Annulling bankruptcy orders—what test applies? (Woolsey v Payne)

How significant is the High Court’s ruling in Woolsey v Payne? Philip Flower, a barrister at 9 Stone Buildings who acted for one of the parties, believes the ruling provides important guidance in the factors required for setting aside statutory demands and bankruptcy orders in insolvency proceedings.

Original news

Woolsey v Payne [2015] EWHC 968 (Ch), [2015] All ER (D) 24 (May)

The Chancery Division considered an appeal by the petitioning creditor, Mr Woolsey, against findings of the Chief Registrar regarding a bankruptcy order and a statutory demand made against the respondents, Mr and Mrs Payne respectively. In dismissing the appeal, the court held that, using the correct test, the wife’s application to annul the bankruptcy order would be allowed and that the other issues raised by Mr Woolsey required further examination at a full hearing.

What was the background to the appeal?

In December 2012, the appellant, Mr Woolsey, loaned £255,000 to Mr and Mrs Payne. The loan was subject to a professionally drafted loan agreement to which both Mr and Mrs Payne were parties as well as a limited company—Russell Payne Chartered Accountants Ltd—of which both Mr and Mrs Payne were members. Mr Payne was a chartered accountant but carried on his business through the limited company and was a director. Mrs Payne was a shareholder and company secretary but not a director of that company.

The terms of the loan agreement were not complied with and Mr Woolsey served statutory demands on both Mr and Mrs Payne. Mrs Payne failed to apply to set aside the statutory demand and did not attend or adduce any evidence at the hearing of the petition which was later presented and so she was adjudicated bankrupt. Her explanation for her failure to take any steps following service of the statutory demand was that she had delegated the entire matter to her husband who had mistakenly understood that there had been an adjournment. Mr Payne, however, did make an application to set aside the statutory demand.

The debt relied upon both in the bankruptcy petition against Mrs Payne and in support of the statutory demand against Mr Payne was identical.

Mrs Payne then applied to have her bankruptcy order annulled under section 282(1)(a) of the Insolvency Act 1986 (IA 1986) on the grounds that it ought not to have been made by reason that the debt was disputed on substantial grounds. Her argument was that had she attended upon the hearing of the petition, she would have advanced the argument that the debt was disputed on substantial grounds and, accordingly, the bankruptcy order would not have been made.

Her application for annulment and Mr Payne’s application to set aside the statutory demand were heard together by Chief Registrar Baister. I represented Mrs Payne. Mr Payne was represented separately as Mrs Payne also asserted that her signature on the loan agreement had been procured by the undue influence of her husband. Apart from that argument, the grounds on both applications were identical.

The grounds on which the debt was disputed were somewhat technical and concerned the provisions of the Consumer Credit Act 1974 (CCA 1974) as in force at the date of the loan (December 2012). Some of those provisions have now been repealed and are no longer in force.

Under CCA 1974, s 16, a loan which was made wholly, or predominantly, for the purpose of a business carried on by the debtor was exempt and not regulated under the CCA 1974 (the business exemption). In addition, if the loan agreement contained a declaration in a prescribed form that it was for such a purpose then a presumption arose that it was exempt from regulation under the CCA 1974. This loan agreement contained such a declaration.

However, under CCA 1974, s 16B (now repealed) that presumption was rebuttable if the creditor knew, or had reasonable grounds to suspect, that the loan was not wholly or predominantly for the purposes of a business carried on by the debtor.

Before the Chief Registrar, Mr and Mrs Payne’s case was as follows:

  • the loan was not for business purposes but for personal matters. This was purely a matter of fact to be determined on the witness statements
  • with respect to the presumption raised by the declaration, Mr Woolsey’s own evidence was that he thought the loan was for the benefit of the business. However, he also said that he thought that business was carried on by the limited company and not Mr or Mrs Payne personally. It could not be said, therefore, that the loan was for a business carried on by either Mr or Mrs Payne personally and since Mr Woolsey knew this he had reasonable grounds to suspect (if not know) this. Accordingly the presumption created by the declaration was rebutted
  • what followed from (i) and (ii) was the loan was potentially regulated under the CCA 1974 if it was made by Mr Woolsey in the course of a credit lending business carried on him. Mr. Woolsey was not licensed under the CCA 1974 and if the loan was made in the course of a credit lending business carried on by him it was not enforceable without authorisation from the Office of Fair Trading (now the Financial Conduct Authority) which had not been obtained. Mr and Mrs Payne contended that the loan was made in the course of a credit lending business. Again that was a matter of fact to be determined on the evidence
  • the evidence was such that there were substantial grounds for arguing all of this. Accordingly the bankruptcy order against Mrs Payne should be annulled and the statutory demand served on Mr Payne set aside on the basis that the debt was disputed on substantial grounds

