Grounds for the Presentation of a Petition: Juxtaposing the Views of the Muir sub-committee and Mrs Justice Proudman

Scottish & Newcastle plc v. Raguz was discussed on this blog on Tuesday, 15 June 2010. It concerns the application by Mr Raguz for permission to appeal District Judge Neil’s decision to make Mr Raguz bankrupt following the presentation of a petition by Scottish & Newcastle plc. The petition debt of £211,275 (undisputed) reflected the aggregate sum paid by the petitioner to the freeholder of premises of which it was the original tenant and in respect of which it was entitled to seek an indemnity from the intermediate lessee to whom the petitioner assigned its interest. Mr Raguz told the Judge that he was offering adequate security for the debt. Alternatively, he prayed the latter to adjourn the petition on the ground that the expected sale of the shareholding in Impney Group Ltd (of which he owned 55 percent) would generate sufficient funds to settle the debt. Thus, on appeal, Mr Raguz’s argument was that District Judge Neil had erred in not dismissing the petition on these grounds.

Some thirty years earlier, a sub-committee under Muir Hunter was set up to examine, amongst other things, the grounds on which petitions for bankruptcy and winding-up should be founded. The sub-committee suggested that a creditor’s petition should be based solely on the debtor’s inability to pay the debts as they fall due and bankruptcy should be imposed only as a last resort when the Court is satisfied that the imposition is justified in the circumstances. The sub-committee noted that these recommendations may drastically reduce the number of debtors that are made bankrupt by substituting the “mechanistic test” of making the debtor bankrupt simply because he has “ceased to pay debts” with a “clear test” of insolvency. The sub-committee further recommended that the Court ought to exercise jurisdiction to ensure that a debtor capable of being petitioned against is “hopelessly insolvent” in the sense of not having any assets out of which the petitioner’s debt can be paid at the time of becoming insolvent or in future (Re Noble [1965] Ch 129); or has enough realisable assets to pay the petitioner but not other creditors; or has enough realisable assets but refuses to make payment or is a debtor on a “contingent or prospective basis.” These recommendations reflect the provisions contained in section 271(3) of the Insolvency Act 1986, to the effect that the Court may dismiss the petition if it is satisfied that the debtor has “made an offer to secure or compound for a debt in respect of which the petition is presented” and the acceptance of such an offer would require the dismissal of the petition, and the offer was unreasonably refused. This also reflects the statement by Henderson J in Ross and Holmes v. Revenue and Customs Commissioners [2010] 2 All ER 126 at 148-9 that “the authorities establish that in such circumstances the discretion to adjourn should only be exercised if there is a reasonable prospect of the petition debt being paid in full within a reasonable period.”

It is difficult to understand why Mrs Justice Proudman declined to exercise discretion to dismiss the petition given that Mr Raguz was neither hopelessly insolvent nor against making payments to the petitioner. He had in his own words “offered adequate security for the debt” and by his own assessment had assets (55% shares of Impney Group Ltd) out of which the petitioner’s debt could be paid. Mrs Justice Proudman examined the application and noted that the appeal jurisdiction involves determining whether District Judge Neil’s decision was wrong on the basis that he did not take into account what he ought to have taken into account and Court of Appeal was not even required to exercise discretion in a different way but to simply take these other things into account (Chadwick J said in Vadher v. Weisgard [1997] BCC 219 at 221). Nonetheless, a closer look at the “new” or other evidence adduced by Mr Raguz revealed that he had initially offered a charge over his Impney shares although Impney went into administrative receivership and the offer of a charge was withdrawn in anticipation. Equally, Mr Raguz had prayed for an adjournment on the grounds that he had offered an assignment of the right of indemnity from Mr Virani (an assignee of the lease) and charges over three pieces of land, although by that time the terms of the charges had changed given that the security was not enforceable until more than six months later. Mr Raguz then withdrew his offer of the right of indemnity against Mr Virani, admitting that the offer had no substantial value. Also, Mr Raguz offered as evidence a terse email from a representative of Keyroll Investments Ltd that stated that this company was interested in purchasing the Impney shares within 4-6 weeks although the email failed to mention the price. Then there was also this “letter” from a certain Mr Rogers representing Pencroft Ltd that offered in a single line to buy the larger plot for the sum of £525, 000.

What this case demonstrates is that it is important to establish tests for determining whether the debtor is “hopelessly insolvent” at the first instance court and whether new evidence meets the requirements for “fresh evidence” on appeal. Relying on the discretion of the judge in each case may fuel inconsistency. Nonetheless, a soothsayer was not needed to predict the decisions in Scottish & Newcastle plc v. Raguz. Judge Neil concluded that the evidence was simply not credible enough and Mrs Justice Proudman failed to see any material change meeting the requirements for the Court to undertake a review under section 375(1) and described Mr Raguz’s efforts at the Court of Appeal as simply “an attempt to have another bite at the same cherry.” (The same bad cherry). Taking Mr Raguz’s contentions at face value, one could reproach Judge Neil and Mrs Justice Proudman for unnecessarily increasing the number of bankrupts by not dismissing the petition against a debtor that was far from being “hopelessly insolvent.” However, a closer examination of the evidence adduced by Mr Raguz shows that the decisions of these judges were not only in keeping with the Insolvency Act but also with the recommendations of the Cork Committee that in some way still represent the spirit of the Act.