPIR 1286 ('Everard')

In Everard, Lloyds ('L') served statutory demands on Everard ('E'), a Lloyds Name. As part of litigation between the parties, E brought and (largely) lost a negligent misrepresentation case against L before Cooke J. Cooke J's refused permission to appeal. E sought permission to appeal from the Court of Appeal, but that application was still pending at the time of the hearing of E's application to set aside the statutory demands.

Laddie J held that the statutory demands were set aside. However, Laddie J went on to make some further points on the counterfactual situation that he had not set aside the statutory demands (paragraph 68); Since these further points were unnecessary to his decision, they are clearly obiter. However, they may be instructive.

Laddie J recorded at paragraph 33, that E had argued, that:

'...second...as a matter of case management, it is appropriate to adjourn this application until after the final determination of the appeal process from Cooke J's judgment. Such an adjournment would automatically extend the prohibition on [L] petitioning for bankruptcy. The third is that I should exercise the powers under Rule 6.5(6) to fix a date after which Lloyd's may present its petitions. That date would be after the determination of the appeal process.'

Laddie J said, at paragraph 68 '...had I not been prepared to set aside the statutory demands, I would almost certainly have refused to exercise any discretion I have under the CPR to stay these proceedings so as to achieve an equivalent result by the back door. If the effect of the Rules is to prevent the court from setting aside the statutory demand, it would not be appropriate to try to undermine the legislative intent by use of the CPR. For very similar reasons, it is most unlikely that I would have felt it appropriate to exercise the power under Rule 6.5(6) in a way which appears to be contrary to its purpose.'

In other words, the insolvency court dismissing an application to set aside a statutory demand, and then setting the date upon/from a bankruptcy petition can be presented, should not when setting that date, set a date with the aim of circumventing the effect of the (limited) grounds for setting aside a statutory demand. The date should not be set for after an appeal process has run its course, when the grounds for setting aside a statutory demand do not include - 'because the judgment debt founding the statutory demand may be set aside on a (threatened) appeal'.

(ii) Davies v Barnes Webster & Sons Ltd [2011] EWHC 2560 (Ch); [2012] BPIR 97 ('Davies'), where 3 months was given rather than the typical 21 or 28 days (note Arnold J in Darbyshire v Turpin [2013] EWHC 954 - considered below - said the default position is 'forthwith')

In Davies, A statutory demand was served on the club chairman of a unincorporated association (a rugby club), because was a member of the management committee of the unincorporated association. The underlying liability was monies due under a building contract entered into by the club treasurer, on behalf of the club.

The debtor/demandee/club chairman's application to set aside the statutory demand failed (paragraph 43). After Mann J dismissed the appeal, he said, at paragraph 44:

'I shall...add one further qualification...It is this. The liability is not a liability which anybody expects [the demandee] to satisfy out of his own funds, although if he has to he has to. It is a liability in respect of which he is likely to be entitled to an indemnity from the club. However, it will take him some time to organise that. He has of course had some considerable time...in order to try to satisfy this debt. [counsel for the demander] sought to explain that there have been inexplicable delays in sorting the matter out. I did not go into that detail. I do not think it matters for present purposes. It would be unduly oppressive to [the demandee] suddenly to find himself the subject of a bankruptcy petition in say 21 or 28 days time. Under rule 6.5 of the Insolvency Rules I can and should specify a time after which the creditor is able to petition on the basis of this demand. It seems to me to be right and in accordance with justice in this case that I should specify a longer period than the 21 or 28 days that one normally sees and I shall specify that the creditor should be at liberty to commence bankruptcy proceedings based on the statutory demand at any time after three months from today. That gives [the demandee] and the club three months to try and bring some order to the financial affairs of [the demandee] and this club. That all seems to me to be very much needed.'

(iii) Darbyshire v Turpin [2013] EWHC 954; [2013] BPIR 558 ('Darbyshire')

In Darbyshire, Gareth Darbyshire ('Mr Darbyshire') appealed against a bankruptcy order made against him. The appeal came before Arnold J, who set out Mr Darbyshire's first appeal point - made in relation to Insolvency Rules 1986, r.6.5(6). At paragraph 18, Arnold J said:

'...Rule 6.5(6) of the Insolvency Rules...provides as follows:

“If the court dismisses the application it shall make an order authorising the creditor to present a bankruptcy petition, either as soon as reasonably practicable or on or after a date specified in the order.”

And at paragraph 19, that '...it is common ground that [the order dismissing an application to setting aside the statutory demand] did not provide for either of those two alternatives. In those circumstances, Mr Derbyshire submits that it was not possible for a petition to be presented. His argument is that, once an application is made to set aside a statutory demand, the creditor cannot then present a petition.

