INSOLVENCY LAW. Bankruptcy is concerned with the insolvency of individuals, and liquidation, or winding-up, with the insolvency of companies.

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1 INSOLVENCY LAW Bankruptcy is concerned with the insolvency of individuals, and liquidation, or winding-up, with the insolvency of companies. BANKRUPTCY The estate of insolvent individuals is dealt with by the trustee-in-bankruptcy and that of companies by the liquidator. Bankruptcy is applicable only to an insolvent individual (X). A licensed insolvency practitioner (generally one selected by the creditors) is appointed to act as the trustee in bankruptcy, to collect in the realisable assets belonging to X, convert them to cash and distribute this to the creditors. Once this process is complete, X is released from any of the debts he incurred up to the date of bankruptcy if they have not been fully settled in the bankruptcy. A bankruptcy order is made by the court following presentation of a bankruptcy petition. The rules are complex, but in essence, a petition can be lodged by X (on grounds that he is unable to pay his debts), or by an unsecured creditor of X who is owed more than 750 and can demonstrate that X cannot pay this debt or has no reasonable prospect of doing so. Effect of bankruptcy Once the trustee in bankruptcy is appointed, X s assets vest in him automatically. Where this includes leasehold property, this automatic assignment does not need the consent of the landlord. It is an excluded assignment for the purpose of the Landlord and Tenant (Covenants) Act Once the assets have vested in the trustee in bankruptcy, X loses the ability to dispose of them, so Y should not enter into new contracts with X in relation to his property. Y should deal only with the trustee in bankruptcy. However, there is limited protection, in the case of registered land, under s 86 of the Land Registration Act 2002, where Y, in good faith, buys the property from X for value without knowing there has been a bankruptcy petition or order and without these having been registered (as a notice of restriction) against the title to the property (see Pick v Chief Land Registrar [2011] EWHC 206). 1

2 Powers of trustee in bankruptcy The trustee in bankruptcy has a wide range of powers (detailed in the IA 1986), enabling him to manage the assets and eventually sell them. The trustee in bankruptcy must observe any existing restrictions and covenants which affect existing properties vested in him in this way (eg registered restrictive covenants affecting the property). This includes paying rent on existing leases. However, the trustee is not obliged to implement any outstanding contracts (such as sale or purchase contracts), though he may choose to do so if this is consistent with proper realisation of X s assets. If the trustee considers the properties or contracts to be onerous, he can disclaim them (in the same way as a liquidator, but not other insolvency officials). Restrictions placed on the bankrupt During the bankruptcy process there are restrictions both on what X can do and on the action its creditors may take against X to recover sums due to them or secure performance of obligations. These restrictions include the following: (a) Between presentation of the bankruptcy petition and the vesting of the property in the trustee in bankruptcy, any purported disposition of that property by X is void (IA 1986, s 284(1)) unless it is: (i) made with the court s permission or subsequent ratification; or (ii) a disposition of registered land to a purchaser acting in good faith, for value and without notice of the presentation of the petition. (b) Between presentation of the bankruptcy petition and making the bankruptcy order the court can, if asked, stay any action or legal process brought against X or its property (IA 1986, s 285(1)). (c) Once the bankruptcy order has been made, unsecured creditors may not enforce a remedy against X or its property, or bring any action or legal proceedings against X, unless they have the leave of the court to do so (IA 1986, s 285(3)). Secured creditors are not affected by this restriction (IA 1986, s 285(4)). 2

3 BANKRUPTCY PETITIONS: PRELIMINARY Pursuant to s.264 of IA 1986, a bankruptcy petition may be presented by any of the following: (1) one of the debtor s creditors or jointly by more than one of them; (2) the debtor; (3) the supervisor of, or any person (other than the debtor) who is bound by, an individual voluntary arrangement; (4) the Official Petitioner or any person specified in a criminal bankruptcy order made in pursuance of s.39(3)(b) of the Powers of the Criminal Courts Act Thus, leaving aside criminal bankruptcy orders (which may no longer be made; Criminal Justice Act 1988, s.170(2)), there are three types of bankruptcy orders, there are three types of bankruptcy petition: (1) creditor's petition (set out in IA 1986, ss ); (2) debtor s petition (set out in IA 1986, ss ); (3) petition by a supervisor or person bound by an individual voluntary arrangement (IVA) (set out in IA 1986, s.276. A bankruptcy petition shall not be presented unless the debtor (IA 1986, s.265(1): (1) is domiciled in England and Wales; or (2) is personally present in England and Wales on the day of presentation of the petition; or (3) at any time within three years ending on the day of presentation has (a) been ordinarily resident or had a place of residence in England and Wales, or (b) has carried on business in England and Wales. 3

