Insolvency rules: a debtor's charter for delay?

You could be forgiven for thinking that petitioning for non-payment of a judgment debt or solicitors’ fees through the bankruptcy courts is a relatively straightforward and creditor-friendly process. It can be anything but, as a 2013 Commercial Court case proved (see Deutsche Bank (Suisse) SA
v Khan and Ors [2013] EWCA
Civ 1149).

Some £55m debt came out of a judgment given by Hamblen J in favour of Deutsche Bank (Suisse) SA (Deutsche). In addition to the loan debt, which did not form part of the petition, there was an order for£2.1m in costs and £46,500 in respect of an overdraft facility (the petition debt).

When the defendants failed to pay the petition debt, Deutsche served a statutory demand (SD) on the lead defendant, Waqar Khan (the debtor). Some remarkable steps were taken
by the debtor (through his solicitors) to delay payment
and avoid bankruptcy.

Disputing service and applying to set aside the SD

• Although personally served, the debtor disputed service. Chief Registrar Baister summarily dismissed an application to set aside on that ground, considering additional service by email sufficient.
• Concurrently, the debtor applied to set aside the SD for want of jurisdiction. That was also dismissed as the “question of jurisdiction falls to be considered not at this stage (i.e. when challenging the SD) but when or if any petition is presented”.

Repeatedly blocking presentation of the petition

• A second identical application to set aside the SD was made at the 11th hour. It had the intended effect of further delaying presentation of the petition (see the Insolvency Act 1986, section 268(1)(a)).
• Although there had been no change of circumstances since his applications to set aside the SD were dismissed, the debtor then applied for a review under the Insolvency Act 1986, section 375.

Refusing to accept service
of the petition

• Despite having solicitors on the record for the purposes of his section 375 application, the debtor instructed them to resist an application for substituted service of the petition on his solicitors. Further delay and costs resulted before the debtor’s solicitors were finally instructed to accept service.

Disputing jurisdiction under the Insolvency Act 1986, section 265

• Deutsche had to show that the debtor was ordinarily resident, had a place of residence or carried on business in England and Wales during the preceding three years to establish jurisdiction there (section 265(1)(a)). The debtor, a former senator in Pakistan, claimed his many visits to London in that period were only “fleeting and transitory”.
• In response, Deutsche served evidence that the debtor beneficially owned and used six luxury apartments in Knightsbridge, had purchased seven luxury cars in London (including three Ferraris), had numerous unpaid congestion charges and utility bills, and even a member of the local gym.

Paying off the overdraft debt just two days before the hearing (without Deutsche’s agreement)

• Deutsche had a dilemma. If it accepted payment, it may later be avoided under the Insolvency Act 1986, section 284; by now there were three supporting creditors, all former solicitors of the debtor claiming unpaid fees.
• It refused to accept the payment, as it was obviously coming from the debtor’s estate. The debtor’s solicitor disputed this, saying his firm had paid it by way of a loan to the debtor, remarkable of itself. It’s doubtful such a mechanism can properly operate to circumvent section 284 and rule 6.32(2)).
• Two of the three supporting creditors were also paid. The third was not offered payment and had to withdraw as a supporting creditor because under the Solicitors Act 1974, section 70, solicitors’ invoices rendered to individuals are not a liquidated debt unless they have been expressly agreed, assessed by the court or made the subject of a judgment debt.

Eventually, with no creditors able to prosecute the petition further, Deutsche was able to accept the debtor’s payment. The court expressed dissatisfaction with
the debtor by ordering indemnity costs and a payment on account of £55,000, representing 63 per cent of Deutsche’s schedule of costs.

It’s a strong message for any solicitor facing non-payment. To pursue the bankruptcy route, you need to take the steps required by section 70 of the Solicitors Act for the debt to be regarded as “liquidated”.

Similarly, if seeking a costs order in litigation, an interim payment is essential if you are likely to be faced with a defendant that has no incentive to pay. Unassessed costs cannot form part of a petition debt,
even if substantial. SJ

Ed Crosse is a London Solicitors Litigation Association committee member and a partner at Simmons & Simmons

www.simmons-simmons.com