Too late to adjourn a bankruptcy hearing to pay the petition debt—Edginton v Sekhon

Too late to adjourn a bankruptcy hearing to pay the petition debt—Edginton v Sekhon

In Edginton v Sekhon [2015] EWCA Civ 816, the Court of Appeal heard a second appeal in relation to a decision made by a deputy district judge at a bankruptcy hearing in which the debtor was refused an adjournment to pay the petition debt within a reasonable time.

Briefly, what were the facts of the case?

The appellant (Mr Edginton), a solicitor, had pursued his former clients, Mr and Mrs Sekhon, for payment of professional fees in respect of work that had been carried out some years previously and which were statute-barred. A costs order in the sum of £1,236 was made against Mr Edginton in July 2011 in relation to an unsuccessful application made by him. Some five months later, and with those costs not having been paid, Mr and Mrs Sekhon served a statutory demand on Mr Edginton.

Mr Edginton unsuccessfully applied to set aside the statutory demand, and in December 2013 (two years after the statutory demand had been served on him) Mr and Mrs Sekhon presented a bankruptcy petition against Mr Edginton.

Mr Edginton opposed the bankruptcy petition on the basis of:

  • his unpaid professional fees
  • costs orders made in his favour against Mr and Mrs Sekhon, which should be set off against the petition debt
  • his assertion that he was not insolvent and that his assets exceeded the petition debt

On the day of the hearing, Mr Edginton also made an application alleging that Mr and Mrs Sekhon were estopped from relying on the costs order on which the petition debt was based.

Despite acknowledging the catastrophic effect of a bankruptcy order being made against Mr Edginton given his profession as a solicitor, the deputy district judge rejected Mr Edginton’s arguments. There were other costs orders which had been made against Mr Edginton in Mr and Mrs Sekhon’s favour which exceeded the amount of the costs orders in Mr Edginton’s favour, and accordingly there was no reason for the judge to exercise his discretion against making a bankruptcy order.

However, before the judge could make a bankruptcy order, Mr Edginton made an oral application—without any prior notice—seeking an adjournment of the hearing in order to pay the petition debt within a reasonable time, although no specific payment proposals were put forward by him. The judge rejected Mr Edginton’s request as it was, in the judge’s view, made far too late, and a bankruptcy order was made.

What were the legal issues that the Court of Appeal had to decide?

In the first appeal, Newey J held that the judge’s decision was within the ambit of his discretion. With permission, Mr Edginton brought a second appeal.

The Court of Appeal had to decide whether the judge wrongly exercised his discretion in not adjourning the petition hearing—a case management decision.

What legal arguments were put forward?

Mr Edginton submitted that:

  • the fact the application for an adjournment was made at the very last minute was an irrelevant consideration for the judge to take into account
  • the longstanding practice of the court to adjourn a petition hearing if there is credible evidence that there is a reasonable prospect that the petition debt will be paid within a reasonable time (see, for example, Harrison v Seggar [2005] EWHC 411 (Ch), [2005] All ER (D) 416 (Feb)) did not apply in this case. In essence, in this case there was no need for Mr Edginton to provide credible evidence—the modest level of the petition debt and the fact that Mr Edginton was a solicitor meant that it was inconceivable that Mr Edginton would not be able to pay the petition debt

Otherwise it was common ground that the conditions to make a bankruptcy order had been satisfied, and that the judge had jurisdiction to make the bankruptcy order.

What did the Court of Appeal decide, and why?

The Court of Appeal (Lewison and Underhill LJJ and the Master of the Rolls) unanimously dismissed the appeal. In giving the only judgment, Lewison LJ held:

  • as a consequence of section 284 of the Insolvency Act 1986 (IA 1986) (restrictions on disposition of property while a bankruptcy petition is pending), any delay in dealing with a bankruptcy petition is liable to have adverse consequences for the creditors generally
  • the judge was correct to take into account the late stage at which Mr Edginton made his application, particularly given that it was made without any kind of prior notice
  • even in ordinary civil litigation, late applications are frowned upon, as are applications to adjourn the final resolution of the case (which, in this case, the petition hearing was conceivably going to be)
  • the Court of Appeal should not cast any doubt on the validity of the longstanding practice to allow adjournments if there is credible evidence that there is a reasonable prospect that the petition debt will be paid within a reasonable time—it could not be said to be wrong to require evidence of ability to pay, even in the case of a modest debt owed by a professional person
  • the judge had, before Mr Edginton made his application, taken into account the effect of a bankruptcy order being made against Mr Edginton. The judge therefore plainly had this in mind when deciding Mr Edginton’s application
  • although other judges might have allowed to Mr Edginton’s application, it was impossible to say that the judge was wrong in the way he exercised his discretion

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

On the face of it, the Court of Appeal’s decision is unsurprising.

Lewison LJ referred to a number of authorities that support the proposition that a petitioning creditor is entitled to a bankruptcy order if all the statutory conditions are satisfied. That is the starting point, and in order for the court to deviate from that, then credible evidence has to be put forward to support any request for an adjournment to allow time to pay. It is not sufficient to simply ask for an adjournment without any supporting evidence, or seek to rely on evidence by implication—in this case that the petition debt was modest and Mr Edginton was a solicitor.

The decision also reiterates that late applications in litigation are frowned upon, particularly those made without any kind of prior notice and where there was no reason for a late application to be made. These are matters that a judge may properly take into account when exercising discretion.

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

For those advising debtors subject to a bankruptcy petition, the two key points to take away from this case are to not make last minute applications unless there is good reason, and to ensure that any application is supported by credible evidence—ideally setting out whether the petition debt will be paid in one lump sum or in instalments, the dates of any payment(s), and the source of funding. To avoid any risk under IA 1986, s 284, the petitioning creditor may require a third party to make the payment(s).

Although, as Lewison LJ noted, some judges may be prepared to grant an adjournment in the absence of any evidence, you are unlikely to find out whether that is the case until the hearing itself, by which time it will be too late. Given the potential consequence of a bankruptcy order being made against the debtor, it is probably not a risk worth taking.

With the increase in the bankruptcy level from £750 to £5,000 in respect of creditor bankruptcy petitions presented after 1 October 2015, it is possible that successfully seeking an adjournment to allow for time to pay has become even more difficult for debtors.

Stephen Leslie, solicitor in the Lexis®PSL Restructuring & Insolvency team.

Further Reading

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What is the procedure on a bankruptcy petition hearing?

Disputed bankruptcy petitions

Appeals in insolvency proceedings

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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.