4 Carrying on business includes being a member of a firm or partnership and conducting business through an agent or manager for the debtor or the partnership and conducting business through an agent or manager for the debtor or the partnership (IA 1986, s.265(2)). For the purpose of calculating the period of three years a debtor does not cease to carry on business until arrangements have been made to settle business debts (Theophile v Solicitor General [1950] AC 186; Re a Debtor (784 of 1991) [1992] Ch 554. CREDITORS PETITIONS The most common route to bankruptcy is via a creditor s petition presented pursuant to s267 of IA 1986 which satisfies the following conditions (IA 1986, s.267(2)): (1) the amount of the debt or debts is equal to or exceeds the bankruptcy level, presently 750 (IA 1986, s.267(4)); (2) the debt, or each of the debts, is for a liquidated sum payable to the petitioning creditor (a petition may be based upon an order for an interim payment under CPR, r.29.5, even where it was ordered that there be a stay of execution: Maxwell v. Bishopsgate Investment Management Limited (1993) The Times, 11 February, or one or more of the petitioning creditors, either immediately or at some time certain, future time and is unsecured; (3) the debt, or each of the debts, is a debt which the debtor appears either unable to pay or to have no reasonable prospect of being able to pay; and (4) there is no outstanding application to set aside a statutory demand served in respect of the debt or debts. Inability to pay is defined as being either: (1) a statutory demand having been served by the petitioning creditor requiring the debtor to pay the debt or secure or compound it to the creditor s satisfaction which statutory demand has neither been complied with nor set aside in accordance with the Insolvency Rules 1986 (or in the case of a debt payable in the future that there is a reasonable prospect that the debtor will be able to pay the debt when it falls due); or 4

5 (2) execution or other process on a judgment or order of the court has been returned unsatisfied in whole or part. In most cases the failure of the debtor to pay or secure or compound to the creditor s satisfaction within 3 weeks of the service of the statutory demand forms the basis of the bankruptcy petition. In large part, the practice and procedure relating to the form and content of statutory demands, their service and applications to set aside are self-contained within Chapter 1 of Part 6 to the Insolvency Rules 1986 and in the Practice Direction. Written evidence in support of an application to set aside a statutory demand (CPR PD Insolvency, para. 12.1) and to prove service of a statutory demand (CPR PD Insolvency, para. 13.1)may be in the form of either an affidavit or a witness statement (CPR PD Insolvency, para. 13.4). Form of statutory demand The IA 1986 requires (IA 1986, s.268(1) and (2)) the service of a statutory demand in the prescribed form. There are three forms prescribed in Sch 4 to the Insolvency Rules 1986; Form 6.1 (debt for a liquidated demand payable immediately), Form 6.2 (debt for a liquidated demand following a judgment of the court) and form 6.3 (debt payable at a future date). Although r.12.7 of the Insolvency Rules 1986 states that the forms prescribed in Sch 4 shall be used in connection with insolvency proceedings, the forms may be used with such variations, if any, as the circumstances may require (Insolvency Rules 1986, r.12.7(2)). The statutory demand must be dated and signed either by the creditor or by a person stating himself to be authorised to make the demand on the creditor s behalf (Insolvency Rules 1986, r.6.1(1)). The prescribed forms require a signature by an individual who must state his relationship to the creditor and give the name of his firm. The statutory demand must: (1) specify whether it is made under s.268(1) (debt payable immediately) or under s.268(2) (debt not so payable) (Insolvency Rules 1986, r.6.1(2)); (2) state the amount of the debt and the consideration for it, or if no consideration, the way in which the debt arises; (Insolvency Rules 1986, r.6.1(3)); (3) if it is a debt payable immediately based upon a judgment or order of the court, it should set out the details of the judgment order (Insolvency Rules 1986, r.6.1(3)(a)); and 5

6 (4) if it is in respect of a debt payable in the future, it must state the grounds on which it is alleged that the debtor appears to have no reasonable prospect of paying (Insolvency Rules 1986, r.6.1(3)(b)). If the statutory demand includes amounts for charges or interest not previously notified to the debtor or other charges accruing from time to time, the amount and rate must be identified separately and the grounds for the claim must be stated. The amount claimed must be limited to that accrued at the date of the demand (Insolvency Rules 1986, r.6.1(4)). A statutory demand may be in respect of more than one debt. They must be separately identified and the basis of each set out (Bennett v Filmer [1998] BPIR 444). Bankruptcy is a regime for dealing with the unsecured liabilities of a debtor. Thus, a creditor cannot petition or serve a statutory demand in respect of any element of his debt which is secured. If a creditor holds security in respect of the debt, the full amount of the debt must be specified, but the creditor must in demand identify the security and place a value upon it at the date of the demand. The amount claimed in the statutory demand must be limited to the balance due after giving credit for the value of the security (Insolvency Rules 1986, r.6.1(5)). Security in respect of the debt refers to security over any property of the debtor and not security provided by a third party (IA 1986, s.383(2) and Re a Debtor (No 310 of 1988) [1989] 1 WLR 452, Knox J). The Insolvency Rules 1986 set out further requirements for the information that must be given in a statutory demand (Insolvency Rules 1986, r.6.2). These include an explanation of the following matters: (1) that if the demand is not complied with bankruptcy proceedings may be commenced; (2) the time within which the demand must be complied with; (3) the methods of compliance open to the debtor; and (4) the debtor s right to apply to the court for the statutory demand to be set aside (Insolvency Rules 1986, r.6.2(1)). 6

