Security for settlement? A petitioning creditor’s prerogative

• United Kingdom

• Restructuring and insolvency

26-10-2021

Reasonable refusal of an offer to settle petition

The Court of Appeal has considered an appeal against the making of a bankruptcy order where the petitioning creditor had refused an offer of security in the case of Hughes and another v Howell (2021) EWCA Civ 1431.  Personal Insolvency specialists will be aware that if a debtor makes an offer to secure or compound a bankruptcy petition debt, the petition could be dismissed under section 271(3) of the Insolvency Act 1986 if the creditor unreasonably refuses to accept the offer.

What was the offer and why was it refused

In this case, the parties agreed that part of the debt was to be paid from the debtor’s share in a residuary estate, but the offer only secured part of the debt and no assurances were given for payment within a reasonable timescale. As such, the ICC Judge held it was reasonable to refuse the offer and make a bankruptcy order.  The Court of Appeal agreed and dismissed the appeal. In doing so, they confirmed that an offer to secure a petition debt must be a concrete, capable of acceptance. It must be a present offer, not the possibility of a future offer.  An offer to top up the shortfall is not enough.  Further, Lewison LJ considered that it is not for the petitioning creditor to negotiate an offer.  It must be made by the debtor.  “A creditor is not acting unreasonably in refusing to wait an indeterminate time for an indeterminate amount before their security can be realised.  Indeed, in the present case it is difficult to see how the security could be realised at all.”  

Why may this be of interest

While not new law, this judgment is a useful statement of the position in light of the new requirement which has been set down in relation to corporate debtors under Schedule 10 to the Corporate Insolvency and Governance Act 2020.  This provides a new procedure where creditors are required to send a notice seeking the debtor company's proposals for payment of the debt.  Unlike a statutory demand which gives the debtor 21 days to pay, the Schedule specifically provides “if no proposal to the creditor’s satisfaction is made within the period of 21 days” then they may present a winding up petition.  No guidance is given as to what kind of proposal might be to the creditor’s satisfaction.  While we would not say that section 271(3) is an equivalent provision, this decision, and previous decisions under that section, may be persuasive, at least while Schedule 10 is in force (currently until 31 March 2022).

How Eversheds Sutherland can help

Now the restrictions on presenting a winding petition have been slightly eased, we can assist you with the preparation of a Schedule 10 Notice as a precursor to presenting a petition.