A Ghost from the Past with Lessons for the Future? Grounds for a debtor’s petition under s 272(1) of the Insolvency Act 1986

On 20 October 2017 Registrar Derrett handed down judgment in the case of Thomas v Haederle (unreported), in which she gave reasons for dismissing a bankruptcy petition presented by the debtor (T) in the County Court at Norwich on 4 December 2014, pursuant to s 272 of the Insolvency Act 1986 (IA86), as it then was.

It is well known that, with effect from 6 April 2016,[1] the Enterprise and Regulatory Reform Act 2013[2] dramatically changed the regime for debtors who wish to have themselves declared bankrupt.  Prior to that date, as happened in the present case, a debtor had to present a bankruptcy petition pursuant to s 272 of IA86.  From that date, for most purposes, s 272 of IA86 was replaced by a new regime contained in the provisions of a new Chapter AI of Part IX of IA86, consisting of ss 263H – 263O, which require the debtor to make a bankruptcy application to an adjudicator.  The exceptions, where the old s 272 of IA86, with relevant modifications, still apply, are:[3]

a) A bankruptcy petition presented by the personal representative of a deceased debtor under the Administration of Insolvent Estates of Deceased Persons Order 1986; and

b) A joint bankruptcy petition presented by the members of a partnership under Art. 11, where the partnership is not being wound up as an unregistered company under Part V of IA86.

As the petition in the present case had been presented before the above changes had come into effect, it had to be dealt with under the old provisions.[4]  Given that the regime for the presentation of a debtor’s petition has been largely defunct for over 18 months, it might be thought that this decision would be a legal fossil, of little more than academic interest.  This is, however, not entirely the case.  As is pointed out above, there remain circumstances where s 272 (albeit in modified from) will continue to be directly relevant.  In addition, and perhaps of greater relevance, the new adjudication regime under ss 263H – 263O, though procedurally very different from that pertaining to the old debtor petitions, imposes on the adjudicator similar considerations: under s 263I, the jurisdictional test, including that relating to the debtor’s centre of main interests (COMI), still remains the same; under s 263K(1)(b); and (2) the adjudicator still has to be satisfied that the debtor is unable to pay his or her debts as at the date of the determination.  These are, in essence, the very issues with which this judgment grapples.

Background

T was a German national who had lived in both Germany and Austria and also, temporarily, in Italy.  Many years earlier, in 2007, T and his then business partner, H, had fallen out and as a result of proceedings brought by H in England judgment had been entered against T in the sum of £866,914.  H obtained a freezing order against T, which T effectively ignored. H made more than one attempt to bring committal proceedings against T, without achieving anything. T was successfully prosecuted for tax evasion in Germany, but this did not assist H and T continued to evade all H’s attempts at enforcement across a number of jurisdictions.

In October 2014, less than two months prior to the presentation of the petition in Norwich, H had ascertained that T had become formally registered as resident in Austria and on the strength of this H attempted to make T bankrupt in Austria.  The attempt failed as T had revoked his residency and the Austrian courts concluded that T’s COMI was no longer in Austria.

Procedural history

On getting wind of the petition, H, as a judgment creditor of T, intervened in the petition at an early stage to challenge COMI.  The court gave some directions for T to file further evidence and subsequently ordered the matter to be transferred to the High Court for determination.  This was eventually set down for two days in June 2016, but at that hearing Registrar Briggs (as he then was) declined to reach a final conclusion and instead ordered further evidence to be filed.  The Registrar did, however, make certain observations at this hearing, which assumed some significance at the final hearing, which was eventually fixed for 6 and 7 July 2017 before Registrar Derrett.

Issue 1: COMI

In considering the question of T’s COMI, the Registrar reminded herself of the recent exegesis given by the former Chief Registrar Baister in Re Budniok.[5]  Having cited the relevant paragraphs of that judgment in full, the Registrar went on to remind herself of the passage in an earlier decision, in which Chief Registrar Baister had explained that, although the factual matrix as it appears at other points in time, including in particular at the date of determination, are relevant, the court is primarily concerned with the location of COMI as at the date of presentation.[6]

The evidence, some of which had to be conducted via video link, was not entirely satisfactory and may have been rendered less so by the fact that both parties were in person.  However, the court was satisfied that the evidence established that in roughly June 2014, T began to make preparations to move himself and his family to Norfolk in England.  T and his family leased a property in a village near Norwich in or about early July 2014, although in fact they then spent the summer on the Continent.  The children were enrolled in schools locally, starting in September, and T opened a bank account here and made other arrangements indicative of a move to England.  In December 2014, however, T was back in Austria dealing with further legal proceedings there.

The reasons he gave for choosing the Norwich area, as opposed to anywhere else in England, were that it combined affordable living arrangements with relatively easy access to both London, where he hoped there might be better work prospects, and the Netherlands, where he had two children by a former marriage.  It is clear, however, that at least part of the motivation for the move was to take advantage of the more lenient bankruptcy regime in this jurisdiction.  T’s decision to relocate to England thus had an element of forum shopping and indeed artificiality about it, but the case law shows that this is not in itself determinative.[7]

Although the Registrar had serious concerns with the veracity of T’s evidence, she was prepared to accept on the balance of probabilities that T’s move to England was sufficiently genuine and had a sufficient degree of permanence to it to warrant the finding that his COMI as at 4 December 2014 was in England.  The fact that his plans later changed and that by the date of determination he was clearly no longer residing in England did not outweigh the above evidence to such a degree as to disturb that conclusion.  The Registrar appears to have placed at least some reliance on the tentative conclusion, reached by Registrar Briggs at the hearing the year before, that subject to better explanations as to the reasons for the move, as at the date of that earlier hearing the court would have been inclined to accept that T’s COMI was in England at the relevant time.  The Registrar noted that T did not inform his creditors of the move, but she found that since both H and the German tax authorities both appeared to have learnt of the move prior to the presentation of the petition, he did not move in order to avoid his creditors, or if that was his intention it was evidently not successful.  The fact that the Austrian courts had found that his COMI was not in Austria by the relevant date further corroborated this finding.

