Q: A debtor has multiple accounts, and an additional debt is discovered or linked after bankruptcy action has already commenced. Can this additional debt be incorporated into the bankruptcy petition?

A: Under section 267 (2)(c) of the Insolvency Act 1986, a creditor’s petition may be presented to the court in respect of a debt or debts only if, at the time the petition is presented the debt, or each of the debts, is a debt which the debtor appears either to be unable to pay or to have no reasonable prospect of being able to pay.

Therefore, while a liability order renders a debt due and payable immediately, an additional step is needed before the debt may validly be included within a bankruptcy petition. This is true of each debt, so it follows that each liability order should be considered individually.

Section 268 (1) of the Insolvency Act 1986 clarifies that a debtor appears to be unable to pay a debt within this context if, but only if, the debt is payable immediately and either (1) a statutory demand has been served and three weeks have elapsed since service, or (2) execution has been returned unsatisfied (i.e. the debt has been returned nulla bona). In relation to ‘reasonable prospect of being able to pay’, only the service of a statutory demand will suffice in order to establish this.

Accordingly the general rule is that, if a liability order has not been included within a statutory demand, it should not then be contained within a bankruptcy petition. This leaves the creditor with the option of either serving a new statutory demand (if a petition has not yet been presented), or of excluding the requisite amount from the bankruptcy petition (in which case it cannot count toward the £5,000.00 bankruptcy threshold).

The chief disadvantage with the latter option is that, while the £5,000.00 threshold only strictly applies at the time when a bankruptcy petition is presented, the court retains a discretion to dismiss the petition if the debt subsequently falls below this level. Accordingly, the lower the level of debt included within a petition, the greater the chance that it may drop to such a degree (through part payment or otherwise). If a debtor were to be made bankrupt, the additional debt could be claimed within the bankruptcy (regardless of whether the debt was included in the petition itself), so an assessment may need to be made as to the debtor’s financial position more generally.

It is important to note that the two options detailed in section 268 are not mutually exclusive, and therefore there is an exception to the general rule. Even if a debt has not been included within a statutory demand, it is capable of being included within a bankruptcy petition if it has been returned by enforcement agents as ‘nulla bona’. We would generally expect to see a signed certification from the enforcement agent to this effect, and this should be retained in order to evidence the unsatisfied return if necessary.

So in essence, a bankruptcy petition could include a mix of liability orders which have been (1) contained in a statutory demand, and/or (2) returned ‘nulla bona’. The same principle applies where a bankruptcy petition has already been presented to the court; under Insolvency Rule 10.16, a creditor’s bankruptcy petition may be amended at any time after presentation with the court’s permission. The question we need to ask is whether, at the time the petition was presented, the additional debt was capable of being included within it, on either of the two grounds. If it was, it follows that an application can be made to amend the bankruptcy petition to include the omitted debt.

If you have any questions regarding the above, please do not hesitate to contact Michelle Summers on 0333 200 5203 or michelle.summers@greenhalghkerr.com.