7 The demand must specify one or more individuals with whom the debtor may, if he wishes, enter into communication in order to secure or compound the debt or establish that there is no reasonable prospect that the debt will be paid when it falls due (Insolvency Rules 1986, r.6.2(2)). Service of a statutory demand within the jurisdiction The creditor is under an overriding obligation to do all that is reasonable for the purpose of bringing the statutory demand to the attention of the debtor, and if practicable to effect personal service (Insolvency Rules 1986, r.6.3(2)). The following specific points are to be noted. (1) Service by advertisement is permissible where the creditor has a judgment of the court and believes with reasonable cause that the debtor is avoiding service and there is no real prospect of the judgment being recovered by execution or other legal process (Insolvency Rules 1986, r.6.3(3)). There is no statutory form of advertisement. However, para of the Practice Direction sets out a form which the court will accept. (2) A statutory demand may be served by insertion through the letter box or by first-class post (CPR PD Insolvency, para. 11.1). As a statutory demand is an extrajudicial document (Re A Debtor (No 190 of 1987) (1988) The Times, 21 May (Vinelott J); it is not possible to obtain an order for substituted service. In all cases where substituted service (which, of course, will be without an order) is effected, the creditor must have taken all those steps which would justify the court. However, service may be effected in any of the ways that would justify it making an order for substituted service of a petition (CPR PD Insolvency, para. 11.3). Upon issuing a bankruptcy petition, the creditor must file an affidavit of service of the statutory demand. Failure to comply with the requirements may result in the court declining to issue the petition (Insolvency Rules 1986, r.6.11(9), CPR PD Insolvency, para. 11.3). (3) The following steps will in most cases suffice to justify an order for substituted service of a petition and will suffice for the service of a statutory demand (CPR PD Insolvency, para. 11.4): (a) one personal call at the place of residence and business of the debtor (or either of such places as are known), 7

8 (b) that a letter of appointment has been sent at least 2 business days before the proposed further appointment, (c) that the letter should state that: (i) if the appointment time is inconvenient, the debtor should name some other time and place, (ii) in the case of a statutory demand that if the debtor fails to keep the appointment, the creditor proposes to serve either by advertisement, post or letter box and that the court will subsequently be asked to treat such as service, and (iii) in the case of a petition, that if the debtor fails to keep the appointment, the creditor proposes to apply to the court for an order for substituted service, (d) that in attending any appointment made by letter, inquiry should be made whether the debtor has received the previous letters, or if the debtor is away, whether letters are being forwarded, and (e) if the debtor is represented by a solicitor, an attempt should be made to arrange personal service through that solicitor; a statutory demand may be served on a solicitor (or any other person) who is duly authorised to accept service (Insolvency Rules 1986, r.6.11(4)). Where the court makes an order for substituted service of a petition by first-class post, the order will normally provide that service be deemed to be effected on the seventh day after posting (CPR PD Insolvency, para. 11.5). The same method of calculating service may be applied to service of a statutory demand (ibid). Application to set aside a statutory demand The debtor may apply within 18 days of service to set aside the statutory demand (Insolvency Rules 1986, r.6.4(1)). The form of application is prescribed Form 6.4. CPR, r.2.8 applies to the computation of time (Insolvency Rules 1986 (as amended), r.12.9). The date of service of the demand itself does 8

9 not count for the purposes of calculating the 18-day period. Written evidence is required in support of the application to set aside in Form 6.5 (Paragraph 12.1 of CPR PD Insolvency). It must state the date upon which the statutory demand came into the debtor s hands, the grounds for setting aside and must exhibit a copy of the statutory demand (Insolvency Rules 1986 r.6.4(1)). A letter written to the court, not in the prescribed form is not an application to set aside (Ayrto v Sovereign Leasing Plc [1998] BPIR 177, CA). The requirement for written evidence allows the evidence to be either in the form of an affidavit of a witness statement (CPR PD Insolvency, para. 13.4). Hearing of application to set aside On receipt of an application to set aside a demand, if the court is satisfied that no sufficient cause is shown, it may dismiss it without giving notice to the creditor. From the date it is dismissed, time for compliance with the demand begins to run again (Insolvency Rules 1986 r.6.5(1)). If the application is not dismissed, the court will give at least 7 days notice of a hearing to the debtor, the creditor and the person named in the demand as being the person to whom the debtor may communicate concerning the demand (Insolvency Rules 1986 r.6.5(2)). The hearing is a summary hearing (usually listed for no more than 15 minutes) in which the court will either summarily determine the application or adjourn it and give directions. There is no requirement under the Insolvency Rules 1986 for the creditor to serve his evidence before the hearing. If he wishes to oppose the application and to put in evidence, the directions given will ordinarily provide for a time to serve such evidence with a further time for the debtor/applicant to put in evidence in reply. The applicant usually has the last opportunity to put in evidence. In the High Court, at the hearing, the court will usually fix a date and time for the hearing of the adjourned application. The court may grant the application to set aside if (Insolvency Rules 1986 r.6.5(4)): (1) the debtor appears to have a counterclaim, set-off or cross-demand which equals or exceeds the amount of the debt or debts specified in the statutory demand; (2) the debt is disputed on grounds which appear to the court to be substantial; (3) it appears that the creditor holds some security in respect of the debt claimed by the demand, and either r.6.1(5) (which requires: (a) the demand to specify the nature of the security and the value that the debtor puts on it at the date of the demand; and (b) the amount of which payment is claimed shall be the full amount of the debt, less the amount specified as the value 9

