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Adjournment of bankruptcy petition following finding of ulterior motive
Where the ulterior motive of the petitioning creditor appears to the court to be to secure an advantage over a class of creditors, the petitioning creditor must prove, on the balance of probabilities, that an immediate order is required in the interest of the class as a whole, or for some other reason. If it can't do so, an adjournment may be ordered under s266(3) of the Insolvency Act 1986.
In Aabar Block SARL and another v Glenn Maud, bank loans made to Maud and his business partner (Q), were used to fund the purchase of an office complex in Madrid through a number of companies including a holding company (R). Those loans were assigned to the petitioners. The debt was £51 million. The office complex was valued at between €3 and €3.5 billion.
The companies entered into liquidation in Spain where a liquidation plan was approved for the sale of the companies. Maud was part of a consortium offering to buy the companies.
Maud sought an adjournment of the bankruptcy petition issued against him to allow that sale to go through. He argued that if it did, he could meet all his creditors' claims. He also alleged that the petitioning creditors had an ulterior motive in seeking to make him bankrupt. The petitioning creditors had, through an agreement with Q, obtained effective control over Q's shares. Maud's bankruptcy would trigger pre-emptive rights in favour of Q over Maud's 50% shareholding in R, which would then enable the petitioning creditor to take control of R and, through it, the valuable office complex.
The High Court concluded that the petitioning creditor did have an ulterior objective in pursuing the petition. It wanted to acquire the office complex, which it would do by reason of a bankruptcy order and through their agreement with Q, and not as a class right in the bankruptcy. Maud had no assets to enforce against other than his shares in R. The realisation of his shares in R at a proper price would benefit all of the creditors, and there were also reasonable prospects that the petition debt would be paid in full within a reasonable time. An immediate bankruptcy order would benefit only the petitioning creditor.
The court found that the process under the Spanish liquidation plan appeared to produce the best opportunity to all the creditors, the majority of whom, in value, were in support of an adjournment. An adjournment was therefore ordered.
Things to consider
It can be difficult without cross-examination for the court to conclude that a creditor is using the bankruptcy process for an ulterior motive, but where such an inference can be drawn then in fairness to all creditors, and the debtor, the court should be called on to exercise its discretion to adjourn the petition.
No reasonable prospect of debt being paid within a reasonable time
In another application to set aside a bankruptcy order, the High Court refused to either set it aside or exercise its discretion to adjourn the petition where there was no credible evidence that the petitioner's debt would be paid within a reasonable time.
In Day v Refulgent Ltd, the debt related to a £30,000 costs order in favour of Refulgent Ltd (Refulgent) arising from proceedings against Day for fraudulent misrepresentation. In those proceedings, Refulgent had also obtained a freezing order over Day's assets including 12 properties. Day opposed the petition issued against him based on the costs order because he had a purchaser for two of the properties and the deposits payable would enable him to pay the debt. He also argued that the freezing order acted as a charge over the properties so that Refulgent was a secured creditor.
The offer to purchase was conditional on the properties being released from the freezing order, the price offered being accepted, and the current mortgage payments being made by Refulgent's solicitors until completion. There were also concerns that the sale was at an undervalue and the purchaser's solvency was questioned. The purchaser's solicitors withdrew the offer but Day continued to oppose the petition on the basis that the sale of the properties to the purchaser would go through. He produced a witness statement exhibiting a letter from the purchaser's broker confirming that the conditional offer was still open, subject to contract. That exhibit did not reach the judge who made the bankruptcy order. Day appealed.
The High Court dismissed the appeal. The court would only adjourn the petition if there was credible evidence of a reasonable prospect of the debt being paid within a reasonable period. There was no such evidence or prospects here. The court referred to a number of difficulties including the terms of the conditional offer originally made, the doubts about the purchaser's solvency, what authority the purchaser's broker had to assert the sale could proceed, and the lack of explanation of the purchaser's change of heart.
The court also confirmed that a freezing order is not akin to a charge or other security on property and Refulgent remained an unsecured creditor entitled to pursue the petition.
Things to consider
Where offers to pay are made late in the day, and especially where a matter has been ongoing for some time, it is incumbent on a debtor to provide the court with credible evidence to satisfy the court that it should exercise its discretion not to make the bankruptcy order. Too little too late will run the risk that the court will not accept bare assertions as to means and ability to pay.