Issue 2: inability to pay

Having found in T’s favour on the jurisdictional point, the Registrar went on to consider whether she should make a bankruptcy order.  This essentially turned on the question of whether T was unable to pay his debts.  She considered the evidence before the court in relation to T’s liabilities and assets and found that the latter outweighed the former by a handsome margin.  This was true even on T’s case, and it was still more true when the court took into consideration the evidence before the court at an earlier hearing on a related dispute between T and H, in December 2016 before Snowden J and the observations of Snowden J himself on that occasion.  The Registrar did not accept that T had complied with his duty to give full disclosure in his statement of affairs in support of his petition.

The court therefore refused to make a bankruptcy order and dismissed the petition.

Future implications

With regard to COMI, this decision does not bring anything startlingly new to the process, but there are some points of interest.  Arguably, in light of the conclusions reached by the Registrar in relation to the veracity of T’s evidence, not merely in relation to this issue but in relation to his ability to pay as well, the decision places insufficient weight on the inferences that could reasonably be drawn with the benefit of hindsight from the events that transpired after the presentation as to T’s true intentions.  Given that the tentative observations expressed by the court at the earlier hearing were made without the benefit of either having the full evidence or hearing the evidence tested in cross-examination, it was perhaps unnecessary to give those observations quite as much weight as the Registrar apparently did.  Also the conclusions of the Austrian court in rejecting the idea that T’s COMI was at a given time in Austria can only be of marginal assistance on the issue as to whether the court in England should accept that he had properly transferred his COMI to England by the relevant date.

That said, this case does throw up some interesting nuances in relation to approaching issues on COMI and, just as with Budniok earlier, it will no doubt be of considerable assistance to adjudicators when grappling with these issues and applying the principles set out in the case law (as helpfully summarised in Budniok) to the facts before them in any given case.

With regard to inability to pay, perhaps because both parties in this case were unrepresented, the court does not appear to have considered the case law in deciding what approach to take in applying the test (in marked contrast to the position on COMI).  The authorities establish that the test to be applied in such cases is not whether the debtor’s liabilities exceed his assets (balance sheet insolvency) but rather whether he could meet then when they fell due (commercial insolvency).[8]  Of course it is a matter for the debtor to prove to the court’s satisfaction that this is case.  It is not entirely clear from the judgment whether this is the test that the court was applying here, nor, if it was not, whether it would have made any material outcome to the conclusion that it reached if a different test had been applied.  The adverse inferences the court drew here are entirely in keeping with authority,[9] so that the judgment seems to have been made on solid grounds.

Nevertheless, this case serves as strong reminder that in relation to debtor-instigated bankruptcy proceedings the court must be astute in examining the evidence proffered by the debtor in support his or her application or petition.  The need to look beneath the surface will be all the more important under the new adjudication regime than with the old s 272 petitions, because the new system effectively precludes creditors who might be prejudiced, such as H here or the wife in Paulin v Paulin, from challenging the evidence and from bringing material discrepancies to the attention of the person in whose lap the decision lies as to whether to make a bankruptcy order.  Of course, the new regime does not preclude creditors from attempting to annul any bankruptcy obtained on such dubious evidence, but the burden on such an application lies on the creditor and that is not the same as the court having reason to doubt the debtor’s evidence in the first place.  This distinction remains important even though, on such an annulment application, the applicant need only show that the debtor was balance sheet insolvent for the burden then to swing onto the debtor to prove that nevertheless he was unable to pay his debts.[10]

It is to be hoped, therefore, that in future adjudicators will take full account of the kind of scrutiny exercised by the court in this case to ensure that justice is properly done in the first place.  It is similarly to be hoped that courts in future, on the very much rarer occasions on which they will be faced with s 272 petitions, will similarly take heed of the lessons to be learnt from this exercise.

[1] Enterprise and Regulatory Reform Act 2013 (Commencement No. 9 and Saving Provisions) Order 2016/191 (the ERR Order), Art. 2.

[2] Enterprise and Regulatory Reform Act 2013, s 71 and Sch 19.

[3] The ERR Order, Art. 4.

[4] The ERR Order, Art. 3.

[5] Re Budniok: Budniok v The Adjudicator, Insolvency Service [2017] EWHC 368 (Ch).

[6] Doyle v Quinn [2015] BPIR 226.

[7] Budniok at [82], citing Chadwick LJ’s dictum in Shierson v Vlieland-Boddy [2005] EWCA Civ 974, [2005] 1 WLR 3966, at para 55(5).

[8] Paulin v Paulin [2009] EWCA Civ. 221, [2009] BPIR 572, at para [41].

[9] Paulin v Paulin, at [50].

[10] Paulin v Paulin, at [49].