Nottingham City Council v Pennant

A bankruptcy petition may be adjourned for payment only where there is a reasonable prospect that the petition debt will be paid in full within a reasonable period. An adjournment designed merely to monitor an instalment arrangement is misconceived. A debtor must show that the petitioning creditor unreasonably refused an offer to secure or compound the debt. The question is whether no reasonable hypothetical creditor would have refused it. The court must not substitute its own commercial judgment for that of the creditor. A local authority may properly consider the debtor’s payment history, enforcement costs and the reliability of the proposed arrangement.

Nottingham City Council appealed against District Judge Oliver’s decision to adjourn for three months a bankruptcy petition against Leroy Pennant concerning council tax liability orders. The debtor proposed paying the arrears and current instalments at £100 per month. The District Judge considered that the Council had unreasonably refused the offer and adjourned the petition to monitor compliance.

The appeal raised issues concerning the proper approach to adjournment, the statutory power to dismiss a petition where an offer has been unreasonably refused, the court’s appellate powers, and the significance of proposed security.

1. Appeal allowed. A bankruptcy order was made.
2. The court may adjourn a bankruptcy petition for payment only where there is a reasonable prospect of payment of the petition debt in full within a reasonable period. An adjournment merely to police the initial performance of a repayment schedule is inappropriate. Repeated short adjournments cannot be used cumulatively to achieve an otherwise impermissible delay.
3. Under Insolvency Act 1986, section 271(3), dismissal may be justified where the debtor has made an offer to secure or compound the petition debt and the offer has been unreasonably refused. The applicable test is whether no reasonable hypothetical creditor would have refused the offer. Acting reasonably is distinct from acting fairly, kindly or generously. A creditor need not balance its interests against those of the debtor or take a commercial risk.
4. The District Judge applied an inappropriate analogy with mortgage possession proceedings under section 36 of the Administration of Justice Act 1970. He also substituted his own assessment of the likely recovery for that of the Council and speculated that the proposed payments would continue. Those errors rendered the decision clearly wrong.
5. The Council’s rejection was not irrational in light of the debtor’s previous defaults, failures to maintain arrangements with bailiffs, the period required to clear the debt, and the absence of provision for ongoing council tax. The proposed charging order was of limited weight because it would require further proceedings and was not enforceable as of right. There was therefore no basis for dismissing the petition.

High Court (Chancery Division): allowed the appeal from District Judge Oliver’s decision dated 13 February 2009 and made a bankruptcy order.