The Chief Registrar held:

  • the presumption under CCA 1974, s 16B was rebutted since, on Mr Woolsey’s own evidence, he believed that the loan was for the purpose of a business carried on by a limited company and not by the debtors personally
  • on the facts he was carrying on a credit lending business and was not licenced
  • by reason of (i) and (ii) the debt was disputed on substantial grounds and both the bankruptcy order should be annulled and the statutory demand set aside

Mr Woolsey appealed that decision.

What were the legal issues that the judge had to decide in this application?

Mr Woolsey appealed on three grounds:

Annulment under IA 1986, s 282

The proper test upon an application for annulment under IA 1986, s 282 was not the same as the test for determining whether a statutory demand should be set aside. The test for setting aside a statutory demand was whether or not the debt was disputed upon grounds that appeared to be substantial. Mr Woolsey argued that on an annulment application the debtor had to go further and demonstrate that there was in fact no debt at all and not just that it was disputed.

Purpose of the loan

The Chief Registrar erred in finding that the fact the loan was for the purposes of a business carried on by a limited company meant that it could not be carried on by the debtors personally.

Credit lending business

The Chief Registrar erred in finding on the facts that Mr Woolsey was carrying on a credit lending business while not being licenced under the CCA 1974.

What were the main legal arguments put forward?

As regards the relevant test, Mr Woolsey argued that the court should follow the decision of Mr Elleray QC sitting as Deputy High Court Judge in the case of Flett v Revenue and Customs Comrs [2010] EWHC 2662 (Ch). In that case the judge stated that:

‘It may not be enough in my view for a debtor to say at the time of an application for annulment: “I had an arguable defence to a given case”. He should be saying: “I did not in fact owe the money for this or that reason, and it is for that reason that he now seeks the annulment of the order.”’

It was argued on behalf of Mrs Payne that the proper test was the same as that for setting aside a statutory demand—relying upon a decision of Neuberger J (as he then was) in Guinan III v Caldwell Associates Ltd [2003] EWHC 3348 (Ch), [2004] All ER (D) 123 (Mar) where, after considering a statement by Laddie J in Everard v The Society of Lloyd’s [2003] EWHC 1890 (Ch, [2003] All ER (D) 334 (Jul), he stated:

‘…if there is what he called “a genuine triable issue” then, whether it is raised at the statutory demand stage, the petition stage or the annulment stage, it is an equally valid point.’

It was also argued on behalf of Mrs Payne that common sense dictated that Neuberger J’s approach was correct since what followed from Flett would be the anomalous position whereby the statutory demand might be set aside but Mrs Payne’s bankruptcy order would remain even though both were founded upon exactly the same debt.

On the question of whether or not a person carries on a business personally as a director of a limited company, it was argued that the Chief Registrar took too narrow a view. Mr Woolsey relied upon Turner & Co (GB) Ltd v Abi [2010] EWHC 2078 (QB) and, secondly, on a series of cases under the Unfair Terms in Consumer Contracts Regulations 1999, SI 1999/2083 (the Regulations).

Turner was a case involving the consideration of the meaning of the term ‘consumer’ within the context of Council Directive 93/13/EEC on unfair terms in consumer contracts (Unfair Contract Terms Directive). In that case, it was held that Mr Abi was not acting as a consumer within the meaning of the term when he had entered into a contract whereby he would be personally liable for commission upon a sale of a business carried on by a limited company of which he was a shareholder and director. It was argued that, where a director borrows money for the purposes of a business carried on through a limited company, he was acting otherwise than as a consumer—which term had been defined as acting in a purely personal capacity.