10 of the security) is not complied with in respect of it, or the court is satisfied that the value of the security equals or exceeds the full amount of the debt; or (4) the court is satisfied, on other grounds, that the demand ought to be set aside. Where the debtor claims to have a counterclaim, set-off or cross-demand, whether or not he could have raised it in the action in which the judgment or order was given which equals or exceeds the amount of the debt or debts specified in the statutory demand, the court will normally set aside the statutory demand if in its opinion on the evidence there is a genuine triable issue (Paragraph 12.4 of the Practice Direction). Assuming that the counterclaim, set-off or cross-demand does give rise to a triable issue, the court will need to assess its potential maximum value. If after giving the debtor credit for that value the balance is greater than the statutory minimum for a bankruptcy petition ( 750), then the application to set aside will be dismissed (AIB Finance Limited v. Debtors [1997] 4 All ER 677, Carnwarth J and [1998] BPIR 533, CA). Where a debtor raises a counterclaim, set off or cross-demand, the creditor may bring into account a further debt not included within the statutory demand. However, an exception to this principle will apply where there is an equitable set-off between the total sums claimed by the creditor (including debts claimed and unclaimed in the statutory demand), for example sums owing under a bank account(s), and the debtor s claims, for example for negligent sale of property secured (TSB Bank plc v Platts [1998] 2 BCLC 1). The rule allows the demand to be set aside in cases where the debtor has a cross-demand. This would appear to cover those claims that are unrelated to the creditor s debt in the statutory demand. Where the debt, not being the subject of a judgment or order, is disputed, the court will normally set aside the demand on being satisfied that there is a genuine triable issue (Paragraph 12.4 of the Practice Direction). The debtor need not go as far as showing that his defence offers a reasonable prospect of success. If the genuine dispute is not to the whole debt, but merely part, the debtor will be unable to have the demand set aside unless the undisputed element is less than the statutory minimum (Re A Debtor (Nos 49 and 50 of 1992) [1995] Ch 66). Where the undisputed element is greater than the statutory minimum, then the debtor will need to pay compound or secure to the creditor s satisfaction the undisputed element. Whilst there is a conflict of authority on the point, it is generally considered that a statutory demand cannot be set aside conditionally, for example on payment of money into court or a joint account. In 10

11 Re A Debtor (No 517 of 1991) ((1991) The Times, 25 November) Ferris J ordered a stationary demand to be set aside on the condition that the sum demanded was paid into a joint account. However, it has been doubted whether there is jurisdiction conditionally to set aside the statutory demand (see Re A Debtor (No 90 of 1992) (1993) The Times, 12 July (Knox J) and Re A Debtor (32-SD-91) [1994] BBC 524 (Vinelott J)). In Re A Debtor (No 90 of 1992) Knox J considered that in the context of applications to set aside statutory demands there was no scope for shadowy defences leading to the imposition of a condition. Either there was a triable issue or there was not. As a matter of practicality, it may be that some of the difficulties arising from the supposed inability to set aside conditionally may be surmounted. If the debtor is able to put up the disputed debt by the time of the effective hearing of the application to set aside, then it is suggested that such payment into, for example, a joint solicitors account will constitute the provision of security which ought to lead to setting aside of the demand. Further, if the court dismisses the application to set aside it shall make an order authorising the creditor to present a bankruptcy petition forthwith or on or after a date to be specified (Insolvency Rules 1986 r.6.5(5)). In appropriate cases the court may be invited to order a date for the authorising of a petition which allows time for the debtor to secure the debt. Should the debt then be secured, for example by payment into an account before presentation of the petition, then it is suggested that the creditor would be unable to satisfy the precondition in IA 1986, s267(2)(b) that the debt is unsecured. Rule 7.55 of the Insolvency Rules 1986, which provides that no insolvency proceedings shall be invalidated by reason of any formal defect or irregularity, does not apply to applications to set aside statutory demands as they are not insolvency proceedings (Re A Debtor (No 190 of 1987) (1988) The Times, May 21 (Vinelott J); Re A Debtor (No 1 of 1987, Lancaster) [1989] 1 WLR 271, CA). However, a demand for a wrongly overstated amount will not be set aside solely as a consequence of the overstatement. It may be set aside where it is perplexing (Re A Debtor (No 1 of 1987, Lancaster) [1989] 1 WLR 271, CA; Re A Debtor (490-SD-1991) [1992] 1 WLR 507 (Hoffman J), not following his previous decision in Re A Debtor (No 10 of 1988) [1989] 1 WLR 405. Further, the use of the wrong form will not necessarily lead to the statutory demand being set aside (Cartwright v Staffordshire and Moorlands District Council [1998] BPIR 328). Where the statutory demand is based upon a judgment or order, the court will not at this stage go behind the judgment and inquire into the validity of the debt nor, as a general rule, will it adjourn the application to await the result of an application to set aside the judgment (Practice Direction, para. 12.3). As a matter of generality, the same Applies to judgments or tax assessments that are under 11

