INTRODUCTION

In Debtor v Focus Insurance (In Liquidation) (also known as Re Debtor (No.22 of 1993)) [1994] 1 WLR 46 [1994] 2 All ER 105 ('Focus'), Mummery J heard an interesting appeal in relation to expedited petitions under s.270 of the Insolvency Act 1986 and the (apparent) bar on petitions being presented when there is an outstanding application to set aside a statutory demand. 

THE FACTS IN FOCUS

The facts in Focus were:

(1) on 15.1.93, a Bermudan Court gave a money judgment, in favour of a company (Focus Insurance Ltd) (the 'Petitioner') and against the company's director ('Mr X') for c.USD 19m (the 'Money Judgment') (paragraph 2). 

(2) on 30.4.93, in England, the Petitioner (in liquidation, controlled by joint liquidators) served on Mr X, a statutory demand (dated 8.4.93) (the 'SD'), founded upon the Money Judgment (c.£13m in sterling) (paragraph 3);

(3) on 4.5.93, Mr X applied to the English Bankruptcy Court, for an order, setting aside the SD (the 'Set SD Aside Application'). About 6 (or more) grounds were given, including (paragraph 4) that:

(a) the Money Judgment was not a final judgment; it was a default judgment;

(b) there was a pending appeal, against the Money Judgment, to the Privy Council

(c) there was a pending stay of execution application (in relation to the Money Judgment);

(d) Mr X had a counterclaim for USD 90m, which would (of course) overtop a USD19m Money Judgment;

(4) on an unspecified date, the English Bankruptcy Court listed the Set SD Aside Application for hearing on 9.6.93 (paragraph 6); 

(5) on 20.5.93, so: (a) just before 21 days elapsed from 30.4.93, (b) subsequent to the Set SD Aside Application being issued, the Petitioner presented a bankruptcy petition (the 'Petition') against Mr X;

(6) the Petition stated:

(a) did not contain any reference to the outstanding Set SD Aside Application (paragraph 8)

(b) in paragraph 9 of the Petition:

'There is a serious possibility that the debtor's property and/or the value of his property will be significantly diminished within the three-week period following the date of service of the statutory demand, and that it is just and proper that this petition be presented in respect of the debt which is the subject of the statutory demand before the end of the three-week period referred to in section 268 of the Insolvency Act 1986' [bold added]

Given it was 1 or 2 days before the 3 weeks expired, Mummery J remarked, this read 'a little oddly' (paragraph 9).

(7) on an unspecifed date, Mr X issued an application to the English Bankruptcy Court, seeking (amongst other things) dismissal of the Petition on the basis that (paragraphs 1 and 12):

(a) the Petitioner had not been entitled to present the Petition, as the Petition's presentation was in breach of the statutory provisions or the rules; and so, 

(b) the presentation of the Petition, had been/was an abuse of process;

Mr X sought that the Petition be dismissed immediately, without any investigation of the grounds stated in the petition (paragraph 1).

This aspect of the application, will be labelled, the 'Ineligible to Present Petition Application'.

(8) on 2.6.93, on the Ineligible to Present Petition Application, the first instance judge, refused to this dismiss the Petition. 

(9) Mr X appealed, and the appeal was listed (very quickly) on 7.6.93, with judgment on 8.6.93.

INSOLVENCY ACT 1986 AND INSOLVENCY RULES

Provisions and rules 

The issue in the case was whether or not, presentation of the Petition, had been permitted by the applicable statutory provisions and rules. Turning then to the applicable statutory provisions and rules, a couple of points can be made:

(1) all the applicable statutory provisions, were from the Insolvency Act 1986 ('IA 1986'), particularly, s.267, s.268 and s.270; s.267(2) contains some pre-conditions for presenting a bankruptcy petition;

(2) Focus was decided in 1993. In 1993, the Insolvency Rules 1986 applied. Since 1993, the Insolvency Rules 1986 have been replaced by the Insolvency (England and Wales) Rules 2016 (more on that, below). 