Contractual interest and the merger principle
The High Court has considered whether a covenant for interest on a loan merged in a judgment so that a much reduced rate of interest applied after judgment, rather than the contractual rate.
In Parr v Tiuta International Ltd, the parties entered into a loan secured on Parr's property. Following default, Tiuta International Ltd (Tiuta) obtained a judgment in 2009 for approximately £207,000 and subsequently repossessed and sold the property in 2010 for approximately £240,000. After applying the sale proceeds, and on the basis that the contractual rate of interest of 1.65% per month had continued to accrue following judgment, there remained a sum outstanding to Tiuta under the loan agreement. Tiuta sought and obtained a charging order over Parr's interest in another property to secure payment of that outstanding amount. The charging order was not defended but nearly three years after it was made final Parr applied to discharge it.
Parr submitted that there had been a merger of the covenant for repayment under the loan agreement and charge with the judgment obtained in 2009. Interest had not therefore continued to accrue at the contractual rate following judgment but at a much reduced rate of 8% as a judgment debt under the County Courts (Interest on Judgment Debts) Order 1991 and the Judgments Act 1838.
As a consequence, when the property was sold, the outstanding debt would have been considerably less than Tiuta claimed and could have been repaid in full from the proceeds of sale. The charging order should not therefore have been made.
On appeal, the High Court confirmed that the entry of a judgment might have the effect of merging the contractual right to interest in a judgment. It is a matter of construction of the particular covenant. In this case, the obligation to pay interest at the contractual rate continued after judgment and up until the point of sale of the property. Until that point, Tiuta had been exercising its rights under the legal charge which made express provision for payment of all liabilities together with interest computed and compounded as set out in the facility letter. This was wide enough to cover all liabilities whether under the agreement or any subsequent judgment debt. Tiuta had been holding the charge as security until the sale took place and was entitled to interest under the charge until that time. Thereafter interest ran at the judgment debt rate. There was therefore still a sum outstanding to Tiuta after the sale and the charging order had been properly obtained, albeit in a greater sum than Tiuta was entitled to.
Things to consider
It will be a matter of interpretation of the relevant clause of the loan agreement and charge as to whether or not the entering of a judgment has the effect of merging contractual rights to interest into the judgment rate. If the parties have not agreed otherwise, the contractual right to interest on a loan ends at judgment.
Late admittance of evidence and placing assets beyond the control of creditors
Usually, it is extremely difficult to persuade a court to allow evidence in to proceedings at a late stage. However, the court can allow late evidence in when to refuse it would affront common sense, or a sense of justice.
The above was confirmed in Swift Advances Plc v Ahmed and Ahmed. In May 2007, Swift Advances Plc (Swift) advanced monies to Mr Ahmed which was secured as a second mortgage on his property. In subsequent possession proceedings, Mr Ahmed alleged that he held the property on trust for his wife under a Deed of Trust dated December 2006 (the Trust Deed) and she therefore had an interest in the property in priority to Swift. The Trust Deed was not noted against the registered title to the property and Swift had had no notice of it.
Swift applied to set aside the Trust Deed pursuant to s423 of the Insolvency Act 1986 on the basis that it was a transaction at an undervalue, that it was entered into by Mr Ahmed in order to put assets beyond the reach of those who might make claims against him and that it was appropriate to grant the relief sought.
Mr Ahmed's evidence had been that he had bought the property in his sole name in 1995 despite the Land Registry entry indicating that he had been the sole proprietor only since November 2006. Mr Ahmed had not been able to offer any explanation as to the date of this entry during his evidence at the trial. Judgment was reserved at the end of the trial.
Immediately following the trial and before judgment was handed down, Swift located in its files a November 2006 Transfer Deed which showed a transfer of the property from joint names of Mr and Mrs Ahmed to Mr Ahmed's sole name. It was dated the same date as a first charge secured upon the property and shortly before the Trust Deed was entered into and the loan from Swift applied for. Swift sought to adduce the Transfer into evidence at this late stage.
The court found that the object of Mr Ahmed's actions in entering into the Transfer and Trust Deed and failing to register the latter was to enable him to continue to act as if he were the legal owner of the property as far as the outside world was concerned but to place his asset beyond the reach of creditors or otherwise to prejudice those that might have a claim upon him. It was appropriate to set aside the Trust Deed pursuant to s423 of the Insolvency Act 1986. The Transfer, shortly before the Trust Deed was entered into, was clearly relevant evidence of Mr Ahmed's intentions and common sense suggested it should be admitted even at this late stage. The Trust Deed was set aside.
