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The pitfalls of petitioning

Whenever a creditor seeks to issue a petition against a debtor it is not unusual for the issue of how to deal with an offer to settle the debt before the petition is heard arises. Likewise how does the petitioner deal with accepting payment from the debtor both in bankruptcy proceedings and winding up?

The Courts have recently been called upon to consider these issues and the decisions highlight the need for careful consideration before entering into any negotiations with a debtor where a petition has been issued.

A creditor who petitions for bankruptcy must carefully consider any offer to settle the debt and make a reasonable decision based on circumstances. In a recent case the bankrupt sought permission to appeal his bankruptcy order on the basis that the Judge had incorrectly decided that the petitioning creditor had not acted unreasonably in rejecting the offer to compound the debt and therefore the petition ought to have been dismissed pursuant to section 271 of the Insolvency Act 1986. The court decided in this instance that for the rejection of the offer to be held out as being unreasonable it had to be shown by the debtor that no reasonable hypothetical creditor would have rejected the offer. This is an objective test and the court will consider all relevant factors and the reasonable hypothetical creditor is not obliged to show patience.

In this particular case the petitioning creditor did not act unreasonably. The offer made related only to a quarter of the liability and was not a cash sum but rather a half share in the equity of a shared property. The realisation of that interest would have been problematic and the petitioning creditor in this instance was able to show that the offer had been considered and had not been rejected due to any internal policy. When a petitioning creditor receives an offer they have to be able to show the court that they have considered the relevant offer and their decision to reject it has been made reasonably based on circumstances. Any decision to reject an offer simply because it is policy based will not be looked upon favourably by the courts.

The difficulty with payments made by a debtor in the lead up to the bankruptcy order was highlighted in another recent case. In that case the statutory demand had been served and then after an unsuccessful application to set it aside the bankruptcy petition was presented. Subsequently a bankruptcy order was made on the petition.

Some four months after the petition had been presented the Trustee in Bankruptcy was appointed. The Trustee discovered that at the time when the application to set aside the statutory demand was before the court the bankrupt had in fact transferred over £300,000 from a bank account in his own name to a bank account in the name of his father. Subsequently monies were then transferred onwards again.

The bankrupt's father appeared to have benefited from a transaction at undervalue and even if the father had been a creditor as it was alleged repayment would have been considered a preference payment. The Trustee in Bankruptcy issued proceedings alleging that the payment received was a transaction at undervalue or preference. Just before the matter came to trial it was discovered that a significant part of the monies which had been paid were spent on a long leasehold of a flat on the date that fell between the presentation of the petition and the bankruptcy order. Following an adjournment of the trial the bankrupt's father sought to alter his evidence, the bankrupt’s father's evidence was to the effect that he had not been a creditor of the bankrupt and that he knew nothing about the relevant bank accounts opened in his name. It was alleged these accounts have been open for and operated by the bankrupt.

This new evidence caused the Trustee in Bankruptcy to revise their case. It was asserted by the Trustee in Bankruptcy that the payments were made post-petition and void pursuant to section 284 of the Insolvency Act 1986 and that the payments made after the vesting of the property were simple misappropriations.

The case is of particular interest as it deals with how void post-petition payments should be treated. Chief Registrar Baister noted the Insolvency Act 1986 section 284 did not spell out the relief that the court can or must grant as a result of the disposition found to be void. It was also unclear whether payments made post-petition pre-bankruptcy should be treated differently from payments made after the estate vested in the Trustee in Bankruptcy pursuant to section 306 Insolvency Act 1986.

It had been the case of the Trustee in Bankruptcy that the appropriate remedy was for an account of monies had and received. The Respondents to the Trustee’s application asserted that the correct approach was for the court to adopt a restitutionary approach meaning that they had to consider whether the Respondents were being unjustly enriched at the expense of the Trustee and whether therefore they could have a change of position defence.

The Chief Registrar decided that he was in agreement with the Trustee in Bankruptcy because section 284 of the insolvency act 1986 set out “a particular statutory regime which gives rise to an obligation to account for money had and received to which you are limited defences.” Therefore, payments made post-petition and pre-vesting and those made post vesting were to be treated the same namely an account for money had received.

In this case where a flat was purchased from a payment that is void under section 284 then that asset may simply be declared to be part of the bankruptcy estate.

In relation to payments made by a company after the presentation of a winding up petition section 127 of the Insolvency Act 1986 states that in a compulsory winding up, any disposition of the company's property made after the commencement of the winding up is void unless the court orders otherwise. In the case of a compulsory winding up the commencement date is deemed to be the date of the presentation of the winding up petition. Therefore, any creditor who presents a winding up petition if offered payment by the debtor company will need to have that payment ratified by the court. Alternatively, the creditor needs to apply to court and seek the dismissal and withdrawal of the petition. This process is easier when a winding up petition has not yet been advertised and is more complicated once the petition has been advertised.

A winding up petition gives rise to a class-action for the benefit of creditors as a whole and therefore once advertised other creditors may apply to continue with the petition and support the winding up of the company.

An issue which sometimes arises as to what happens when payments are made by the insolvent company’s bank after the presentation of a winding up petition but pursuant to payment instructions issued by that company prior to the petition been presented.

The starting point is that the definition of property under the Insolvency Act 1986 is wide and includes money, goods and chose in action. Therefore, any money held in the bank account of the insolvent company is a debt owed by that bank to the account holder and is therefore a chose in action. Fortunately, due to the speed of banking transactions and the vigilance of banks cases where payments are made post the petition being presented on instructions received prior to the petition are rare. However, in situations where monies received from a company which has had a winding up petition presented against it care needs to be taken in how those monies are treated and whether an application to court is necessary to have the payment ratified.

Mayo Wynne Baxter have specialists who can give advice on all matters arising from insolvency of individuals or companies, should you wish to discuss any issues arising from the above please contact Darren Stone, Head of Insolvency at Mayo Wynne Baxter.