What Happens When A Debtor Pays A Petition Debt Below £5,000?

It is well-known that since October 2015, a bankruptcy petition may only be issued against an individual where the outstanding debt exceeds £5,000.  However, what happens when a petition is issued and the debtor subsequently pays sufficient funds to reduce the debt below £5,000?

This was the scenario in the recent case of Allen v London Borough of Haringey [2017] EWHC 2664(CH).

Background

Between 2009 and 2016 Mr Allen had accrued over £13,000 in council tax debt to Haringey in respect of two properties owned by him.  Mr Allen had been making offers to repay the debt at £400 a month but these were rejected.  Mr Allen’s ex-wife paid off some of the indebtedness for which she was responsible and so by May 2016 when Haringey issued the petition, the debt stood at £6,835.  Following issue and service of the petition, Mr Allen continued to make offers of £450 per month however the council indicated that because the matter had got this far they were no longer prepared to accept any repayment arrangements.  The matter first came to a hearing on 1 September 2016.

Immediately before the hearing Mr Allen paid a further sum of money reducing the debt to £4,998, just £2 below the bankruptcy limit.  At the hearing Mr Allen continued to state his willingness to repay the debt at £450 per month and Haringey restated its position that this was not acceptable in view of the amount of time for which council tax had been outstanding.

Because the debt was now below the bankruptcy threshold the district judge indicated that she was not so much concerned with the monthly payment level as with the fact that the bankruptcy debt was now below the threshold. In light of that, she intended to adjourn the petition because if the petition was dismissed, it would involve making an order in relation to the petitioning creditor’s costs and she ought to have a schedule of those before making an order.  She explained that a consequence of the adjournment would be to enable Mr Allen to make further payments as well, with a view to the petition being dismissed at the next hearing if there are still no supporting creditors and with a view to the court making an order in relation to those costs on the dismissal.

She also indicated to Mr Allen that the court still had the discretion at the next hearing to make a bankruptcy order if for example, it turned out that the payments being offered were not continued.  In light of the fact that the council felt strongly that the bankruptcy order should be granted she issued directions requiring a witness statement from Mr Allen setting out the history of his proposals to settle the matter, and for Haringey to respond to set out their position.

Following the hearing on 26 October 2016 Mr Allen had paid a further £1,000 to the council (reducing the debt to £3,998) but he had failed to file any evidence in accordance with the direction.  Instead, he simply produced a wage slip indicating that he had limited means on his £15,000 a year income and increasing his offer to £500 per month.  The council stated at the hearing that Mr Allen was not in fact paying council tax for the current year.

Legal Position

The relevant statutory position is now set out in Rule 10.24 of the Insolvency Rules 2016 and the leading case dealing with this issue is Lilley v American Express Europe Limited [2000] BPIR 70.  Lilley dealt with the question whether a subsequent payment by the debtor after the presentation of the petition which brings the level of the debt below the bankruptcy level effectively ousts the jurisdiction of the court to make a bankruptcy order.

It was noted that there are no express provisions in either the 1986 Insolvency Act or Rules which deals with this scenario.  Rule 10.24 (and its predecessor Rule 6.25 on which Lilley was decided) states that “the court may make a bankruptcy order if satisfied that the statements in the petition are true, and the debt in which it was founded has not been paid, or secured or compounded for”.  HHJ Jarvis QC stated that “it seems to me [that rule] mirrors the principles set out in section 271 IA 1986.  It seems to be clear that the court cannot make a bankruptcy order if the whole of the debt has been paid by the time it comes for hearing, but the Act says nothing to prevent a court from making an order if only part of the debt has been paid.  In my judgement a court must retain a discretion as to whether or not it is proper to make an order in these circumstances”.  The court went on to consider a scenario where a debtor plays a cat and mouse game with the petitioning creditor and pays off just enough to take the debt under the bankruptcy level.  The court would retain a discretion to make an order in those circumstances but if the case was one where the debtor was in genuine difficulties and had made efforts to pay money, then the court would consider carefully whether or not it should exercise its discretion to make a bankruptcy order.

