, Hearing the creditor's petition
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Hearing the creditor's petition

Ultimately the court will hear a petition for the bankruptcy of the debtor assuming the same has been properly issued and served and the requisite time has elapsed (which is 14 days from service of the petition under Insolvency Rule 6.18, unless the debtor has absconded, it is a proper case for an expedited hearing or the debtor consents to an earlier hearing). Service has to be personal service on the debtor by delivery of a sealed copy of the petition (Insolvency Rule 6.14) unless the court is satisfied by evidence that the debtor is avoiding personal service, in which case it can order substituted service to be affected in any manner that the court thinks fit. (In addition if the debtor is subject to a voluntary arrangement, namely an arrangement with his creditors, the supervisor of the arrangement also has to have a copy of the petition sent to him or her). The court has to go through a number of tests in order to determine whether a bankruptcy order can be made.

The first point the court has to determine is whether the bankruptcy debt is due. Just because the debtor has not applied to set aside a statutory demand does not mean that the debtor cannot challenge the debt. The court will not be undertaking a trial of a debt action. What the debtor has to do is show a genuine triable issue of the sort which would avoid summary judgment in a civil action (judgment given where there is no properly arguable defence). Thus if the court does not think there is a debt then there can be no bankruptcy order.

If there was a debt, if it is a future debt the question is whether on the balance of probabilities the debtor has no reasonable prospect of being able to pay such debt when it falls due. This is obviously much harder than demonstrating that an existing debt has not been paid. If the debt is an existing debt the question is whether it has been paid or secured or compounded for. If the debt has been paid, or if paid more than £ 750 remains outstanding, the court can still make the debtor bankrupt (it will not normally do so for less than £ 750 unless the circumstances indicate for example a pattern of "tactical" payments to just below the bankruptcy level). Securing the debt is giving a mortgage or the like which will sufficiently satisfy it. Compounding of the debt is an arrangement which reasonably satisfies the creditor. Therefore the court will look at the circumstances relied on by the debtor to suggest that sufficient security or compounding for the debt has been given and agreement reached in respect of the same.

Even if agreement is not been reached what has been offered can be relevant because the court also has power to dismiss the petition under section 271 (3). The first point is that the petition may be dismissed if the court is satisfied that the debtor is able to pay all of his or her debts. This again means on a balance of probabilities. It may likewise be satisfied if there was an offer to secure or compound the debt which would lead to dismissal of the petition but which has been unreasonably refused by the creditor. In other words, if there was security or an offer put forward which the court considers that the creditor was unreasonable in refusing then petition can be dismissed. That is not the same as deciding whether the court itself would have accepted the offer. What you do is look at the relevant situation having regard to the history between the creditor and the debtor. (For example past promises which have been reneged on can be relevant history). Having regard to the history there may be a number of different stances which could reasonably taken. Any reasonable stance would of necessity not be unreasonable. Therefore if the court thinks that having regard to the history the creditor has been unreasonable then that is a case in which the court may dismiss the petition. However if the court considers that the creditor could reasonably have accepted but could also reasonably have refused, then this exception will not apply.

Next week we will look at the position of the creditors who give notice and appear on such petition.

Michael J. Booth QC