Mummery J addressed:

(1)(a) s.267 of the IA 1986 - which contains the pre-conditions for presenting a bankruptcy petition; and (b) s.268 of the IA 1986 - which defines what s.267(2)(c) inability to pay means. Mummery J said, at paragraph 13 (pages 48-49):

'Sections 267 and 268 of the [IA 1986] state the grounds on which a creditor may present a bankruptcy petition. A creditor's petition may be presented to the court in respect of a debt owed by the debtor to the petitioning creditor, but only if certain conditions are satisfied at the time when the petition is presented. Those conditions are set out in section 267(2)(a), (b), (c) and (d). Only the latter two of the four conditions are relevant to this appeal; they provide:

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

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

Section 268 defines “inability to pay” a debt by reference to failure to comply, within a period of three weeks of it being served, with a prescribed form of statutory demand which has not been set aside in accordance with the rules.'

The full wording of s.268 of the IA 1986 is set out in a footnote[1].

(2) the applicable rules in the Insolvency Rules (1986 version). Mummery J said, at paragraph 13 (49):

'The Insolvency Rules 1986 require that the creditors petition should identify the debt in the manner specified in rule 6.8. Rule 6.8(2) is of particular relevance; it provides:

“Where the debt is one for which, under section 268, a statutory demand must have been served on the debtor -…

(b) it shall be stated that, to the best of the creditor's knowledge and belief -

(i) the demand has neither been complied with nor set aside in accordance with the Rules, and

(ii) no application to set it aside is outstanding.”'

(3) the combination of these, and Mr X's submissions; as a result, Mummery J summarised Mr X's submissions on these provisions/rules, at paragraph 17 (49):

'Having regard to those statutory provisions and rules [Mr X] complaints in this case can be stated as follows. (1) He has, in accordance with the Insolvency Rules, applied to the court to have the statutory demand set aside. The application is fixed for hearing before the district judge on [9.6.93]. When he filed his application the court did not exercise the power under rule 6.5(1) to dismiss his application without giving notice to the creditor on the ground that it did not show sufficient cause. There will, therefore, be an inter partes hearing of his application on Wednesday. (2) At a time when his application to set aside was outstanding, the petitioning creditors presented a petition. They were not entitled to do this because the precondition set in section 267(2)(d) of the Insolvency Act 1986 was not satisfied. (3) The petition also fails to comply with the requirements of the rules, in particular rule 6.8(2)(b)(ii), because it does not state, as the rule requires, that no application to set aside the demand is outstanding. Indeed, the petitioners could not truthfully make such an assertion in the petition. The petitioners have, therefore, adopted a course which has deprived the debtor of the opportunity of avoiding the immediate presentation of the petition. If his application to set aside the demand were successful, then no petition would be presented.'

In short, Mr X's position was that '...the petition is an abuse of the process and should be dismissed immediately' (paragraph 18). 

As stated, the first instance judge rejected this submission (paragraph 18).

Section 270 - entitled 'Expedited petition' 

Mummery J then turned to s.270 of the IA 1986, and Mummery J's criticism, that Mr X had failed to take this provision into account properly. Mummery J said, at paragraph 19 onwards (pages 49 to 50):

'In my judgment, [Mr X's] submissions do not take sufficient account of the terms of section 270 of the Act of 1986, read in the context of the opening words of subsection 267(2) laying down the conditions which must be satisfied at the time when a bankruptcy petition is presented. The opening words of section 267(2) state: “Subject to the next three sections, a creditor's petition may be presented to the court in respect of a debt or debts only if, at the time the petition is presented,” the conditions in (a), (b), (c) and (d) are satisfied.

One of the three sections to which section 267(2) is subject is section 270 which provides:

“In the case of a creditor's petition presented wholly or partly in respect of a debt which is the subject of a statutory demand under section 268, the petition may be presented before the end of the threeweek period there mentioned if there is a serious possibility that the debtor's property or the value of any of his property will be significantly diminished during that period and the petition contains a statement to that effect.”