12 appeal (Cartwright v Staffordshire and Moorlands District Council [1998] BPIR 328); Re A Debtor (960- SD-1992) [1993] STC 218). It is of no relevance to an application to set aside a statutory demand that the debtor is able to prove solvency. Whilst such a matter may be of relevance to the question of whether a bankruptcy order ought to be made, it forms no part of whether the debtor is unable to pay his debts within the meaning of s.268 of IA It is a ground for setting aside the statutory demand if the creditor either omits to value its security in the statutory demand or the court is satisfied that the value of the security is equal to or greater than the debt claimed (Insolvency Rules 1986, r.6.5(4)(c)). The proper value to be placed would appear to be the forced sale value of the property secured (Platts v Western Trust & Savings Limited [1996] BPIR 339, CA). Rule 6.5(5) provides that where the court is satisfied that the security is under-valued, the creditor may be required to amend its demand accordingly. Security means security over the property of the debtor and not that of a third party (IA 1986, s.383(2) and Re A Debtor (No 310 of 1988) [1989] 1 WLR 452 (Knox J). It would now appear to be settled that a landlord s right of re-entry is not a security (Razzaq v Pala [1997] 1 WLR 1337; Re Park Air Services [1999] 2 WLR 396 HL; Re Lomax Leisure Limited [1999] 3 All ER 22). Examples of statutory demands set aside under on other grounds are: (1) where the undisputed element was slightly over 750 (City Electrical Factors Limited v Hardingham [1996] BPIR 541); (2) where the demand was in respect of a statute barred debt (Re A Debtor (50A-SD-1995) [1997] 2 WLR 57; Re Karnos Property Co Ltd [1989] BCLC 340); and (3) where the demand raised a difficult point of law that could only be resolved at trial (Cala v Assiudoman (KPS) Harrow Limited [1996] BPIR 245). Difficult issues arise where the debtor seeks to secure or compound the debt. In Re A Debtor (415-SD 1993) ([1994] 1 WLR 917) Jacob J held that an offer to secure or compound was not a ground for setting aside the demand. That was a matter for consideration at the hearing of the petition where the court may consider whether in making a bankruptcy order the creditor has unreasonably declined an offer to secure or compound the debt under s.271 of IA He further held that r.6.5(4) was 12

13 designed to deal with procedural matters rather than substantive issues. The point, however, remains unclear. In Budge v AF Budge (Contractors) Limited, ([1997] BPIR 366) the Court of Appeal suggested that r.6.4(5) should not be too constricted. Further, the marginal notes to Form 6.5 set out various grounds for setting aside a statutory demand. These include a ground that the debtor wishes to secure or compound the debt. A demand in relation to unpaid professional fees will not be set aside merely on the basis that the debtor has sought some form of assessment or taxation which may result in the fee being reduced (Re A Debtor (No 88 of 1991) [1993] Ch 286 (Nicholls V-C); Re A Debtor (No 833 of 1993) [1994] NPC 82. A statutory demand is not an action within the meaning of the s.69 of the Solicitors Act 1974 and so a solicitor need not wait until the expiry of 1 month from its invoice before serving a demand (Re A Debtor (No 88 of 1991) [1993] Ch 286). An appeal against a decision on an application to set aside a statutory demand is not a trial on the merits. Accordingly, fresh evidence may be adduced and is not subject to the restrictions on the introduction of such evidence on appeal set out in Ladd v Marshall ([1954] 1 WLR 1489; see Royal Bank of Scotland v Binnell [1996] BPIR 352; Laurier v United Overseas Bank [1996] BPIR 635; Salvridge v Hussein [1999] BPIR 410; Purvis v HM Customs and Excise [1999] BPIR 396). Costs The use of statutory demands in both personal and corporate insolvency has been described as a high risk strategy (In Re A Company (No of 1991) [1992] 1 WLR 351 per Hoffman J.). Where the debt is subject to a bona fide dispute, the demand may constitute an abuse of process and its setting aside may be on terms that the creditor pay the debtor s costs on an indemnity basis (ibid). Where a solicitor or a director swears an affidavit in support of a statutory demand or a bankruptcy petition without adequate grounds for his belief he may be ordered to pay the costs personally (Re A Company (No of 1995) [1996] 1 WLR 491; Re A Company (No of 1998) (1998) The Times, 7 October). Rule 7.33 (as amended) incorporates the costs provisions of CPR Parts (save for the provisions relating to fast-track costs in Part 46). The summary assessment procedure applies to applications to set aside statutory demands. CREDITORS BANKRUPTCY PETITIONS 13

14 There are three prescribed statutory forms of creditor s petition set out in Sch 4 to the Insolvency Rules 1986: Form 6.7 failure to comply with a statutory demand for a liquidated sum payable immediately; Form 6.8 failure to comply with a statutory demand for a liquidated sum payable at a future date; Form 6.9 where execution or other legal process on a judgment has been returned in whole or in part. In relation to a petition presented on the basis of an unsatisified execution, this is limited to a return by the High Court sheriff or county court bailiff. It does not cover other forms of judgment enforcement such as a garnishee or charging orders (Muir Hunter Personal Insolvency (Sweet & Maxwell, looseleaf, para /2). The usual practice (at least in the High Court) is that the sheriff s or bailiff s return must be produced to the court. It must be shown that there was a serious attempt to levy execution. A return which simply states that the sheriff or bailiff was unable to gain access will be insufficient (Re A Debtor (No 340 of 1992) 2 BCLC 171 (Aldous J); [1996] 2 All ER 211, CA). Formalities The contents of the petition are prescribed in the relevant form, the Insolvency Rules 1986, rr.6.7 and 6.8 and para. 15 of the Practice Direction. There are a few points to be noted. The title to the petition need only recite the debtor s name. Any alias or trading name or names will appear in the body of the petition (CPR PD Insolvency, para. 15.1). Where the petition is based upon a statutory demand, only the debt claimed in the demand may be included (CPR PD Insolvency, para. 15.2). A creditor cannot claim in the petition a greater sum than that included in the demand, for example, by including interest accrued from the date of the demand (Insolvency Rules 1986, r.6.8(1)(c)). However, r.7.55 may save a petition from being dismissed where it irregularly includes post statutory demand interest (Re A Debtor (No 510 of 1997) (1998) The Times, 18 June. The petition must set out the date of service of the demand (CPR PD Insolvency, para. 15.5). In the case of personal service, the date of service as set out in the affidavit of service should be recited and whether service is effected before or after 5 pm on Monday to Friday or at any time on a Saturday or a Sunday (See CPR Part 6.7(2) and (3)). In the case of substituted service (other than by advertisement) the date alleged in the affidavit of service should be recited. This will usually be 7 days after posting 14

