High Court provides guidance on what defences are effective against a bankruptcy petition

Jim Stafford

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The High Court recently handed down judgment in respect of a bankruptcy petition brought by ACC Loan Management against Mr. P. (Bankruptcy cases do not show the name of the debtor for publicity reasons.) The full text of the judgment may be read here:

http://www.courts.ie/Judgments.nsf/09859e7a3f34669680256ef3004a27de/be16dad29dce715080257f6f005b2a6a?OpenDocument

The judgment provides useful guidance on the High Court’s approach to the issues of:

  • Whether a bankruptcy petition is being brought for an ulterior purpose.
  • Whether a bankruptcy petition may be deferred to allow the debtor to proceed with other legal cases.
  • What considerations the court will give to allowing the debtor to bring a PIA/DSA
The background was that ACC presented a petition for adjudication of bankruptcy against Mr. P on 17th April, 2015 in sum of €3.6M, on foot of a judgment obtained in the High Court against him in July 2014.

Secured creditors, including ACC, as of the date of the statement of affairs sworn on 3rd November, 2015, amounted to €4,289,400.

Whether a bankruptcy petition is being brought for an ulterior motive

The debtor argued that ACC were attempting to frustrate his own proceedings against the bank and against the bank’s receivers. The judge concluded that the presentation of the Petition was not done for an ulterior motive, and that it was entitled to bring a petition to enforce its debt.

Whether a bankruptcy petition may be deferred to allow the debtor to proceed with legal cases against the bank/receivers.

The debtor had issued legal proceedings against the bank and the receivers. The Court ruled that the Official Assignee could continue the proceedings if Mr. P was adjudicated bankrupt.

What considerations the court will give to allowing the debtor to bring a PIA/DSA

Counsel for Mr. P argued that the bankruptcy proceedings be stayed in the context of s.14 (2) of the Act as substituted by the Personal Insolvency Act, 2012, which requires the court to consider whether a personal insolvency arrangement might be more appropriate to the circumstances.

Section 14 of the Bankruptcy Act, 1988 was amended by the substitution of a new s.14 by the Personal Insolvency Act, 2012. Section 14(2) provides as follows:

14 (2) Before making an order under subsection (1), the Court shall consider the nature and value of the assets available to the debtor, the extent of his liabilities, and whether the debtor’s inability to meet his engagements could, having regard to those matters and the contents of any statement of affairs of the debtor filed with the Court, be more appropriately dealt with by means of—

(a) a Debt Settlement Arrangement, or

(b) a Personal Insolvency Arrangement,

and where the Court forms such an opinion the Court may adjourn the hearing of the petition to allow the debtor an opportunity to enter into such of those arrangements as is specified by the Court in adjourning the hearing.”

By virtue of s.91 of the Personal Insolvency Act, 2012 a debtor may seek to make a proposal for a personal insolvency arrangement only when the aggregate of his secured debts is less than €3 million, unless all of the secured creditors consent in writing to the limit not having application in his case. The Court held that it was an insurmountable hurdle for the debtor to recover the amount necessary from his own proceedings against the bank and the receivers to bring the amount of secured debts below €3 million.

The exercise required by s. 14(2) requires the Court to consider the value of the assets and liabilities of the debtor, but also to consider whether his inability to meet his engagements could “more appropriately be dealt with means of either a personal insolvency arrangement or a debt settlement arrangement”. The Court was not satisfied having regard to the level of secured debt that the debtor could appropriately, or indeed at all, hope to engage a personal insolvency arrangement with his creditors, and in those circumstances formed an opinion that the debtor’s inability to meet his financial commitments was not likely to be dealt with more appropriately under the insolvency regime.

My Comment

It is clear that the High Court does have an inherent jurisdiction to stay bankruptcy proceedings that are oppressive or an abuse of process, following the principles identified in McGinn v. Beagan. However, in this case the Court ruled that the petitioning creditor had not brought the petition for an ulterior motive.

It is also clear that the Court was prepared to consider placing a stay on the bankruptcy proceedings to allow the debtor to progress his own proceedings. On the facts of the case, the Court ruled that the Official Assignee could continue with the proceedings. However, other bankruptcy petitions could produce a different outcome. A debtor might be able to argue that the Official Assignee might not be in a position to provide security for costs etc, and argue that the debtor should be allowed to continue with certain legal proceedings.

Whilst s.14 (2) of the Act as substituted by the Personal Insolvency Act, 2012 does provide some protection to debtors defending bankruptcy petitions, it appears that the High Court will not allow the section to be used if the debtor is over the threshold limit of €3m for a PIA (unless all secured creditors consent to a PIA.)

Jim Stafford
 
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