Legal Considerations in Allen

The judge in Allen noted that the adjournment had been made because the court wished to consider whether it was appropriate to make a bankruptcy order despite the fact that the debt was now below the bankruptcy threshold.  The district judge had directed herself by asking first whether the offer of £500 per month in respect of the outstanding debt was one that fell under the court’s consideration under section 271 IA 1986, noting that sub-section 3 permitted the court to dismiss the petition if a debtor had made an offer to secure or compound the debt which the petitioning creditor ought reasonably to have accepted.

In that respect she referred to HMRC v Garwood [2012] BPIR 575 and that “in order to consider that the offer had been unreasonably refused, the court would have to conclude that no reasonable, hypothetical creditor in the position of the petitioning creditor would refuse the offer.  That means in effect, that if the refusal is within the reasonable range of responses to the offer put forward, then a court is not in a position to interfere and insist that the offer is accepted, and the petition is dismissed”.  In other words, the court was not limited to considering matters actually taken into account by the petitioning creditor but must look at all the relevant factors and their impact on the reasonable hypothetical creditor and that included the history.

The district judge had noted that evidence from Mr Allen about his income and outgoings were scant but that given his mortgage outgoings, further outgoings of £500 per month would leave him nothing on which to live.  It was also noted that Mr Allen had not paid any council tax for the current period.  In those circumstances the district judge decided to make the bankruptcy order.

Appeal

The first ground of appeal related to the judicial representations made to Mr Allen at the first hearing.  It was asserted that the effect of those representations were that the bankruptcy petition would be dismissed if Mr Allen behaved reasonably.  However, the appeal court held that the district judge’s approach was made perfectly clear to the parties in that she required evidence from both sides as to the conduct of each party and it was expressly reserved that a bankruptcy order may be made at the subsequent hearing.  It was not right to cherry pick sentences from the district judge’s observations and it was clear from the district judge’s approach that she had properly directed herself in relation to current case law.

The second ground related to the reasonableness of the conduct of Mr Allen during the adjournment.  It was held that although he had paid £1,000 and had increased his offer, one cannot look at the offers in isolation.  They need to be demonstrably sound offers and Haringey were entitled to take the view that the mere offer of payment if not backed by a demonstration that the payment could be maintained was not one which warranted serious consideration.

The final ground related to the fact that Mr Allen was unrepresented at the hearing and the district judge should have adjourned the case to provide him with a further opportunity to submit evidence.  It was held that, in accordance with the case of Felicia v Barono [2012] EWCA Civ 908 that the same rules apply to the conduct of a case by litigants in person as apply to those who are professionally represented and although some indulgence may be extended to a litigant in person an opponent who is represented is entitled to assume finality in litigation without excessive indulgence being granted to a litigant in person.

Summary

The making of a bankruptcy order at a final hearing is at the discretion of the court.  In practice, the court will not normally make a bankruptcy order when the sum due on the petition is less than the bankruptcy level.

However, the conduct of the debtor throughout the course of his or her dealings with the creditor is relevant.  If payments made prior to the petition being heard appear to be a cynical attempt by the debtor to avoid a bankruptcy order, it may well still be possible for the order to be granted.  Also relevant may be long periods of time with no payment from the debtor.

If the debtor is making reasonable offers of repayment by installments, it is equally at the discretion of the court whether or not to make a bankruptcy order, whether or not the debt is above or below the bankruptcy threshold.  Again, the conduct of the debtor will be relevant as well as the reasonableness of the creditor and the factors it takes into consideration when deciding not to accept the offer put forward.  The test of this is an objective one.

It is also worth noting that the petitioning creditor’s legal costs cannot form part of the petitioning debt upon which a bankruptcy order is sought.  It is not possible to supplement the debt in the pending action by adding to it the costs of the pending action.  From Re a debtor (no 20 of 1953) [1954] 1 WLR 1190 “since these costs had not been finally taxed and the amount had not been inserted in the order until after July 17, it was impossible for the petitioning creditor to say that the whole of the debt upon which she founded her claim had existed as a debt available for bankruptcy purposes”.  Therefore, it would be wrong to add the costs in this case onto the debt so as to bring the level up to the bankruptcy level.