15 or being inserted in the letter box. In the case of substituted service by advertisement (under r.6.3); it will be the date of the advertisement or, as the case may be, the first advertisement. Where the petition is based on a statutory demand that is based upon a county court judgment there will need to be endorsed on the petition a certificate stating: I/We certify that on the day of 19 I/We attended on the county court and was/were informed by an officer of the court that no money had been paid into court in the action or matter [name] v [name] [claim number] pursuant to the statutory demand. (CPR PD Insolvency, para. 15.7(2)). The endorsement is not required if the petition is additionally based upon a debt over 750 which is not the subject of a county court judgment. Where a petition contains a request for the appointment as trustee in bankruptcy of a person who was the former supervisor of an individual voluntary arrangement of the debtor, the proposed appointee, not less than 2 days before the hearing of the petition must file in court a report giving particulars of the date on which he gave written notice to those creditors bound by the arrangement of his intention to seek appointment (such a date to be at least 10 days before the day on which the report is filed) and details of any responses (Insolvency Rules 1986, r.6.10(6)). Issue of petition The petition is issued in the High Court in the following cases (Insolvency Rules 1986, r.6.9(1)): (1) if the petition is presented by a Minister of the Crown or a government department and it is based either on a statutory demand which has specified an intention to petition in that court or on an unsatisfied execution; (2) if the debtor has resided or carried on business within the London insolvency district for the greater part of the 6 months immediately preceding the presentation of the petition, or for a longer period in those 6 Mondays than any other insolvency district; (3) the debtor is not resident in England and Wales; and (4) the petitioner is unable to ascertain the residence or place of business of the debtor. 15

16 In any other case the petition is presented in the county court for the insolvency district in which the debtor has resided or carried on business for the longest period during those 6 months (Insolvency Rules 1986, r.6.9(2)). If he has carried on business in one district and resided in another, the petition is presented to the court for the insolvency district in which he has resided (Insolvency Rules 1986, r.6.9(2)). If he has carried on business in more than one district in the 6-month period, the petition is presented to the court for the insolvency district which is or has been his principal place of business for the longest time (Insolvency Rules 1986, r.6.9(4)). Where an individual voluntary arrangement is in force, it is presented to the court to which the nominee s report was submitted (Insolvency Rules 1986, r.6.9(4a). It is not clear whether this rule only applies to a petition presented under s.264(1)(c) of IA 1986 a supervisor or a person bound by an individual voluntary arrangement (IVA). Whilst the rule does not expressly state this, the better view is that it is so limited. A post IVA creditor may have no knowledge of the individual voluntary arrangement). If the petition is presented in the wrong court, the court has the power under r.7.12 of the Insolvency Rules 1986 to transfer it or to order that the proceedings continue in the court in which they have been commenced. To issue a petition there must be presented to the court (Insolvency Rules 1986, r.6.10): (1) the petition verified by an affidavit or witness statement verified by a statement of truth; (in accordance with rr.6.12(1) and 7.57(5)); (2) where the petition is based upon the statutory demand, an affidavit (or witness statement verified by a statement of truth) of service of the demand exhibiting a copy of the petition; (3) the court issue fee plus the deposit for the official receiver s fees; if a bankruptcy order is not made, the deposit will be returned; or (4) sufficient copies of the petition must be filed for service on the debtor and on the supervisor of any individual voluntary arrangement that is in force (Insolvency Rules 1986, r.6.10(3)). There are prescribed forms of affidavit of service of the demand. Form 6.11 sets out the form for personal service. Form 6.12 sets out the form for substituted service. Where the demand has been acknowledged (however served) the acknowledgement must be exhibited to the affidavit (Insolvency Rules 1986, r.6.11(4)). If the demand has been neither personally served nor acknowledged, the affidavit of service must set out the steps taken to serve the debtor personally and state the means whereby it was sought to bring the demand to the debtor s attention and it must specify a date by 16

17 which (to the best of the knowledge, information and belief of the deponent) the demand will have come to the debtor s attention. (Insolvency Rules 1986, r.6.11(5)). The date specified will be deemed to be the date of service unless the court orders otherwise (Insolvency Rules 1986, r.6.11(7)). However, the court may decline to file a petition if not satisfied that the creditor has not discharged the obligation to do all that is reasonable to bring the demand to the debtor s attention (Insolvency Rules 1986, r.6.11(7)) if there is a delay of more than 4 months between the service of the statutory demand and the presentation of the petition, the reasons for the delay must be explained in the affidavit verifying the petition (Insolvency Rules 1986, r.6.12(7)). Service of the petition As with statutory demands, the overriding requirement is to effect personal service on the debtor (Insolvency Rules 1986, r.6.14(1)). If the court is satisfied by affidavit or other evidence on oath that the debtor is keeping out of the way to avoid service, or for any other cause, I understand that may order substituted service of the petition. Paragraph 11.4 of the Practice Direction (Insolvency Rules 1986, r.6.14(2)) sets out the attempts personally to serve which will usually be required to justify an order for substituted. Service of the petition will need to be proved by an affidavit or witness statement verified by a statement of truth exhibiting a copy of the petition and (in cases where substituted service of the petition has been ordered, a copy of the order) (Insolvency Rules 1986, r.6.15). Matters before the hearing of the petition There are various matters over which the court has jurisdiction prior to the hearing of the petition. The most important are as follows. Consensual dismissal or withdrawal of the petition with leave A petition cannot be withdrawn save with leave of the court (IA 1986, s.266(2)). The most likely circumstance for an application for leave to withdraw will be a case in which the petition debt has been paid or terms of settlement have been agreed. The debtor may want to get rid of the petition as soon as possible for a number of reasons. First, whilst the petition is alive, other creditors may give notice of support and seek to be substituted for the original petitioning creditor. Secondly, should this come about and a bankruptcy order subsequently be made on the petition, any payment by the debtor from his own monies to the creditor after presentation of the petition in an attempt to see off 17

