Seeking adjournments at bankruptcy hearings—Day v Refulgent Ltd

Eleanor Temple, barrister at Kings Chambers, explores Day v Refulgent Ltd and explains why petitioners and litigants should not turn up at a bankruptcy petition hearing and expect to get an adjournment.

Original news

Day v Refulgent Ltd [2016] EWHC 7 (Ch), [2016] All ER (D) 21 (Jan)

The Chancery Division, in dismissing an appeal against a bankruptcy order, held that there had been a clear and careful judgment by the district judge, who had reached a decision that had been well open to her on the evidence.

What was the background to the application?

This was an application by Mr Day for permission to appeal a bankruptcy order made against him by District Judge Kelly. The application for permission to appeal was listed at the same time as the appeal.

The brief background to this matter was that the respondent in this case (and petitioner in bankruptcy), Refulgent Ltd, had brought proceedings in the High Court against Mr Day and another. Pending the hearing of those proceedings, Refulgent had obtained a freezing order over Mr Day’s worldwide assets. As a result of court hearings regarding that order, Mr Day had been ordered to pay costs of £30,000 to Refulgent. Mr Day should have paid these costs by 24 December 2014, but failed to do so. Therefore, Refulgent presented a bankruptcy petition and Mr Day sought to defend that petition. He did so on several grounds, including:

  • first, he maintained the debt was secured by the freezing order and so the petition should be dismissed
  • second, Mr Day argued that he wanted to sell some of the assets subject to the freezing order to pay the debt and said that the district judge, who had heard the petition in bankruptcy, was unreasonable in not allowing him to do so by adjourning the petition. Refulgent argued that it was not secured by the freezing order and that it was not unreasonable as the sales of property were proposed at an undervalue and on conditions that undermined the sale. Further, Refulgent argued that Mr Day ought to have made the application to the High Court to vary the freezing order sooner
  • third, Mr Day argued that Refulgent had unreasonably refused to accept offers of security in relation to the petition debt

There were two previous adjournments to the hearing of the bankruptcy petition and the matter came before the district judge in July 2015. She ordered that by 3 August 2015 Mr Day had to make an application to the High Court for a variation to the freezing order to let him sell two properties in Scotland and produce evidence that these sales were proceeding and a timescale for exchange of contracts. When the case came back to the court, Mr Day, who was representing himself, had not complied with the July order. All he had done was send the application to the High Court on 3 August 2015 by post. To this extent he had not ‘made’ an application by 3 August 2015 and he had not provided documentary evidence that the sales of the Scottish properties were proceeding.

He argued that the bankruptcy hearing should be adjourned again and said the sales of the Scottish properties were still proceeding and that he had made offers to Refulgent—principally to transfer one of the properties in Scotland to Refulgent. The judge had to decide whether to accede to the request for an adjournment.

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

His Honour Judge Behrens had to decide:

  • whether Refulgent was secured by the freezing order
  • if not, whether Mr Day had made an offer to secure the debt which the petitioner had unreasonably refused
  • finally, whether the district judge ought to have adjourned the petition in any event to allow the application to vary the freezing order and the sale of the two Scottish properties to proceed

What were the main legal arguments put forward?

Mr Day argued that the district judge was wrong to make a decision on the bankruptcy petition before the outcome of the application to vary the freezing order was known. Mr Day also argued that the district judge had not properly reviewed and discussed his alternative proposals. In addition, he argued that:

  • the debt was secured by the freezing order
  • Refulgent was being unreasonable and he could pay the debt
  • Refulgent was using the freezing order to stop him paying the debt

Refulgent opposed the application submitting that it was a discretionary decision of the district judge and that she had considered all relevant factors. Reliance was placed on the decision of Photographic Performance Ltd v AEI Rediffusion Music Ltd [1999] 2 All ER 299, which established that before the court can interfere it must be shown that the judge:

  • erred in principle in their approach or left out of account or took into account some feature they should, or should not, have considered, or
  • was wholly wrong because the court was forced to the conclusion that the judge had not balanced the factors fairly in the scale

Refulgent also relied on Edginton v Sekhon [2015] EWCA Civ 816 (see blog post: Too late to adjourn a bankruptcy hearing to pay the petition debt) to establish that there was no right to an adjournment, as there was no convincing evidence the debt could be paid within a reasonable time. In that case, the court said the decision as to whether to adjourn or not was a case management decision—the judge had the discretion and the Court of Appeal should be slow to overturn an exercise of discretion.

