Chapter 40
February 2006
40.28 Creditors' right to present petition
a) Company
A creditor, or creditors, may petition the court for the winding up of the company [note 1] (but see paragraph 40.29). In this context the term ‘creditor’ includes contingent and prospective creditors, who may petition on the ‘just and equitable’ ground [note 2].
b) Partnership
Insolvent partnerships are wound up as unregistered companies under Part V of the Insolvency Act 1986. The Insolvent Partnerships Order 1994 (‘IPO’) adapts those provisions to suit the special circumstances of partnership cases. A creditor may petition merely for the winding up of the partnership, or also present concurrent petitions against any or all of the partners. Full details of these procedures are given in Chapter 45 - Proceedings up to order, Part 17 to Part 23 and Chapter 53 - Partnerships.
c) Bankruptcy
A petition for a bankruptcy order against an individual may be presented by a creditor or jointly by more than one creditor [note 3]. The petitioning creditor or each of the petitioning creditors must be a person to whom the debt or (as the case may be) at least one of the debts is owed [note 4].
40.29 Minimum debt
To present a winding-up petition on the basis of a written demand, there must be a debt of more than the statutory minimum, which is currently £750 [note 5].
In order to start bankruptcy proceedings the debt must exceed the bankruptcy level of £750 and the debtor appear unable to pay his debts [note 6].For the purposes of section 267(2)(c) a person appears unable to pay a debt or debts if a statutory demand is not complied with during a period of 3 weeks from the date of service, or, in the case of a judgment debt, execution or other process issued in respect of it is returned unsatisfied in whole or in part. The role of the statutory demand is to give rise to a presumption of inability to pay a debt.
A number of creditors for smaller amounts can aggregate their claims to reach this minimum [note 7].
40.30 Disputed debts
In order that a petition be presented it is essential that there is a debt and that there is no bona fide dispute concerning the debt. The court will not make a winding-up or bankruptcy order on the basis of a claim which is genuinely disputed [note 8]. If the claim has already proceeded to judgment, there can usually be no dispute that the debt is owing, although there might still be scope for the debtor to cross-claim . The court can go behind the judgment [note 9] although it is very rare for this to happen and will usually only occur in the case of a default judgment.
40.31 Meaning of prove
Where a company is being wound up by the court, or a bankruptcy order has been made, a person claiming to be a creditor and wishing to recover his/her debt in whole or in part must, subject to any order of the court [note 10], submit his/her claim in writing to the liquidator, official receiver where acting as receiver and manager, or to the trustee [note 11].
A person who lodges a claim is referred to as ‘proving’ for his/her debt and the document by which he/she seeks to establish his/her claim is his/her ‘proof’ [note 12].
The procedure for proving is set out in Chapter 9 of Part 4 of the Insolvency Rules 1986, applicable to all types of winding up, and Chapter 8 of Part 6 of the Insolvency Rules applicable to bankruptcy. A summary of these rules is provided in Chapter 16, Part 5
40.32 Estimate of Quantum
The official receiver as liquidator or trustee may estimate the value of any debt which, by reason of it being subject to any contingency or for any reason, does not bear a certain value, and that estimated amount, subject to any revision if circumstances change, is the amount provable [note 13].
40.33 Rejected proofs
If the liquidator or trustee rejects a claim in whole or in part, he/she shall prepare a written statement of his/her reasons for doing so, and send it forthwith to the creditor [note 14].
If a creditor is dissatisfied with the liquidator or trustee’s decision with respect to his/her proof (including any decision on the question of preference) he/she may apply to the court for the decision to be reversed or varied [note 15]. See also Chapter 36 - Estate Accounting, paragraphs 36.71 and 36.72.
40.34 Proofs of secured creditors
(June 2008)
A secured creditor can
Where a creditor puts a value on his/her security and that security is subsequently realised, the net amount realised shall be substituted for the value previously placed on the security and the creditor will be entitled to prove for the adjusted balance [Note 18] (see paragraphs 40.45 to 40.75).
In all cases a creditor is not entitled to include within his proof of debt a claim for interest falling due after the insolvency order date. Where a secured creditor realises his/her security, he/she may prove for the balance of his/her debt, after deducting the amount realised.
The proceeds of sale may be applied to the repayment of the capital sum, interest accrued prior to the date of the bankruptcy order and interest accrued post bankruptcy. If the money realised is insufficient to pay this total amount in full the creditor cannot include the post bankruptcy order interest in calculating the amount to be claimed in submitting a proof of debt [Note 19] [Note 20].
In bankruptcy, the bankrupt or the joint owner, where applicable, may wish to continue residing at the property after the bankruptcy order date and continue to make payments to the secured creditor in order to avoid the property being repossessed. The secured creditor would in these circumstances, subject to the terms of the mortgage arrangement, use these sums, in the first instance to discharge the continuing accrual of interest under the mortgage. The creditor is otherwise unable to pursue the insolvent for interest falling due after the order date as a post bankruptcy debt [Note 19].