That provision should be read with section 271(2) which provides:

“In a case in which the petition contains such a statement as is required by section 270, the court shall not make a bankruptcy order until at least three weeks have elapsed since the service of any statutory demand under section 268.” [bold added]

This then generated the key question in the case: '...whether a petition may be presented under section 270 at a time when there is an outstanding application to set aside a statutory demand on which the petition is based.' (paragraph 22). Or, to put it another way: 'whether this petition should be dismissed on the ground that, at the time it was presented, there was an outstanding application by the debtor to set aside the statutory demand' (paragraph 23)

Mummery J noted 4 points - points which were not 'not seriously disputed' (paragaph 22):

'(1) A petition may be presented under section 270 in the circumstances specified in the section, even though the three-week period has not expired, and the condition in section 267(2)(c) is not satisfied at the time of presentation.'

'(2) A petition may be presented under section 270 even before the debtor has been given an opportunity to issue an application to set aside the statutory demand on which the petition is based. The petition may be presented before the end of the three-week period. It may be presented immediately after the statutory demand has been served. If a petition may be presented within the three-week period, and even before the debtor has had an opportunity to apply to set the demand aside, it is difficult to see why the creditor should not be entitled to present such a petition after the application has been issued. What matters is whether the presentation is justified by a serious possibility that the debtor's property, or the value of it, will be significantly diminished during that period. That possibility may exist in a case where the debtor has issued an application to set aside the demand, as well as in a case where he has not done that or where he has not even had the opportunity to do that.' [bold added]

'(3) None of the Insolvency Rules makes specific provision for the contents of the creditor's petition presented under section 270. It is to be noted that the general requirements in rule 6.8(2) are reflected in the forms set out in Schedule 4 to the Rules of 1986 to be used in and in connection with insolvency proceedings: see in particular form 6.7, paragraph 4. But those forms are, according to rule 12.7(2), to be used “with such variations, if any, as the circumstances may require.”'

'(4). I note the provisions of rule 7.55:

“No insolvency proceedings shall be invalidated by any formal defect or by any irregularity, unless the court before which objection is made considers that substantial injustice has been caused by the defect or irregularity, and that the injustice cannot be remedied by any order of the court.”'

Legal Position 

At paragraph 24 (page 51-52), Mummery J said 'In my view, the legal position is as follows.' before setting out 6 points:

'(1) The requirement in section 267(2) that a creditor's petition may be presented to the court only if, at the time when it is presented, there is no outstanding application to set aside a statutory demand does not necessarily apply to every case. The requirement is expressly made “subject to” section 270.'

'(2) Where a statutory provision is expressed to be “subject to” another statutory provision, the latter (the master provision) prevails over the former (the subject provision) if there is any conflict between them: see the decision of Megarry J. in Clark (C. & J.) Ltd. v. Inland Revenue Commissioners [1973] 1 W.L.R. 905, 911B–C, affirmed on appeal [1975] 1 W.L.R. 413.'

'(3) Section 270 relaxes the requirements of section 267(2) by enabling a petition to be presented in respect of a debt demanded before the expiration of the three-week period referred to in section 268. The reason for the relaxation is that the creditor may require protection against the serious possibility of jeopardy to the debtor's property during that period.'

'(4) If [Mr X's] submissions to this court are correct, the provision for expedition in section 270 would operate capriciously. A creditor would be entitled to present such a petition, which I can describe as an expedited petition, if he acted so swiftly after the service of the statutory demand that the debtor had no time to issue an application to set the demand aside. But, on [Mr X's] construction, the creditor would not be entitled to present a petition, even if there were a serious possibility of jeopardy, if the debtor had issued his application to set aside the demand before the creditor had presented the expedited petition. In my view, such a consequence is unlikely to have been the parliamentary intention.'

'(5) Non-compliance with rule 6.8(2)(b)(ii) does not automatically or necessarily invalidate a petition. If the application to set aside the statutory demand succeeds, the petition will then be dismissed. If the application to set aside the statutory demand fails, the debtor will still be entitled to challenge the assertion in the expedited petition that there was a serious possibility of jeopardy to his property. If the court is not satisfied on jeopardy it may dismiss that petition. If, however, it is satisfied on that point the court may, in its discretion, waive any irregularity under rule 7.55, if satisfied that the debtor has not suffered substantial injustice or prejudice as a result of non-compliance and then proceed to make a bankruptcy order on that petition.'

