In the recently reported decision of Go Capital v Phull, the court had to consider whether or not to make a bankruptcy order on a petition presented for a liability said to be due on a guarantee document. Factually, there was evidence about casting doubt about the validity of the guarantee document itself, whether it was a sham or there had been a case of forgery. There had been no application to set aside the statutory demand. The judgment is silent as to why that was the case.
Chef ICC Judge Briggs summarized the legal position under section 271(4) insolvency Act 1986 as “no bankruptcy order may be made on a creditor’s petition unless the court is satisfied (1) the debt in respect of which the petition has been presented was payable at the date of the petition or has subsequently become payable and (2) the debt has not been paid secured or compounded for”.
There is no distinction between the test required as to the setting aside the statutory demand and that for the making of the bankruptcy order.
Having examined in some detail the evidence and the dispute raised, the Judge concluded that “at the hearing of a bankruptcy petition, the court may make an order for bankruptcy if satisfied that the statements in the petition are true and that the debt on which it is founded has not been paid, secured or compounded”.
Having considered the evidence advanced by the alleged debtor disputing the debt, he was not satisfied that the petition statements were true and so declined to make the bankruptcy order.
It is difficult to criticise any judge for adopting the position that the court has to be satisfied as to the truth of the statements put before it as a justification for the order being sought. However, in this particular decision, it ignores that the bankruptcy process arguably occurs in two stages, the Statutory Demand followed by the Petition if that demand is not set aside on an application by the Debtor.
Whilst the court does have a discretion at all times as to the making of the order, the process adopted by the Judge is at odds with the appeal decision in Turner v Royal Bank of Scotland (2000), in which the relationship between an application to set aside a statutory demand and the hearing of the bankruptcy petition was in issue. In that case the Court of Appeal dealt with the same considerations to be undertaken at the hearing of the petition as those considered by Chief ICC Judge Briggs but concluded that the establishment of the debt was a matter to be dealt with at the Statutory Demand stage with Chadwick L.J. saying, “Questions as to the existence of the debt at the date of the presentation of the petition, and any cross-claim, are intended to be dealt with on an application to set aside the statutory demand – that is to say, before the petition is presented.”
Turner was not mentioned in the judgment in Go Capital and it could be argued that, Mr Phull having not applied to set aside the demand, the existence of the debt was established.
Despite the debtor succeeding in this case in defending of the petition notwithstanding the fact that there has been no application to set aside the demand, this has to be a high risk tactic and is not one that would generally be recommended.
As a further point, the judgment mentions that Counsel for the petitioner was asked why the bankruptcy route had been taken. The response was that this was a quick an inexpensive way to enforce the debt. Chief ICC Judge Briggs gave the reminder that insolvency processes are a collective regime designed to secure a distribution of assets to the creditors on a pari passu basis. It was not merely a debt collection method. There were serious consequence on issuing a petition to the disposition of ay property subsequently. If a petitioner seeks to use the insolvency processes as a form of debt collection, they can expect to face the prospect of an adverse costs order on an indemnity basis.
This is also one of the early decisions on a remote hearing and there were clearly teething troubles. The court noted that one advocate had trouble with his microphone, there was no list of authorities and the electronic bundle ran to hundreds of pages but was not bookmarked, hyperlinked and it was not possible to write comments. Despite this, the Judge obviously did a good job in dealing with the application thoroughly but there must inevitably be a limited period in which teething problems with remote hearings and the provision of e-bundles will be tolerated.