18 the petition will be void (IA 1986, s.284). Thirdly, in the event of a bankruptcy order on the petition, the debtor s ordinary payments during the pendency of the petition will be void (ibid) unless validated by the court. Where the petitioner applies to the court for the petition to be dismissed or withdrawn, he must (unless the court requires otherwise) file an affidavit setting out the grounds of the application and the circumstances in which it is made (Insolvency Rules 1986, r.6.32). If, since presentation of the petition, payment has been made, the affidavit must set out what dispositions have been made for the purposes of the settlement, whether any dispositions were of the debtor and whether any disposition of the debtor s property was made with leave of the court. The court cannot give leave to withdraw the petition before it is heard (Insolvency Rules 1986, r.6.32(3)). In practice, the High Court will permit withdrawal of the petition before service and will order it to be dismissed after service. Ordinarily, the court will dispense with the detailed affidavit where there are no creditors who have given notice supporting the petition. Such orders may be made without attendance (Practice Direction, para. 16.3(2)). Where a petition is withdrawn or dismissed after payment of the petitioning debt, the petitioning creditor will usually be entitled to an order for costs (Re A Debtor (No 510 of 1997) (1998) The Times, 18 June). Non-consensual dismissal The court may dismiss a petition (IA 1986, s.266), for example for want of prosecution (TSB Bank v Platts [1997] BPIR 151). Disclosure and further information Any party to insolvency proceedings may apply to the court for an order for clarification and further information in accordance with CPR Part 18 and for disclosure in accordance with CPR Part 31 (Insolvency Rules 1986, r.7.60 (as amended). For an example of the use of this provision, see Re Primlaks (UK) Limited (No 2) [1990] BCLC 234). Security for costs Rule 7.51 (as amended) incorporates the provisions of the CPR into insolvency proceedings, save insofar as inconsistent with the Insolvency Rules Thus, the provisions of CPR, r

19 apply. Accordingly, the principles upon which the court will ordinarily order a claimant to proceedings to provide security will apply to petitions. It would also appear that s.726 of CA 1985, which provides that a limited company plaintiff to legal proceedings may be required to give security, also applies. In addition to these provisions, in relation to petitions presented in respect of debts payable in the future, the petitioner may be required to give security for the debtor s costs (Insolvency Rules 1986, r.6.17). Hearing of the Petition Ordinarily, the petition will not be heard until at least 14 days after service on the debtor, subject to expedition in appropriate cases or where the debtor has absconded. The persons who may appear on the hearing of the petition are the petitioner, the debtor, the supervisor of any individual voluntary arrangement in force and any creditor who has given notice of intention to appear. A creditor who has not given notice may appear with the leave of the court. A debtor intending to oppose the petition must (not later than 7 days before the day fixed for the hearing) file in court a notice specifying the grounds on which he will object to the making of the bankruptcy order and he must send a copy to the petitioner (Insolvency Rules 1986, r.6.21). The Insolvency Rules 1986 provide no penal sanction for non-compliance with this rule. Failure to serve a notice probably amounts to an irregularity under r.7.55, which may be waived. The court will not make a bankruptcy order unless it is satisfied that the debt or one of the debts in respect of which the petition was presented is either (IA 1986, s.271(1)): (1) a debt, having been payable at the date of presentation or having become payable, has been neither paid (It would seem that payment by a debtor out of his own money after presentation of the petition in a case where there are supporting creditors will not prevent the making of a bankruptcy order: Smith v Ian Simpson and Company [2000] 3 WLR 495), nor secured or compounded for; or (2) a debt which the debtor has no reasonable prospect of being able to pay when it falls due. The court may dismiss the petition if it is satisfied that the debtor is able to pay all his debts (including contingent and prospective liabilities) or is satisfied that the debtor has made an offer to secure or compound the petition debt, that the acceptance of the offer would have required the dismissal of 19