'(6) I should state that I am concerned by [Mr X's] argument that, if the construction I have adopted is correct, the procedure under section 270 may be abused. He points out that the presentation of a petition is very damaging to a debtor's credit and standing, even though that petition is later dismissed. He submits that there is a risk that there may be cases where a petition is presented and damage is done to the debtor who ultimately succeeds on his application to set aside, even to the extent of showing that there is no question of any sum of money owing by him to the petitioning creditor. I think that the answer to the anxieties of [Mr X] was provided by [counsel], who appeared for the petitioning creditors. He pointed out that the statement as to the serious possibility of jeopardy in the petition cannot simply be made without foundation; it has to be verified by an affidavit which justifies the allegation made. He also points out that no order can be made until it has been established that a debt is owing. No bankruptcy order would be made until the application to set aside the statutory demand has been heard. It is also provided by section 271(2) that at least three weeks must have elapsed since the service of the statutory demand before a bankruptcy order can be made. I would add that if the debtor succeeds in having a statutory demand set aside, and then succeeds in having the petition dismissed, he may have redress for any damage that he has suffered if he can show that there has been an abuse of legal process by the presentation of a petition against him maliciously and without reasonable cause: see Johnson v. Emerson (1871) L.R. 6 Ex. 329.'[2]

Accordingly, Mummery J dismissed the appeal, concluding that, the extant Set SD Aside Application, had not, via s.267(2)(d), barred the Petitioner from presenting the Petition within the 3 week period. The Petition, satisfying s.270, could be presented legitmately within the 3 week period[3].

Expedited Petition and Service of a Statutory Demand 

A linked point, arose in different case: Wehmeyer v Wehmeyer [2001] 2 FLR 84, [2001] BPIR 548 ('Wehmeyer'). An issue in Wehmeyer was, whether a petition falling within s.270 of the IA 1986, could be presented, beforea statutory demand had even been served (or, it seems, concurrently with the service of a statutory demand - see paragraph 22)? Mr Registrar James, at paragraph 26 concluded, obiter[4], on this:

'...the presentation of a petition, and it is the presentation which is referred to in s 270, may only be expedited under that section in circumstances where a demand has already been served.'

The Registrar reasoned:

'...s 270 relates to a petition presented in respect of a debt which is the subject of a statutory demand under s 268. The latter section provides that the debtor appears to be unable to pay a debt for the purpose of s 267(2)(c):

'(1) … if, but only if the debt is payable immediately and either—

(a) the petitioning creditor to whom the debt is owed has [my emphasis] served on the debtor a demand…, at least 3 weeks have elapsed since the demand was served and the demand has neither been complied with nor set aside in accordance with the rules …'

[26] In my judgment, the present' [words underlined, are in italics in original]

Accordingly, where s.267(1)(a) (not s.268(1)(b)) is to be used to satisfy s.267(2)(c), the sequence must be: (a) statutory demand; then (b) presentation of the petition (within the 3 weeks, if s.270 of the IA 1986 permits it; otherwise, after the 3 weeks - but if delayed 4 months or more, see this article). 

INSOLVENCY RULES 1986 AND INSOLENCY (ENGLAND AND WALES) RULES 2016

Insolvency Rules 1986:

(1) r.6.8 is now Insolvency (England and Wales) Rules 1986, r.10.9;

(2) r.6.5 is now Insolvency (England and Wales) Rules 1986, r.10.5;

(3) r.6.7 is now Insolvency (England and Wales) Rules 1986, r.10.8;

(4) r.12.7 (which should, it seems, be a referece to 12A.7), is now Insolvency (England and Wales) Rules 1986, r.1.4;

(5) r.7.55 is now Insolvency (England and Wales) Rules 1986, r.12.65.

SIMON HILL © 2026*

BARRISTER 

33 BEDFORD ROW

Simon Hill practices in the following areas: insolvency, company and business law, with some tax and property law.

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