As far as the security position was concerned, Refulgent relied on the House of Lords case of Fourie v La Roux [2007] 1 All ER 1087. It found that a freezing order is not the same as a charge or a security. Refulgent also argued that it was not unreasonable to refuse to accept an offer of security—see Shrimpton (Michael) v Darbys Solicitors LLP [2011] EWHC 3796 (Ch).

What did the judge decide and why?

At the hearing, Judge Behrens granted permission to appeal and went on to hear and subsequently dismiss the appeal.

This was a review, not a rehearing, and therefore Judge Behrens had to consider if the district judge had complied with the principles set out in Photographic Performance v AEI Rediffusion. He found she had. Although he had to look at everything the district judge considered, even if he disagreed, he had to decide if it was unreasonable.

Judge Behrens noted that the district judge had considered all the arguments by Mr Day and all offers made to Refulgent and she found against him. There was no proper evidence as to the equity in the Scottish properties or that the sales were proceeding. Mr Day didn’t do anything about the application to the High Court until the last minute and then not in accordance with her order and she was clear that the bankruptcy petition should not be repeatedly adjourned.

On the application before the district judge, Mr Day should have attached a particular piece of email evidence and had failed to do so. Judge Behrens allowed this to be produced. It purported to show that the sale of the Scottish properties was proceeding, but he found this did not make any difference as there were unacceptable conditions attached to the Scottish sale. There was, therefore, no real prospect that Mr Day could pay the debt within a reasonable time. The district judge had considered all of Mr Day’s offers and she was entitled to say that Refulgent had not acted unreasonably in rejecting the late offers. The debt was not secured by the freezing order and there was no realistic prospect the debt would be paid within a reasonable time and therefore she was entitled to refuse to adjourn the proceedings. Judge Behrens said he would probably have made the same decision.

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

There are a few interesting and helpful points made in this case. It is the only reported case about the nature of a freezing order and its effect on bankruptcy. If someone cannot pay a debt because of a freezing order you can still pursue a bankruptcy petition. Mr Day wanted to sell the properties at a price under their value and on various conditions. It’s interesting to ask what would have happened if he wanted to sell them at full value and without conditions. On the facts of this case, it would probably make no difference, as there was still a substantial delay in paying the debt and no evidence the properties could or would be sold within a reasonable period. Therefore, the judge was still entitled to refuse an adjournment.

This case cements the Edginton decision on the issue of the judge’s discretion whether to adjourn a bankruptcy petition or not. Only if there is credible evidence that the petitioner’s debt can be paid within a reasonable time should it be adjourned.

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

Petitioners and litigants should not expect to turn up at court at a bankruptcy petition hearing and expect to get an adjournment without compelling evidence that the debt can be paid within a short period. To do so is very a high-risk strategy. Clearly, repeated adjournments of bankruptcy petitions will not be allowed. Another good lesson from the case is that a freezing order does not provide a petitioning creditor with security for its debt—preventing the prosecution of a bankruptcy petition. This particular point has not been decided in any previous case.

Eleanor Temple practises in commercial and insolvency litigation and advisory work, specialising in company and partnership law, corporate and personal insolvency, director disqualification, banking and finance, restitution, fiduciaries, contract, commercial fraud and asset tracing. Eleanor acted for the Refulgent in this appeal.

Interviewed by Diana Bentley.

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

Further Reading

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What is the procedure on a bankruptcy petition hearing?

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First published on LexisPSL Restructuring and Insolvency

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