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 a recent case we handled where the debtor in council tax bankruptcy proceedings paid the debt down to £4,829 just prior to the hearing.

Allen v London Borough of Haringey [2017] EWHC 2664(CH).

The facts in Allen were very similar and so provided useful guidance for the court.

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.

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”.

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 instalments, 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. 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”.