Legal guidance

Grounds for setting aside a statutory demand or bankruptcy petition

The Insolvency Court’s duty of inquiry & set off in insolvency proceedings

In this short article Intelligence UK International provides invaluable insight and grounds for setting aside a statutory demand or petition for anyone facing insolvency proceedings, whether personal insolvency or corporate.

Insolvency claims in set off

Firstly, we address the right to advance a claim in set off. It is widely established that where a cross claim exists that matches or extinguishes a petitioning creditor’s claim, then the general rule is that set off must be taken into account and that claims are set off accordingly. It is therefore a complete defence to the winding up or bankruptcy petition if the alleged debtor has a genuine cross claim.

Corporate insolvency claims in set off

In corporate insolvency, the right to set off is statutory law. Rule 14.25 of the Insolvency Rules 2016 is the part that deals with set off and it is compulsory and inescapable that where there have been mutual dealings between the company and a creditor, claims must be set off accordingly during the petition proceedings:

14.25.—(1) This rule applies in a winding up where, before the company goes into liquidation, there have been mutual dealings between the company and a creditor of the company proving or claiming to prove for a debt in the liquidation.

(2) An account must be taken of what is due from the company and the creditor to each other in respect of their mutual dealings and the sums due from the one must be set off against the sums due from the other.

Personal insolvency claims in set off

The rule in set off respective of a bankruptcy petition is also much the same principle as with corporate insolvency. It is an abuse of process for the petitioner to present a petition knowing that the alleged debtor has a cross claim that equals, or exceeds the sum of the petitioning creditor’s claim.

Rule 10.5(1) of the Insolvency Rules 2016 deals with setting aside statutory demands. The law states that:  ‘The court may grant the application if;

(a) the debtor appears to have a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt specified in the statutory demand;

(b) the debt is disputed on grounds which appear to the court to be substantial;

(c) it appears that the creditor holds some security in relation to the debt claimed by the demand, and either rule 10.1(9) is not complied with in relation to it, or the court is satisfied that the value of the security equals or exceeds the full amount of the debt; or

(d) the court is satisfied, on other grounds, that the demand ought to be set aside.’

(2) At the hearing of a bankruptcy petition, section 271(1) of the Insolvency Act 1986 applies, which reads:

The court shall not make a bankruptcy order on a creditor’s petition unless it is satisfied that the debt, or one of the debts, in respect of which the petition was presented is either–

(a) a debt which, having been payable at the date of the petition or having since become payable, has been neither paid nor secured or compounded for, or

(b) a debt which the debtor has no reasonable prospect of being able to pay when it falls due.’

Grounds for setting aside a statutory demand. Grounds for setting aside a bankruptcy petition.  Set aside winding up petition.

Defence to a statutory demand / winding up or bankruptcy petition

Aside from a cross claim in set off, it is a defence and a low bar to attain if the sum of the petitioner’s claim is disputed on genuine and substantial grounds. In such circumstances, the statutory demand or petition should be dismissed by the court as an abuse of process.

In Parmalat Capital Finance Limited v Food Holdings Limited and Dairy Holdings Limited, Lord Hoffman observed that:

“If a petitioner’s debt is bona fide disputed on substantial grounds, the normal practice is for the court to dismiss the petition and leave the creditor first to establish his claim in an action. The main reason for this practice is the danger of abuse of the winding up procedure. A party to a dispute should not be allowed to use the threat of a winding up petition as a means of forcing the company to pay a bona fide disputed debt. This is a rule of practice rather than law and there is no doubt that the court retains a discretion to make a winding up order even though there is a dispute.”

It is important however, if seeking to deploy the defence, that the grounds for the dispute are substantial and properly made out.

The Insolvency Court’s duty of inquiry

It is invaluable knowledge that many do not know about, (not even experienced insolvency counsel) that it is not res-judicata to apply for the insolvency court to exercise its duty of inquiry as to the validity of a debt in insolvency, even if such debt is affirmed by a judgment.

To persuade the bankruptcy court to exercise its duty of inquiry or to “go behind” the judgment, it is not necessary to establish fraud or collusion or miscarriage of justice, but merely to set out prima facie grounds to impugn the judgment or the debt that lays behind it.

The duty of inquiry is affirmed in a number of renowned judgments, and we list a few of the most common in concise form:

In Re Hawkins (1895) 1 QB 404 Lord Justice Lopes observed that:

“the Court of Bankruptcy is not bound by a judgment at law, but is entitled to investigate all the facts of the case whenever, but not before, a prime facie case impeaching the judgment is made out.   Otherwise a man might defeat all his just creditors by allowing judgment to be taken by default or consent”

In Dawodu v American Express [2001] BPIR 983, 2001 WL 542130 Etherton J considered an appeal by Mr Dawodu against a bankruptcy order founded on a petition in respect to a ‘series of judgment debts and interest’ amounting to £15,000.  None of the orders relied upon by the petitioning creditor, American Express had been appealed by Mr Dawodu.

“What in my judgment is required is that the Court be shown something from which it can conclude that had there been a properly conducted judicial process it would have been found, or very likely would have been found, that nothing was in fact due to the Claimant”.

It is clear that in those circumstances the Court can enquire into the judgment and the judgment debt, even though the debtor himself has previously applied to have the judgment set aside, and even though that application has been refused and that refusal has been affirmed by the Court of Appeal”

In Re Flatau Ex p. Scotch Whiskey Distillers Ltd, [1889] 22 QBD 83, at paragraphs 85-86 Lord Esher noted that

“when an issue has been determined in any other court, if evidence is brought before the Court of Bankruptcy of circumstances tending to show that there had been fraud, or collusion, or miscarriage of justice, the Court of Bankruptcy has power to go behind the judgment and to enquire into the validity of the debt. But that the Court of Bankruptcy is bound in every case as a matter of course to go behind a judgment is a preposterous proposition”

In Re Fraser, ex parte Central Bank of London (1892) 2 QB 633, Fraser was a judgment debtor, who had exhaustively challenged the imposition of a judgment debt upon him, but without success. Fraser’s application to set aside the judgment debt had failed before a Master (twice), Judge (once), Divisional Court (once) and Court of Appeal (once), yet this presented no bar in the Bankruptcy Court.

If you are experiencing insolvency issues and would like to use our professional, investigatory, due diligence or legal consultancy services get in touch with us today, setting out concise details of your enquiry.

We work with leading insolvency counsel who can represent you in court after we have boiled down the case to the primary arguments during our investigatory process. Our ability to cut to the chase saves our clients huge sums of money in legal fees and often, our specialist expertise results in petitions or statutory demands being retracted prior to litigation becoming necessary. Read more about our insolvency investigation services.

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We are Intelligence UK International, a leading global private intelligence agency dedicated to investigating and combatting domestic corruption and economic crime where law enforcement fail. Bringing you hard hitting investigatory journalism, holding the unaccountable to account.
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