20 the petition and that the creditor has unreasonably refused (IA 1986, s.271(3). It will not be unreasonable for a petitioning creditor to refuse to accept payment where there are supporting creditors who obtain a bankruptcy order: Smith v Ian Simpson and Company [2000] 3 WLR 495). The following points are to be noted. (1) The discretion whether or not to make a bankruptcy order is wider than the matters considered on an application to set aside a statutory demand. It would appear that a debtor is not prevented from repeating at the hearing of the petition those arguments that were unsuccessful at the application to set aside the demand (Erberhardt v Mair [1995] 1 WLR However, see Brillouet v Hachette Magazines Limited [1996] BPIR 518). (2) The burden of satisfying the court of the matters in s.271(1) lies with the creditor. The burden of satisfying the court to apply s.271(3) lies with the debtor. (3) Unreasonable refusal has been held to mean a refusal which is beyond the range of any possible reasonable reaction in the circumstances (Re A Debtor (No 32 of 1993) [1994] 1 WLR 899 (Timothy Lloyd QC)). A creditor is entitled to have regard to his own interest. Acting reasonably is not the same as acting justly, kindly or fairly (IRC v A Debtor [1995] BCC 971 (Robert Walker J). (4) A creditor who was capable of voting down a proposal for an individual voluntary arrangement could be held to have acted unreasonably for the purposes of s.271(3) (Re A Debtor (No 2389 of 1989) [1991] Ch 326 (Vinelott J). (5) The court may make a bankruptcy order if satisfied that the statements in the petition are true and the petition debt has not been paid, secured or compounded for (Insolvency Rules 1986, r.6.25(1)). The rule requires the court to investigate the statements in the petition including the underlying debt (See Muir Hunter, para ). Where the debt is disputed, the court may give directions for service of evidence, disclosure and for deponents to attend for cross-examination. (6) If the petition is brought in respect of a judgment the court may stay or dismiss the petition on the ground that an appeal is pending or that execution has been stayed (Insolvency Rules 20

21 1986, r.6.25(2)). A petition may not be dismissed solely on the grounds that the debt is overstated (Insolvency Rules 1986, r.6.25(3)). It is of note that whilst the court will usually not set aside a statutory demand where there is an appeal pending, it may stay or dismiss the petition in cases where the appeal is genuine (Re A Debtor (No 799 of 1994), ex parte Cobbs Property Services [1995] 1 WLR 467). If the petitioning creditor fails to appear at the hearing of the petition, he shall not be entitled to present another petition in respect of the same debt without leave of the court (Insolvency Rules 1986, r.6.26). If the petition has not been served by the hearing date, the petitioner may apply for an extension stating the reasons why the petition has not been served (Insolvency Rules 1986, r.6.28). If an application for an extension is made less than 2 clear working days before the hearing date, the costs of the application will be disallowed. If the petition has not been served and no one attends, the petition will be re-listed for 21 days later. Written evidence will need to be filed by the petitioner explaining the reasons for the delay and the non-attendance and giving reasons why the petition ought not to be dismissed (CPR PD Insolvency, para. 14). The petitioning creditor or his solicitors should attend the court to ascertain whether the application has reached the file. It should not be presumed that an extension would be granted (CPR PD Insolvency, para. 14(3)). Adjournment, substitution and change of carriage of petition The court has the power to adjourn the hearing of the petition (Insolvency Rules 1986, r.6.29), but repeated adjournments to allow the debtor to make payments by instalments are improper. The petitioner is entitled to have his debt paid in full, or alternatively secured or compounded to his reasonable satisfaction. Adjournments to enable payment ought ordinarily to be granted only on the basis that there is a reasonable prospect of payment within a reasonable time (Re Gilmartin [1989] 1 WLR 513; Judd v Williams [1998] BPIR 88). There are two separate provisions in rr.6.30 and 6.31 of the Insolvency Rules 1986 allowing supporting creditors to take over a petition in circumstances where the original petitioning creditor is either found not entitled to continue with his petition or for a variety of reasons does not proceed with it. The advantages to a supporting creditor of proceeding under the existing petition rather than starting afresh are that: (1) any payments made during the pendency of the petition will be void unless the court orders otherwise (IA 1986, s.284); 21

22 (2) the relevant time for attacking transactions at undervalue or preferences is determined by reference to the date of presentation of the petition which results in the bankruptcy order being made (IA 1986, s.341); and (3) the earlier the date, the more antecedent transactions that may be caught; and (4) time and costs are saved. Where a petitioner is found not entitled to petition or consents to withdraw the petition or allows it to be dismissed or consents to adjournment or fails to appear or does not seek a bankruptcy order, then a supporting creditor may apply for substitution, provided he satisfies three conditions ((Insolvency Rules 1986, r.6.30): (1) he has given notice of intention to appear pursuant to r.6.23; (2) he wants to prosecute the petition; and (3) he was at the date when the petition was presented, in a position to present its own petition. Therefore, a substituting creditor must either have served a statutory demand more than 21 days before the petition in respect of which there was no outstanding application to set aside or had an unsatisfied sheriff s return. Should an order for substitution be made, then the petition will need to be amended to include the details of the substituted debt re-verified and re-reserved. As an alternative to substitution, the court may authorise a supporting creditor to have the carriage of the petition in place of the original petitioner (Insolvency Rules 1986, r.6.31). If an application is successful, the petition is not amended, but is proceeded with in its original form by the new petitioner. The petition is prosecuted on its original basis. The applicant must have served notice of support (Insolvency Rules 1986, r.6.23) and must be an unpaid and unsecured creditor (Insolvency Rules 1986, r.6.31(2)(a)). The court may order a change in carriage of the petition where the petitioner intends to secure the postponement, adjournment or withdrawal of the petition or does not intend to prosecute it diligently or at all (Insolvency Rules 1986, r.6.31(2)(b)). Whilst r.6.31 contains none of the restrictions as to the ability of the new petitioner to present its own petition, it provides in para. (3) that no order shall be made if the petitioner s debt has been paid, secured or compounded for by 22