Arnold J continued, at paragraph 19:

'Against that background, the purpose of Rule 6.5(6) is to provide a mechanism to lift that restriction and allow a petition to be presented. I do not agree with that analysis of the purpose of Rule 6.5(6). Once the application to set aside the statutory demand is dismissed, then the restriction on filing a petition automatically falls away. The purpose of Rule 6.5(6) is to enable the debtor, whose application to set aside the statutory demand has been dismissed, to ask for time in which to pay the debt before a petition is presented or, if not to pay the debt, to try and arrive at some compromise with the prospective petitioner.'

Adopting the petitioner's argument, Arnold J said, at paragraph 19:

'...the default position, in the absence of any request by the debtor for more time or, even if a request is made, if no justification is provided, is for the court to authorise the presentation of a petition forthwith. Accordingly, in those circumstances, it seems to me to be clear that Rule 6.5(6) should not be interpreted as prohibiting the petitioner from presenting a petition forthwith if no date is specified in the order. In support of that approach I would rely upon the judgments in Re Bezier Acquisitions [2011] EWHC 3299 (Ch) at [19]-[21], Re Ceart Risk [2012] BCC 592 at [15]-[16] and Re BXL Services [2012] BCC 656 at [10]-[13].'

(iv) Tatishev v Zimmerz Management LP [2021] EWHC 2611 (Ch) ('Tatishev')

In Tatishev, at paragraph 56, ICC Judge Mullen said:

'IR 10.5(8) requires me, on dismissing an application to set aside a statutory demand, to make an order authorising the creditor to present a petition. In the circumstances I shall authorise the presentation of a petition after 14 days.'

[2] It should be noted, for completeness, that a bankruptcy petition does not need to be founded upon a statutory demand. A bankruptcy petition can, alternatively, be based upon unsatisfied execution.

[3] Insolvency Rules 1986 r.6.12 (now obsolete) was entitled 'Verification of petition'. Insolvency Rules 1986 r.6.12(7) read:

'If the petition is based upon a statutory demand, and more than 4 months have elapsed between the service of the demand and the presentation of the petition, the [petition must include a statement explaining] the reasons for the delay.'

[4] For completeness, it is helpful to set out paragraphs 31 to 37 (inclusive) from Dunbar Assets plc v Fowler [2012] Lexis Citation 108, in full:

'31. The point arises out of rule 6.12 Insolvency Rules 1986. The rule deals with verification of bankruptcy petitions. Sub-rule (7) provides:

If the petition is based upon a statutory demand, and more than 4 months have elapsed between the service of the demand and the presentation of the petition, the [petition must include a statement explaining] the reasons for the delay.

32. As far as I am aware there is no authority on this provision, and I have never heard argument on it before. Sealy and Milman's Annotated Guide to the Insolvency Legislation 2012 (15th Edition) says nothing about sub-rule (7). Muir Hunter on Personal Insolvency comments as follows:

7-267 This is presumably designed to give the court some control over the use of the bankruptcy process, and to prevent creditors relying on 'stale' statutory demands; furthermore, Form 6.13A, at statutory note (f), itself requires a statement of 'reasons for the delay and explanations of the circumstances which have contributed to the late presentation of the petition.' In such cases, the debtor's financial position may have subsequently altered, and it might be unfair to allow a petition to be presented against him; alternatively, there may have been lengthy negotiations for payment or compromise of the debt between the creditor and the debtor, and the creditor may wish not simply to obtain a bankruptcy order, but to put further pressure on the debtor to pay or compromise the debt.

7-268 However, the rules do not in fact provide any express sanction to penalise 'the late presentation of the petition', and r. 6.10(3) appears to require the court to seal the copies of the petition as presented to it; no provision is made comparable to the BR 1952 r. 151, which required the Registrar, before sealing the petition, to investigate the statements in it generally. Under r. 6.11(9), however, the court may take objection to the creditor's failure sufficiently to comply with his obligations under r. 6.3(2), as to adequately bringing the demand to the debtor's attention. Further, s. 266(3) does empower the court to dismiss a petition, or to stay proceedings on it, where there has been a contravention of the Rules, 'or for any other reason'. There is no Rule requiring a petition to be presented within four months, but the staleness of the demand on which it is founded might be regarded by the court as falling within 'any other reason'. No similar sanction is applied to a petition based not upon a statutory demand but upon an unsatisfied execution.

