Insolvency Law Update

A Bankruptcy order should not be made if application to set aside statutory demand is outstanding.

The High Court has confirmed that, when a creditor's bankruptcy petition is presented while there is an outstanding application to set aside a statutory demand in respect of that debt, the court should not make a bankruptcy order. However, where an order has been wrongly made, it is not always the case that it should be set aside on appeal.

In the case of Regis Direct Ltd v Hakeem, the debtor had applied to the High Court to have a statutory demand set aside in August 2010. Due to an administrative error by the court and the debtor's delay in pursuing the matter, the application was not issued or served. Section 267(2)(d) of the Insolvency Act 1986 (IA 1986) states that a creditor may not present a bankruptcy petition based on a statutory demand where there is an outstanding application to set aside that demand. A creditor's bankruptcy petition was subsequently presented in the Luton County Court and a bankruptcy order was made on 22 March 2011. The debtor's application to set aside the statutory demand was ultimately dismissed on 24 March 2011, 2 days after the bankruptcy order had been made. The debtor appealed the bankruptcy order on the ground that it had been wrongly made.

On appeal, Norris J considered the consequences of non-compliance with section 267(2)(d) of the IA 1986, applying established principles of statutory interpretation. He concluded that section 267(2)(d) was not intended to render void a bankruptcy petition presented when there was an outstanding application. Instead, the court should exercise its power under section 266(3) of the IA 1986 to either dismiss or stay the petition until the outcome of the debtor's application was known.

However, Norris J noted that the fact that the bankruptcy order had been wrongly made in the circumstances, did not necessarily mean that it should be set aside on appeal. In these particular circumstances, the bankruptcy order should stand because, by 25 March 2011, an unimpeachable petition could have been presented and the debtor would suffer no prejudice by allowing the order made three days earlier to have effect.

For more advice and help relating to questions of insolvency, whether personal or in relation to a business, please contact Catherine Sandbach, Dispute Resolution Team.

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This article has been prepared for general interest and information purposes only; it does not constitute legal advice and should not be relied on as such. While all possible care has been taken in the preparation of this article, no responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by the firm or the authors.