40.34A Treatment of shortfall – purchase of interest in property
(May 2008)
The bankrupt or joint owner, where applicable, may seek to purchase the bankrupt’s interest in the property, which vests in the trustee. In doing so, the bankrupt and/or joint owner may remortgage the property, in which case the bankrupt and/or joint owner will enter a new post bankruptcy credit agreement. If the property were subsequently sold at a shortfall, such a secured creditor would not be entitled to claim in the bankruptcy (see paragraph 40.17).
40.34B Treatment of shortfall – deed of acknowledgement
(May 2008)
Alternatively, the bankrupt may sign a deed of acknowledgement (see Chapter 33, paragraph 33.127), which acknowledges his/her responsibility for the secured debt or guarantees payment. In doing so, after the bankruptcy order date, the bankrupt has entered into an agreement to post bankruptcy liability for any shortfall, which if such shortfall arises following sale, also remains valid as a debt provable in bankruptcy.
The trustee or liquidator can give notice that he/she proposes to redeem the security at the value shown in the proof at the expiry of 28 days [note 21]. Such a notice may or may not cause the creditor to exercise his/her right to re-value that security with the agreement of the trustee or liquidator or with the leave of the court. The trustee or liquidator can then only redeem the security at the revised valuation [note 22].
If the secured creditor -
he/she may revalue his/her security only with leave of the court [note 23].
The liquidator or trustee, if he/she is dissatisfied with the value which a secured creditor puts on his/her security (whether in his/her proof or by way of revaluation) may require the property comprised in the security to be offered for sale [note 24].
40.36 Failure to disclose security
If a secured creditor omits to disclose his/her security in his/her proof, he/she can be required to surrender it for the general benefit of creditors unless the Court is satisfied that the omission was inadvertent or the result of an honest mistake [note 25].
40.37 Rule against double proof
There cannot be two proofs in respect of the same debt. A guarantor cannot prove in the proceedings unless the creditor is no longer entitled to prove (e.g. because the guarantor has paid him/her in full). The rule against double proof prevents a guarantor proving in the proceedings as a contingent creditor until he/she has discharged the entire guaranteed indebtedness. Until he/she has discharged the whole indebtedness, the principal creditor is entitled to prove in respect of the whole indebtedness; the guarantor is debarred by the rule against double proof from making any claim at all [note 26]
40.37A Creditors not proving in surplus bankruptcy cases
(June 2008)
Where creditors with a valid claim in the bankruptcy proceedings do not submit a proof of debt and a surplus is expected, this can lead to difficulty in the trustee completing the distribution of funds, returning any surplus to the bankrupt and the case being closed.
Where there are no postponed claims (see paragraph 40.120 and Chapter 36, Part 5, paragraph 36.102) the return of the surplus to the bankrupt is dependent upon all of the bankruptcy creditors and where applicable, statutory interest being paid in full, however, dividends are only paid to creditors who have proved their claims [Note 27] [Note 28] [Note 29]. It appears where a dividend of 100p in the £ has been paid to creditors who have proved, statutory interest cannot be paid to those creditors until the remaining creditors, who have not proved (excluding postponed debts), have been paid in full [Note 30]. This implies that a small number of known but unproved creditors may prevent the payment of statutory interest and transfer of any surplus funds to the bankrupt and as a result may prevent him/her from being able to submit an annulment application.
Following the decision in the case of Ward Ex parte Hammond and son v the Official Receiver [Note 31] for the purposes of interpreting or acting under section 330(5) of the Insolvency Act 1986, creditors means creditors who have proved in the bankruptcy, having disregard to those who had not proved. Conversely, the case of Gill v Quinn [Note 32] differs in that the bankrupt’s application for an annulment was dismissed on the grounds that many of the creditors had not proved in the bankruptcy and were likely to remain unpaid as a result.
The apparent conflict between the decisions in the cases of Re. Ward and Gill v Quinn above; where Ward is deemed capable of receiving a surplus after payment of the bankruptcy debts and statutory interest, discounting creditors who have not claimed; yet Gill is not able to obtain an annulment having secured funds sufficient to pay creditors who have proved, with statutory interest, due to the creditors who had not proved; is surrounded by various other case law. Where the official receiver finds that this conflict is causing concern, specifically where assets remain to be realised, advice should be sought from Technical Section.
40.37B Treatment of creditors not proving in surplus bankruptcy cases
(June 2008)
Where the official receiver is attempting to deal with a distribution of surplus funds and he/she is experiencing difficulty with regard to the treatment of creditors who have not proved (see paragraph 40.37A above), he/she should ensure that these creditors are included in all steps up to and including the issue of the notice of intended dividend (form DVDL).
Where a dividend of 100p in the £ is expected, he/she should add an additional sentence to the notice of intended dividend informing creditors who have not proved that if they do not do so, they will not participate in the dividend and any remaining funds will be used to pay statutory interest to those creditors who have proved and thereafter any surplus remaining will be paid to the bankrupt/former bankrupt (See Chapter 36, Part 5). It is advisable, prior to actioning such a payment to the bankrupt, that a check is made to establish whether the bankrupt/former bankrupt has failed again, in which case the surplus may be paid into the subsequent bankruptcy estate rather than being returned to the bankrupt.
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