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Valid debt not the be all and end all when presenting a bankruptcy petition


19 October 2018: In a recently reported case, a local authority had presented a bankruptcy petition against a debtor in respect of council tax arrears following a statutory demand. The council provided the debtor with evidence of the council tax liability orders confirming the debt. The debtor filed evidence in response which explained that she was living in social housing and was financially dependent on her daughter. At the first hearing of the bankruptcy petition, the court adjourned and ordered the debtor to provide a further argument to explain why a bankruptcy order should not be made.

The debtor’s subsequent argument claimed that a bankruptcy order would serve no purpose or benefit to the council as she had no assets. The judge however made the bankruptcy order on the basis that the council tax liability orders were in existence and had not been set aside or challenged. The debtor appealed.

At the appeal hearing, the High Court found that in cases of unpaid council tax arrears the burden of proof fell on the council to show, on the face of it, that the bankruptcy order would serve a purpose. In this instance, the court found that there was no evidence that a bankruptcy order would serve any useful purpose or benefit the council as the debtor had no assets and the bankruptcy order was set aside by the court. Whilst the council had identified that the debtor may have been due to receive an inheritance (which the debtor said was to be a very small amount), they had never notified the debtor of this belief and this was also not included as part of their evidence and the debtor had not been given the opportunity to address it.

Whilst this case relates specifically to unpaid council tax, it does highlight an unusual defence to a bankruptcy petition available to debtors and serves as a reminder to creditors that proof of existence of a debt may not always be enough when it comes to making a bankruptcy order. The judge in this case noted that if the court is not convinced that there are any assets or that any assets will come into existence the court would be justified in exercising its discretion by refusing to make a bankruptcy order.

BRI Business Recovery and Insolvency are willing and able to assist creditors in forming a view on whether formal bankruptcy or winding up proceedings should be taken against a particular debtor. Please do not hesitate to contact any of the management team should you wish to discuss this further.