Bankruptcy petitions—are you being served? (Gate Gourmet Luxembourg IV Sarl v Morby)

Bankruptcy petitions—are you being served? (Gate Gourmet Luxembourg IV Sarl v Morby)

How important is it to be properly served with a bankruptcy petition? Steven Thompson QC, a barrister at XXIV Old Buildings, who represented the petitioners in Gate Gourmet v Morby, says the court’s decision in that case shows a defect in the service of a petition can be waived, but points out the importance of ensuring it has a court office stamp date on it.

Original news

Gate Gourmet Luxembourg IV Sarl and another v Morby [2015] EWHC 1203 (Ch), [2015] All ER (D) 117 (May)

The Chancery Division made a bankruptcy order in respect of the respondent, having considered issues of jurisdiction, service and security.

What was the background to the hearing briefly?

A few years ago, Mr Morby sold a group of companies to Gate Gourmet for several million pounds. However, a tax dispute arose after the sale and Gate Gourmet brought proceedings against Mr Morby. The proceedings were settled. Under its terms Mr Morby agreed to pay Gate Gourmet two tranches of money—he paid the first tranche but not the second. The debt was secured by a second charge over a property owned by Mr Morby in the south of France. Gate Gourmet issued a statutory demand which Mr Morby sought to set aside on the basis that Gate Gourmet had the charge. There was an issue about the extent of any equity in the house but Mr Morby refused to let a valuer into his house. Mr Morby appeared in person in the county court, but it dismissed the challenge to the demand. The same day, Gate Gourmet presented the bankruptcy petition.

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

There were three issues:

  • whether the court had jurisdiction
  • whether Mr Morby was properly served, and
  • whether the existence of the charge precluded a bankruptcy order being made

What were the main legal arguments put forward?

As to jurisdiction, Gate Gourmet said that the court had jurisdiction on any or all of three bases:

Presence in the country

Mr Morby was in the country on the date of presentation of the petition. The petition had been presented on the same day as the dismissal of the application to set aside the statutory demand. Mr Morby alleged that he was not in England that day, despite having been in the county court. But later he changed his story and said that he had made a mistake. Now he said he had been in England on that day, but he had not been in the country three days later. The petition was presented on the earlier date, but it was only 3 days later that the High Court had date-stamped it with the endorsement. The issue turned on what the court had stamped and written on the petition. Gate Gourmet filed evidence that it had presented the petition on the earlier date, which was also clear from the face of the petition, albeit the later date was marked on the endorsement.

Being domiciled in England

Gate Gourmet said Mr Morby was domiciled in England. Mr Morby said that he was domiciled in Dubai, but on the basis of transient employment and accommodation. Gate Gourmet argued on the facts that Mr Morby was domiciled in England.

Carrying on business in England

Gate Gourmet argued that Mr Morby remained carrying on business in England while he had outstanding business debts. Re A Debtor (No 784 of 1991) [1992] Ch 554, [1992] 3 All ER 376 is authority for the principle that a person does not cease to carry on business until their business debts are settled. Mr Morby had not settled his debts payable pursuant to the settlement of the litigation arising out of the sale of his companies to Gate Gourmet.

As to service, Gate Gourmet knew that Mr Morby lived in Dubai. Mr Morby agreed to meet a process server at Heathrow airport for the purposes of service. The process server, who had seen him at the county court hearing, handed him the bankruptcy petition personally. According to the process server, Mr Morby handed the bankruptcy petition to his friend who then complained that the address on the bankruptcy petition was wrong and tried to give it back to the process server. The process server said he could not take it back and Mr Morby‘s friend then threw it in the bin. Mr Morby claimed that he had not been personally served, but that the process server had given the bankruptcy petition to his friend.

Gate Gourmet also argued that under rule 7.55 of the Insolvency Rules 1986, SI 1986/1925 (IR 1986) any defect of service as alleged could be waived. There are conflicting decisions on this in the High Court—some cases say that service is so important a concept in bankruptcy that the court cannot waive any defect. But other decisions put less weight on the formality of service and that seems in line with the modern approach to the mechanics of service generally.

Gate Gourmet also submitted the court could retrospectively give permission for substituted service following the thinking in Abela v Baadarani [2013] UKSC 44, [2013] All ER (D) 249 (Jun). Under the Civil Procedure Rules 1998, SI 1998/3132 (CPR 1998) there is more flexibility than under the IR 1986.

What did the Registrar decide, and why?

The Registrar held that the court had jurisdiction over the petition, on each and all of the three bases:

  • he had been present in England on the day of presentation of the petition
  • he was domiciled in England, and
  • he was carrying on business here

As this last point, the Registrar found that ‘it would be a strange result if Mr Morby was able to claim that even though there had not been finality in relation to his dealings.... he was not carrying on business’ and that ‘he continues to carry on business as a result of the share purchase agreement and the litigation arising out of it’.

There was no dispute that there were minor errors on the face of the bankruptcy petition but that could not invalidate it or render service ineffective. There was a straight conflict of fact as to who had been served by the process server. There was no order for cross-examination on the statement, and the Registrar declined to resolve the dispute on the papers. However, the Registrar held that good personal service was achieved by the process server giving the bankruptcy petition to Mr Morby’s friend, at Mr Morby’s request, at an appointment he had made specifically to be served, while he stood there watching him.

So the Registrar agreed that the bankruptcy petition had in fact been personally served and, further, the court had power to waive the defect and that, if there was one, he should do so in this case.

The Registrar declined to read the ambit of the IR 1986 to permit retrospective substituted service.

The issue of security was not really fought in the end. The Registrar noted that evidence suggested that there was no equity left in the French property after the first charge. He also held that in any event the bankruptcy petition had the requisite statement making it clear that Gate Gourmet was not relying on the secured element of the debt.

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

This case follows the recent thinking on IR 1986, r 7.55. There are conflicting cases about whether the court can waive a defect in service of a bankruptcy petition and this is a clear decision that says the court can do so. It is also clear that the IR 1986 are more restrictive than the CPR 1998, but noteworthy that the Registrar recommended that the Rules Committee consider extending the IR 1986 to follow the CPR 1998. It also indicates a common-sense approach to personal service, suggesting that it does not necessarily entail handing a document literally into the hands of the debtor.

What practical lessons can those advising take away from the case?

When you present a petition make sure that the court office date-stamps it and put the right date on it, but when you serve a debtor personally do not worry too much if they ask the process server to hand it to someone else standing next to them.

Steven Thompson QC has been a barrister in practice at XXIV Old Buildings since pupillage in 1996/7. He has a commercial practice with a particular emphasis on joint venture, civil fraud, insolvency and aviation disputes.

Interviewed by Fran Benson.

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:

How to present a bankruptcy petition and the documents you need to complete

How to effect service of the bankruptcy petition on the debtor and what happens if service cannot be effected

Disputed bankruptcy petitions

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First published on LexisPSL Restructuring and Insolvency

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About the author:

Stephen qualified as a solicitor in 2005 and joined the Restructuring and Insolvency team at Lexis®PSL in September 2014 from Shoosmiths LLP, where he was a senior associate in the restructuring and insolvency team.

Primarily focused on contentious and advisory corporate and personal insolvency work, Stephen’s experience includes acting for office-holders on a wide range of issues, including appointments, investigations and the recovery and realisation of assets (including antecedent transaction claims), and for creditors in respect of the impact on them of the insolvency of debtors and counterparties.