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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.

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