Burden on local authority to explain what purpose will be served by bankruptcy (Lock v Aylesbury Vale District Council)

07 Sep 2018 | 7 min read
 

Tom Cockburn, barrister at 9 Stone Buildings, points out that although the decision in Lock v Aylesbury Vale District Council appears limited to local authority petitioning creditors, practitioners advising other types of creditors should be aware that the same reasoning could be applied if a creditor has particular knowledge of the debtor’s financial circumstances.

Lock v Aylesbury Vale District Council [2018] EWHC 2015 (Ch), [2018] All ER (D) 136 (Aug)

What are the practical implications of this case?

The court in this case decided that local authority petitioning creditors are under an obligation to identify what purpose would be served by a bankruptcy order in circumstances where there are no obvious assets of substance in the debtor’s estate from which a distribution could be made to creditors in the event of a bankruptcy.

It is well established that the court will dismiss a bankruptcy petition under section 266(3) of the Insolvency Act 1986 (IA 1986) if the debtor is able to demonstrate that they have insufficient assets to provide for a distribution to creditors (after the costs of the bankruptcy are accounted for), unless another reason will be served by a bankruptcy order. The debtor’s burden of establishing that their estate is of such a minimal scale is, however, a high one, and will not be discharged by the debtor’s sworn statement that they have no further assets.

The court held that, where a bankruptcy petition is presented by a local authority with some knowledge of the debtor’s financial circumstances from which no assets of substance have been identified, the debtor’s legal burden of evidencing the extent of their estate is discharged, unless the local authority has explained why it believes a purpose will be served by bankruptcy.

Since local authorities are expected not to pursue bankruptcy proceedings unless and until there are no available methods of enforcing a debt, it will often be the case that the debtor against whom a bankruptcy petition is presented has no obvious assets from which a distribution could be made. This decision suggests that in these circumstances a local authority should not present a bankruptcy petition speculatively on the basis that the debtor may have undisclosed assets. If there are specific reasons for believing that the debtor has such assets (whether current or prospective), these reasons should be identified at an early stage in order to prompt the debtor to respond with evidence contesting the same, if appropriate.

Although the decision appears limited to local authority petitioning creditors, practitioners advising other types of creditors should take note that the same reasoning could be applied if the creditor is in a position to have particular knowledge of the debtor’s financial circumstances.

What was the background?

Aylesbury Vale District Council petitioned for Ms Lock’s bankruptcy on the basis of an unsatisfied liability order. The council was aware that she was unemployed and was living in accommodation rented from a social landlord. She had been in receipt of income support until 2012, and the council subsequently terminated her housing benefit and council tax reduction after Ms Lock had failed to evidence to the council’s satisfaction how she was supporting herself.

Before presenting the bankruptcy petition, the council completed an internal checklist to confirm that bankruptcy proceedings were appropriate. It was acknowledged that ‘there are no clear assets’, but it was decided that it was appropriate to present a bankruptcy petition as there was a possibility that Ms Lock had received an inheritance. No mention was made of the suspected inheritance in the bankruptcy petition, or in the evidence in support that was provided after the bankruptcy petition was contested and directions were given. In her evidence, Ms Lock stated that she had minimal assets and exhibited the documents she had sent to the council, but did not provide exhaustive financial disclosure or any corroborating witness evidence.

A bankruptcy order was made at the County Court at Milton Keynes after the district judge refused to hear Ms Lock’s substantive submissions on the bankruptcy petition because she had failed to provide a skeleton argument seven days in advance of the hearing, as previously directed. She had filed a lengthy skeleton argument on the morning of the hearing, which included the submission that no proper purpose would be served by a bankruptcy order as her assets totalled no more than £100, and that the court should dismiss the bankruptcy petition under IA 1986, s 266(3).

Ms Lock applied for permission to appeal on numerous grounds, and Morgan J granted permission on the sole ground that the district judge had been wrong to refuse to hear her submission that no useful purpose would be served by a bankruptcy order (the application being adjourned in relation to the remaining grounds).

At the appeal hearing, the council did not suggest that the district judge was correct to refuse to hear Ms Lock’s submissions, but argued that no injustice was caused by the procedural irregularity because she had failed to discharge the heavy burden of evidencing the insufficiency of her assets clearly required in Re Field [1978] Ch 371. The court had therefore not been in a position to dismiss the bankruptcy petition on this basis.

What did the court decide?

His Honour Judge Hodge QC, sitting as a deputy judge of the High Court, confirmed that, where a lack of assets was relied on as a ground on which a bankruptcy petition should be dismissed under IA 1986, s 266(3), the legal burden was on the debtor to evidence the lack of assets, and such a burden was a high one.

However, in cases of bankruptcy petitions founded upon unpaid council tax, there was a burden on the local authority ‘to at least raise a prima facie case that a bankruptcy order will achieve some useful purpose’. When directed to file evidence, the council should have identified the possibility that Ms Lock had received an inheritance and that the information she had provided as to her financial circumstances was inadequate. Ms Lock had not been directed to file evidence of her current or prospective assets, and had not had her attention drawn to the council’s belief that she may have received an inheritance. Aside from this possibility, the court could be satisfied that she had insufficient assets to provide a proper purpose for a bankruptcy order and that there was nothing to be gained by an investigation into her affairs.

The judge therefore found that the district judge’s refusal to hear Ms Lock’s submissions on this point was unjust, and the appeal was allowed. He commented that if there are unusual circumstances which might justify the making of a bankruptcy order, they ‘should be put fairly and squarely before the court so that the respondent to the bankruptcy petition has the opportunity of addressing the point in evidence’.

Further Reading

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Tom Cockburn has a broad commercial and chancery practice. He routinely appears in both the county court and High Court in corporate and personal insolvency applications.

Interviewed by Kate Beaumont.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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