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

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

 

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

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About the author:

Anna joined the Restructuring and Insolvency team at Lexis®PSL in August 2013 from Berwin Leighton Paisner where she was a senior associate in the Restructuring Team.

Anna has worked on a number of large scale restructurings primarily in the UK market acting on behalf of lending institutions.

Recent transactions include the restructuring of a UK hotel chain and the administration sale of part of the Connaught group. Anna has also spent time on secondment at The Royal Bank of Scotland and trained at Clifford Chance qualifying in 2007.