Mr and Mrs Payne argued that the Chief Registrar had been correct in the first instance. The words of the CCA 1974 referred to a loan made ‘wholly or predominantly for a business carried on by [the debtor]’ and accordingly considerations of the meaning of the term ‘consumer’ were irrelevant.

As regards the final ground of appeal, this was a matter of fact to be determined by the evidence contained in the witness statements. It was submitted on behalf of Mr and Mrs Payne that a determination of whether or not Mr Woolsey was carrying on a credit lending business was not something that could be determined upon a summary application on paper but was a matter for a trial judge having regard to all the facts of the case. Mr and Mrs Payne referred to the decision of Lord Neuberger MR in Helden v Strathmore Ltd [2011] EWCA Civ 542, [2011] All ER (D) 92 (May), in which he considered an earlier case—Tamimi v Khodari [2009] EWCA Civ 1109, [2009] All ER (D) 87 (Oct)—and in which he stated:

‘In my view, that case [ie Tamimi] helps to the extent of emphasising the point that, whether a person carries on the business of engaging in a specific activity is a matter of secondary fact, an inference, which is essentially for the trial judge, who must determine the issue by reference to all the relevant facts of the case.’

What did the judge decide, and why?

The judge held that the correct test to be applied in an application under IA 1986, s 282(1)(a) was the same as that to be applied on an application to set aside a statutory demand. He preferred Neuberger J’s analysis in Guinan III to that of Mr Elleray QC in Flett.

On the question of whether or not a loan made to a director for the purposes of a business carried on by a limited company, the judge held that the Chief Registrar had adopted too narrow an approach. He rejected the argument that the principle of a limited company having a separate legal identity meant that its business could inevitably be separated from that of its directors within the context of the CCA 1974—which had to be interpreted in light of the Unfair Contract Terms Directive.

However, he also found that there was sufficient evidence raised by Mr and Mrs Payne that notwithstanding this, the loan may have been, as they contended, for purely personal matters. In light of his finding as to the correct test to be applied on both applications, he found that the debt was disputed on substantial grounds in this respect and, accordingly, he did not allow the appeal on this ground.

On the final ground—whether or not Mr Woolsey made the loan in the course of a credit lending business—the judge found that in light of Lord Neuberger’s statement in Helden this was not a matter that was suitable for a summary determination on paper. Since sufficient factual matters had been raised in the witness statements to support the contention that Mr Woolsey may have made the loan in the course of business, this was a matter that should be determined at trial by a judge with the benefit of oral evidence and cross-examination. Again in light of the finding as to the appropriate test, the judge found that this issue was disputed on substantial grounds and accordingly did not grant the appeal on this point.

To what extent is the judgment helpful in clarifying the law in this area?

The judgment at least provides a considered analysis of what might be seen as conflicting judgments (Flett and Guinan III) as to the appropriate test to be applied upon an annulment application under IA 1986, s 282(1)(a) where the bankrupt was arguing that the bankruptcy order ought not to have been made by reason of a dispute as to the debt. The appropriate test is the same as that upon an application to set aside a statutory demand—namely that the debt is disputed on grounds that appear to the court to be substantial.

Although CCA 1974, s 16 has been repealed, the same business exemption is continued in CCA 1974, s 55, and while the case was not decided on this point, there is at least some guidance as to the interpretation of the phrase ‘a loan made wholly or predominantly for the purposes of a business carried on by [the debtor]’ within the CCA 1974. It may be that directors or shareholders of limited companies taking loans for the purposes of the company’s business cannot rely upon this phrase so as to pray in aid the protection of the CCA 1974 by reference to the separate legal identity of the company. However, this case was not decided on that issue and it does not provide any binding authority on the point.

Philip Flower is a barrister with 9 Stone Buildings and has a wide-ranging Chancery practice covering most areas of general civil and commercial work, landlord and tenant, covenants in restraint of trade, insolvency, breach of confidence and intellectual property.

Interviewed by Janine Isenegger.

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

Further Reading

If you are a LexisPSL subscriber, click the link below for further information:

What steps are available if it transpires that the bankruptcy order should not have been made and what are the usual grounds for the court annulling the bankruptcy order?

A summary checklist and timeline for annulment applications where bankruptcy order ought not to have been made

What to do if you are served with a statutory demand and you dispute the debt

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First published on LexisPSL Restructuring and Insolvency

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