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Petitioning creditors: Take care when considering offers

10 February 2010

Your statutory demand has been served but the debtor fails to pay. You issue a bankruptcy petition and serve it. At the hearing of petition the court dismisses it. How could that happen?

At a bankruptcy hearing one of the issues the court will consider is whether to dismiss a bankruptcy petition. If the debtor can show that you as petitioning creditor unreasonably refused an offer from the debtor to settle the debt upon which you based the petition, then you may be at risk of the petition being dismissed.

In assessing whether your refusal was reasonable the court must consider the reaction of a hypothetical reasonable creditor to the offer in question. 

The point was recently examined in Ross & Another v HM Revenue and Customs (HMRC) [2010] EWHC 3 (CH), which illustrates what circumstances the court should take into account when making this decision. The High Court held that the main characteristics of the petitioning creditor should be used as a basis to judge the reasonableness of any refusal of the offer.

In Ross, HMRC had refused to accept a debtor's offer of mortgage over his property as security for the payment of the debt owed to HMRC.

The High Court held that HMRC's refusal of the offer was reasonable given that it was a government body and without the resources to act as a mortgagee and enforce security in the event of the debtor's default. In making its decision, The High Court also took into account the debtor's history of default, partial payments and false promises in circumstances in which the debtor appeared to have ample assets to meet his debts.

Conclusion
The court will take into account the constraints that might apply to a creditor, the background of the debt and the petition in deciding whether the refusal of an offer in settlement was reasonable. 

Practice point
To avoid a court dismissing the bankruptcy petition and awarding costs to the debtor, it is essential to ensure that you consider the relevant factors on receipt of an offer a debtor. This applies to offers you receive before or during bankruptcy proceedings, as the court may be prepared to accept the debtor's argument that your refusal was unreasonable.

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Robert Syms

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