Owo-Samson v Barclays Bank Plc & Anor

A creditor’s estimate of the value of existing security permits presentation of a bankruptcy petition unless the debtor challenges it. Once challenged, the debtor must satisfy the court that the petition debt is fully secured.

The valuation compares the available security with the debt then payable. Estimated future enforcement costs, particularly costs inflated by anticipated resistance from the debtor, should not be added. A fully secured debt cannot support a bankruptcy order.

Although proof that an order ought not to have been made engages the court’s power to annul under the Insolvency Act 1986, annulment remains discretionary. The debtor’s prospects of promptly satisfying the creditor and other liabilities are critical.

The appellant sought annulment of a bankruptcy order founded on an unpaid costs judgment secured by a charging order over his home. The bank had valued its security at £20,000 and petitioned for the estimated unsecured balance. The appellant did not challenge that valuation at the statutory-demand or petition hearings.

Fresh valuation evidence later indicated that the security had been substantially undervalued. A registrar nevertheless refused annulment, and a judge of the Chancery Division dismissed the first appeal.

The second appeal concerned whether the creditor’s estimate displaced the inquiry required by section 271(1)(a) of the Insolvency Act 1986, whether future enforcement costs formed part of the secured-debt calculation, and how the annulment discretion should be exercised.

Appeal allowed unanimously and the annulment application remitted to a different registrar. Carnwath LJ delivered the judgment, with which Newman J and Ward LJ agreed.

1. A petitioning creditor may rely on its estimate of existing security unless the debtor questions that estimate. If the valuation is challenged, the debtor bears the burden of satisfying the court that the debt is fully secured. Section 271(1)(a) of the Insolvency Act 1986 therefore continues to apply; it does not fall away merely because the creditor has made an estimate under section 269(1)(b).

2. A pre-existing security which equals or exceeds the relevant debt is an absolute bar to a creditor’s petition. Where a partially secured debt is divided under section 269(2), the debtor is entitled to dismissal if the nominally unsecured balance is itself shown to be fully secured. The approach in Platts v Western Trust & Savings Ltd [1996] BPIR 339 was applied.

3. The appellant’s home was to be valued on the retrospective evidence accepted by the court. The calculation should not include estimated future costs of enforcing the charging order. The statutory inquiry concerns the debt payable at the relevant time. Anticipated resistance by the debtor cannot inflate the estimate because valuation is an objective exercise. On the proper calculation, the petition debt was fully secured and the bankruptcy order ought not to have been made.

4. That conclusion did not compel annulment. The word “may” in section 282 preserves a discretion. Where a creditor acted reasonably and the debtor failed to advance an available defence earlier, a critical consideration is whether annulment would enable the debtor to satisfy the petitioning creditor and meet other liabilities.

5. The registrar also proceeded on the mistaken basis that section 15 of the Trusts of Land and Appointment of Trustees Act 1996 might permit enforcement to be postponed for many years. Enforcement of a charging order is governed by rule 73.10 of the Civil Procedure Rules 1998. Article 8 of the European Convention on Human Rights may be relevant to a home, but is unlikely to carry substantial weight without a credible means of paying the debt within a reasonable time.

6. The Court of Appeal lacked adequate material to exercise the annulment discretion itself. The appellant was entitled to a rehearing conducted on the correct legal basis.

1. Court of Appeal (Civil Division): By [2003] EWCA Civ 714, unanimously allowed the second appeal and remitted the annulment application to a different registrar.
2. Chancery Division: His Honour Judge McGonigal, sitting as a High Court judge, dismissed the appeal from the registrar’s decision.
3. Bankruptcy court: Registrar Baister dismissed the revived application to annul the bankruptcy order. Deputy Registrar Middleton had previously permitted review of an earlier dismissal because that decision had proceeded upon an outdated statement of the law.