State Bank of India & Ors v Mallya

When exercising the discretion to amend or dismiss a bankruptcy petition following a failure to disclose security, the court must consider relevant circumstances connected with the statutory breach. The relevant security is security held over property of the debtor in respect of the petition debt. Security over third-party assets is not relevant to that issue and cannot justify dismissal under section 266(3) of the Insolvency Act 1986. Relevant circumstances may include the consequences of the breach, the parties’ conduct, the purpose and collective nature of bankruptcy, the public interest in prompt administration, and consequences for transactions involving the bankruptcy estate. Third-party assets may nevertheless be relevant to a time-to-pay proposal or a compromise that releases the debtor’s liability.

The petitioners sought Dr Mallya’s bankruptcy on the basis of an unsatisfied judgment debt arising from guarantees given in relation to loans to Kingfisher Airlines. An earlier judgment, [2020] EWHC 96, found that the petition failed to disclose security which the petitioners held, or might hold, over Dr Mallya’s assets, contrary to section 269 of the Insolvency Act 1986 and rule 10.9 of the Insolvency (England and Wales) Rules 2016.

The present hearing concerned whether the petition should be amended or dismissed. Dr Mallya argued that security over assets of associated companies should be taken into account because, together with his own assets, it might cover the debt. The central issue was how the court should exercise its discretion following the statutory breach.

1. Disposition. The court rejected the argument that security over third-party assets could justify dismissal of the bankruptcy petition. The issue of whether the petitioners held security over the assets of associated companies was therefore immaterial to the statutory discretion, and no determination of the disputed Indian-law evidence was required.
2. A breach of section 269 of the Insolvency Act 1986 does not automatically require dismissal. Consistently with Barclays Bank Plc v Mogg [2004] BPIR 259, the court may consider whether the defect can be cured by amendment and must exercise its power judicially and in a principled manner.
3. The relevant considerations include the consequences of the breach, the conduct of the parties and all the circumstances of the case. The circumstances must be relevant to the breach. They may include the nature of bankruptcy as a collective remedy affecting the status of an individual, the public interest in prompt processing, the relevance of the presentation date to avoidance provisions, and the effect of bankruptcy on dispositions of property.
4. Section 383(2) defines security for this purpose by reference to security held over property of the person by whom the debt is owed. The statutory language leaves no room for treating security over property belonging to third parties as relevant to dismissal under section 266(3). The reasoning was consistent with the analysis of security in Bristol Airport Plc v Powdrill [1990] 1 Ch 744.
5. Third-party assets are not irrelevant in every bankruptcy context. They may be relevant to a time-to-pay proposal where they are to be used to pay the petition debt, or where a co-debtor’s security, payment or compromise releases the debtor’s liability.
6. The petitioners’ failure to state security over Dr Mallya’s assets prevented an immediate bankruptcy order, but did not itself compel dismissal. The court’s conclusion made it unnecessary to decide whether the petitioners had security over UBHL’s or other associated companies’ assets.

The judgment itself records an earlier judgment of the same court, [2020] EWHC 96, which adjourned the bankruptcy petition and identified the failure to disclose security. The present judgment determined the further argument concerning the effect of security over third-party assets.