33. The evidence in support of the petition given in compliance with rule 6.12 is that of John Duffy of 21 March 2012. He explains the delay in presenting the petition at paragraph 4 as follows:

4. There has been a delay between the service of the statutory demand dated 28 June 2011 and the presentation of the Petition as a result of the time required to further investigate the properties ("Properties") owned by Luxton Limited and Lindus Limited t/a The Luxton Property Trading Partnership and The Guild of St James (Cornwall) Limited, the principal borrowers, and their potential value. This process required the appointment of an internal chartered surveyor whose remit included inspecting the [P]roperties and liaising with agents. In addition, there have been investigations regarding title issues relating to the Properties, including foreshore entitlement. All of these actions have taken time but have been necessary to establish the value of the Properties.

34. Mr Fowler says that the reasons for the delay given by Mr Duffy are misleading and untrue (see paragraph 6 of Mr Fowler's witness statement and the material in the proceeding paragraphs leading up to his allegation; see also the two page written submissions setting out six respects in which he contends the court has been misled).

35. I did not hear oral evidence on this point from either Mr Duffy or Mr Fowler. In the absence of cross-examination (which would have been disproportionate) I cannot reach any conclusion on the truthfulness or accuracy of either Mr Duffy's reasons for the delay or Mr Fowler's objections to and criticisms of them. I will presume (but again without making any finding of fact) (a) in Mr Fowler's favour that Mr Duffy's statements in paragraph 4 of his first witness statement were inaccurate in whole or in part but (b) in Mr Duffy's favour that he made those statements bona fide and without any intention to mislead the court.

36. If the purpose of rule 6.12(7) is, as the learned authors of Muir Hunter contend, to prevent a petitioner from relying on a stale statutory demand (and I can think of no other purpose) it cannot be said to be a mischief requiring dismissal of the petition in the particular circumstances of this case. As we have seen, the statutory demand was served on 4 July 2011 (alternatively 4 August 2011 (see paragraph 6 of Mr Fowler's skeleton argument)) and the petition was presented on 26 March 2012, so the gap was just under eight months, almost double the time mentioned in sub-rule (7). It cannot be said that Mr Fowler has suffered any prejudice as a result of the further delay as a result of the passage of a further four months or thereabouts: he does not say he has suffered any prejudice, and plainly much of the time was taken up by the settlement negotiations to which I have referred, so Mr Fowler must have contemplated the possibility of a petition being presented throughout the whole of the period between service of the demand and presentation of petition, including the extra four months. The statutory demand cannot be said to be stale in the sense that Mr Fowler was lulled into any false sense of security about his position as a result of the delay in presenting the petition.

37. The sub-rule itself does not provide for any sanction, although I have no doubt that the court could deal with any serious abuse that did result in prejudice to a debtor by dismissing a petition presented in circumstances that did give rise to unfairness to the debtor by using the power given by section 266(3) Insolvency Act 1986 by exercising its general control of proceedings or perhaps even by using the powers given to it by section 363(1) Insolvency Act 1986. There is nothing in the circumstances of this case that would warrant the exercise of such power or control. For those reasons it is unnecessary to embark on a detailed examination of the facts and matters on which Mr Fowler relies.'

[5] In Muir Hunter on Personal Insolvency 2022, the commentary to the (obsolete) Insolvency Rules 1986 r.6.12 'verification of petition' still contains these 2 paragraphs. But it now also refers to Dunbar Assets plc v Fowler [2012] Lexis Citation 108 and the fact that Registrar Baister in that case quoted the 2 paragraphs (from an earlier edition of Muir Hunter on Personal Insolvency). The commentary states::

'The above two paragraphs were cited by the Chief Registrar in Dunbar Assets Plc v Fowler [2013] B.P.I.R. 46. The Chief Registrar had no doubt that, notwithstanding that there was no express sanction for non-compliance with this rule, the court could deal with any serious abuse that did result in prejudice to a debtor by dismissing a petition presented in circumstances that did give rise to unfairness to the debtor by using the power given by IA 1986 s.266(3), by exercising its general control of proceedings or perhaps even by using the power given to it by IA 1986 s.363(1) (ibid., at [37]).'

[6] In Dunbar Assets plc v Fowler [2012] Lexis Citation 108, Registrar Baister said, at paragraph 35:

'I did not hear oral evidence on this point from either Mr Duffy or Mr Fowler. In the absence of cross-examination (which would have been disproportionate) I cannot reach any conclusion on the truthfulness or accuracy of either Mr Duffy's reasons for the delay or Mr Fowler's objections to and criticisms of them. I will presume (but again without making any finding of fact) (a) in Mr Fowler's favour that Mr Duffy's statements in paragraph 4 of his first witness statement were inaccurate in whole or in part but (b) in Mr Duffy's favour that he made those statements bona fide and without any intention to mislead the court.'