When may a petitioning creditor reasonably refuse an offer to settle a bankruptcy petition debt?

A bankruptcy petition may be dismissed if the debtor shows that the petitioning creditor unreasonably refused an offer to settle the debt on which the petition is based.  In assessing reasonableness the court consider the reaction of a hypothetical reasonable creditor to the offer.  In Ross and anor v HM Revenue and Customs [2010] EWHC 12 (ch), the High Court ruled on the extent to which the court considers the particular circumstances of each case when making that assessment and held that the court could take into account the main characteristics of the petitioning creditor in question and judge the creditor's refusal of the offer in the light of the background circumstances of the bankruptcy petition and the underlying debt.

HM Revenue and Customs (HMRC) refused to accept a debtor's offer of a Mortgage over his house as Security for the payment of the debt he owed them and on which the bankruptcy petition was based.  The Court held this refusal of the debtor's offer to be reasonable.  HMRC was a government body and did not have the resources to act as mortgagee and enforce the security should the debtor default.  Furthermore the refusal could be judged in the context of the debtor's history of failing to comply with previous offers of settlement.

Dismissal of winding up petition where the debt is genuinely disputed

Usually, a court will not make a winding p order against a company, if the petition debt is disputed and there is substance to the debtor's dispute (Commissioners of Customs & Excise v Arena Corporation Ltd [2004] EWCA Civ 271).  However, in exceptional cases, the court may make a winding up order, even if the petition is based upon a disputed debt (Parmalat Capital Finance Ltd v Food Holdings Ltd [2008] UKPC23).  In Lachonta Foundation v GBI Investments Limited [2010] EWHC 37 (Ch), the High Court put a company into Compulsory Liquidation, even though there were legitimate grounds to dispute the petition debt.

In Lachonta Foundation v GBI Investments Limited [2010] EWHC 37 (Ch), the court have detailed consideration to the factors to be considered when deciding if the case is exceptional and held that the following were relevant:

Does the petitioning creditor have adequate alternative remedy available?

In this case, the HC held that liquidation was the only adequate remedy available.  The debtor's only assets of value were bearer shares.  A liquidator could investigate the whereabouts of the shares and takes steps to reclaim them for the creditors.  Similar steps could not be achieved by alternative civil claims.

What was the financial position of the debtor company, if the petition debt were discounted?

Here, the debtor company appeared to be insolvent, even if the debt were discounted.  There were real doubts about the amount of money that the debtor company would ultimately receive from its main creditor and the debtor appeared to have other liabilities that it had no prospect of being able to discharge.

What prejudice, if any, would the debtor company suffer if it were turned around?

The debtor company's only function was to be responsible for the debt to the creditor, hold the bearer shares as security for that debt and to receive monies from its main creditor.  If it were wound up, a liquidator would be equally able to carry out those functions.  Consequently, there was no prejudice to the debtor company in making the winding up order.

The HC held it appropriate to make a Winding-up Order, despite the defence to the petition.