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HIGH COURT CONFIRMS THAT THE INSOLVENCY RULES CAN WAIVE DEFECTS IN SERVICE OF A BANKRUPTCY PETITION

High Court Confirms that the Insolvency Rules Can Waive Defects in Service of a Bankruptcy Petition
Ben Gray 

The detailed procedural requirements of the Insolvency Rules 1986 make inadvertent breach a perpetual possibility. Debtors often try to take steps to frustrate the process, and may rely on such breaches to do so. A common tactic is to evade personal service. The Court is therefore faced with a need to balance the protections these procedural requirements establish against the possibility of their exploitation by unscrupulous debtors.

In the event of a procedural breach Creditors have some protection in Rule 7.55, which allows for defects and irregularities to be waived by the Court where it has caused no substantial and irremediable injustice:

No insolvency proceedings shall be invalidated by any formal defect or by any irregularity, unless the court before which objection is made considers that substantial injustice has been caused by the defect or irregularity, and that the injustice cannot be remedied by any order of the court.

This Rule, however, had been the subject of conflicting authorities, particularly over whether it could be used to remedy and defects in service. An answer was given by Registrar Briggs in Gate Gourmet Luxembourg IV SARL and others v Morby [2015] EWHC 1203 (Ch), and the High Court has confirmed in a subsequent appeal ([2016] EWHC 74 (Ch)) that Rule 7.55 can be used to remedy defects in service.

The Case

The Debtor was served with a Statutory Demand, which he challenged. This failed and the Creditors were given permission to serve him with a Bankruptcy Petition.

The Debtor agreed to meet the Creditors’ process server for the purposes of serving the Petition. He went to this meeting accompanied by a witness whom he claimed was there to ‘check the Petition was correct before I accepted service’. This witness received the document and identified that there may have been an error in the address. He tried to hand the document back to the server, who refused to take it, so instead put the papers in the bin. The Debtor was present throughout the meeting.

Before the Registrar

Before Registrar Briggs the Debtor challenged the application on a number of grounds, one of which was that he had not been properly served with the Petition. The Registrar rejected this. On the basis of the high degree of knowledge and involvement the Debtor had in the circumstances of the meeting, service had been effected. He had notice of the Petition and an opportunity to deal with its subject matter.

The Registrar went on to conclude that, in the alternative, had the Claimant not been personally served, the case was an appropriate one to exercise Rule 7.55. He reviewed the authorities and concluded that the Rule could apply to the service of a Petition. Had he not been personally served, Rule 7.55 would have applied: the Debtor knew that he was being served with a Petition; he knew where permission to present it had been given; he knew it was for a bankruptcy order; and he attended the meeting for the specific purpose of collecting that Petition.

The Appeal

The Debtor appealed to the Chancery Division (before Deputy High Court Judge Edward Murray). This decision reviews the authorities on the requirements for service, and refers to the recent case Tseitline v Mikhelson [2015] EWHC 3065 (Comm) on service under the CPR. Following that case, the Court in this case reiterated that personal service of a bankruptcy petition requires that one:

  1. Physically hand the Petition to the Debtor; or
  2. If the debtor will not accept it, tells them the contents of the document and leaves it with them. Specifically, one has to bring to the Debtor’s attention that it is a legal document that requires his attention in connection with proceedings.

The purpose of this latter rule is to prevent the Debtor from being able to say he ignored the Petition because, for example, he considered it to be junk mail.

On the facts this case satisfied the requirements of the second limb of the personal service test. The debtor arranged the meeting for the purpose of being served with a bankruptcy petition, and based on what happened there was ‘no doubt’ that he was aware that the document being served as a bankruptcy petition. Likewise, the petition had been ‘left’ with the Debtor – he could at any time have exercised dominion over it by asking his witness to give it to him, or by retrieving it from the bin.

The Court confirmed that Rule 7.55 does apply to service of a Petition. Although a complete failure to effect personal service would be a fundamental error irremediable by the Rule, there were cases where its exercise would be appropriate. Though the strictness of the need for compliance with the rules of service varied according to the nature of the proceedings, there was no strict policy barrier preventing reliance on the Rule in an appropriate case. If the essential purpose of personal service had been achieved, Rule 7.55 could be relied upon.

Here, reliance on the Rule was not strictly necessary as there had been valid personal service. Nevertheless, had that not been the case, it would have been appropriate to rely on rule 7.55. The Debtor was not, for example, deprived of an opportunity to deal with the petition; misled into ignoring it; or unable to deal with the subsequent proceedings.

Observations

This case is useful confirmation from the High Court that Rule 7.55 can be relied upon where a Debtor takes issue with matters of service. Although the reasoning is strictly obiter, it is persuasive. This is a useful tool for petitioning creditors, and the decision indicates a willingness from the Court to not allow purely technical arguments to frustrate a legitimate petition.

Give that debtors frequently try to evade service, and can come up with contrived mechanisms for doing so, this decision helps limit the ability of unscrupulous debtors from exploiting technicalities in an attempt to defeat insolvency proceedings.

Posted: 05.02.2016 at 13:57
Tags:  Comments  Insolvency
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