Things to consider
The court's approach is generally strict in applications of this nature. The principle that there must be finality in litigation weighs heavily on the court's decision to admit late evidence, or not. However, as the court had not assessed the evidence and the trial had not concluded, the judge considered it would be an affront to common sense and to any sense of justice to exclude it from his considerations.
Broad view of negotiations for 'without prejudice' privilege purposes
The Court of Appeal has provided a reminder as to when discussions are to be taken as covered by the 'without prejudice' privilege.
Suh and Suh v Mace (UK) Ltd involved litigants in person. Mrs Suh attended meetings with the defendant's solicitor. She had wanted to know how to extract herself from the litigation. Various discussions and negotiations took place and admissions were made by Mrs Suh. The defendant subsequently sought to rely on the admissions at trial. At first instance the court held they were not protected by without prejudice privilege as Mrs Suh claimed.
Overturning that decision, the Court of Appeal held that the circumstances and purpose of the communications, rather than the contents, had to be considered from an objective standpoint. The true question to be determined was whether the discussions were or ought to have been seen by both parties as "negotiations genuinely aimed at settlement". A broad view ought to be taken. Although it might be more difficult to determine with a litigant in person whether discussions were negotiations genuinely aimed at settlement, in this case there could have been no other purpose for the meeting than to seek some kind of solution to the litigation. The discussions were privileged, as was the correspondence referring to those discussions. Mrs Suh's subsequent conduct could not be taken as a waiver of that privilege and the admissions were inadmissible at trial. A re-trial was ordered.
Things to consider
If, when considered objectively and in the round, there could be no other reason or purpose for the discussions or communications other than to try and achieve a settlement, the communications will be without prejudice.
Where litigants in person are concerned, consideration should be given to explaining the basis of the without prejudice principle to them and seeking confirmation from them as to whether it is intended to apply to the particular communications or not. That way, the costs of arguing about it, or indeed, the costs of a re-trial as in this case, may be avoided.
Personal service of bankruptcy petition
The High Court has had to determine whether the handing of a bankruptcy petition to a third party constituted personal service on the debtor for the purposes of r6.14 of the Insolvency Rules 1986 (IR).
In Morby v Gate Gourmet Luxembourg IV Sarl and another, Gate instructed a process server to serve a bankruptcy petition on Morby. Morby agreed to meet the process server for that purpose but refused to touch the petition or accept service of it. The process server handed it to a Mr Malik, who had accompanied Morby to the meeting. Mr Malik had put the petition in the bin when the process server refused to take it back.
Morby was made bankrupt but appealed on the basis that the petition had not been personally served upon him.
The issue was whether the petition had been personally served as required by r6.14 IR and if not, whether the court should exercise its discretion under r7.55 IR which enables the court to cure formal defects or irregularities where there is no injustice.
The High Court, dismissing the appeal, held that the two limb test as to personal service applied to personal service of a bankruptcy petition. Personal service is effected if:
- the document is handed to the person to be served or, if he will not accept it,
- i) the person being served must be told what the document contains and ii) the document must be left with or near him.
The court held that as Morby had not touched the bankruptcy petition limb one did not apply. However, Morby's evidence was that he clearly knew that the document was a petition seeking his bankruptcy. He was therefore aware it was a legal document which required his attention. The fact that the petition had been handed to Mr Malik did not, on the facts of the case, mean the petition had not been left with or near Morby. The test for personal service had been satisfied and personal service had been validly effected. The bankruptcy order would stand.
As there had been effective service, and so no formal defect or irregularity, it was not necessary for the court to exercise its discretion under r7.55 IR. However, if the method of service had been an irregularity, it had not caused Morby any injustice and the exercise of the discretion under r7.55 IR at first instance to cure any irregularity, had been appropriate.
Things to consider
Personal service is required to ensure that the person being served understands that the document being served is a legal document that requires attention in connection with proceedings and so should not be ignored. That knowledge had been acquired here and the court was not prepared to accept Morby's attempts to avoid service.
The judgment will be helpful where an astute debtor is proving difficult to serve personally in the hope of avoiding the jurisdiction of the court. Each case will, however, require a fact-specific determination in relation to both parts of the second limb of the test.
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