Khulood Abdulla Hassan Al Rostamani & Ors v Mohamed Hassan El Haddad

A bankruptcy petition founded on unpaid judgment debts should not ordinarily be used to reopen issues already determined when a statutory demand was challenged. The court should generally refuse such reargument unless there has been a material change of circumstance.

Bankruptcy is a collective remedy. A petition is not abusive merely because it may confer advantages on the petitioning creditor in related litigation, provided that obtaining payment and the independent investigation and administration of the debtor’s assets are at least purposes of the proceedings. Personal motives are irrelevant. A debtor seeking dismissal on the ground that bankruptcy would be pointless faces a heavy burden, particularly where alleged claims or other potentially realisable assets exist.

The petitioners sought a bankruptcy order against the debtor for three unpaid indemnity-costs orders totalling £1,478,565. The debtor relied on alleged cross-claims in separate King’s Bench proceedings, alleged abuse of process, the petitioners’ alleged unreasonable refusal to exploit land held by a Saudi company, and alleged fraud in obtaining the costs orders.

The debtor had previously unsuccessfully applied to set aside the statutory demand. ICC Judge Mullen had considered the alleged cross-claims and rejected them, and permission to appeal had been refused. The central issues were whether the debtor could reopen those matters at the petition hearing, whether the petition was abusive or pointless, whether section 271(3) of the Insolvency Act 1986 applied, and whether the court should go behind the judgment debts.

1. Disposition. The petition was allowed and a bankruptcy order was made. The petitioners were prima facie entitled to the order in respect of liquidated, unpaid judgment debts.
2. Previously determined cross-claims. The debtor’s alleged claims in the King’s Bench proceedings had been raised and determined on the application to set aside the statutory demand. There had been no material change of circumstance. Applying the principle in Turner v Royal Bank of Scotland, it would be wrong to permit the debtor to reargue the same grounds at the petition hearing. The claims also ran only against the first petitioner and did not establish any arguable claim against the other petitioners.
3. Abuse and proper purpose. Bankruptcy is a class remedy involving collective enforcement and the investigation and administration of the debtor’s assets. The petition was not abusive. The petitioners’ purposes included recovering the judgment debts and having the debtor’s assets and claims independently investigated by a trustee. It was immaterial that the order might also benefit them in related litigation, or that a personal motive was alleged. A proper purpose need not be the principal purpose.
4. Pointlessness. The discretion not to make an order because it would serve no useful purpose is exceptional. The debtor bears a heavy burden, and the impossibility of benefit must be obvious without detailed investigation. The debtor’s alleged claims and his claimed 51% interest in KMP Saudi meant that the estate could not be treated as devoid of potentially realisable assets.
5. Section 271(3). The alleged offers concerning KMP Saudi’s land were not offers to secure or compound for the petition debts. The petitioners therefore could not have unreasonably refused an offer within section 271(3). In any event, the evidence did not establish that accepting the offers would enable the debtor to pay his debts in the immediate or near future.
6. Going behind judgment debts. The bankruptcy court may investigate a judgment debt where there is fraud, collusion or miscarriage of justice suggesting that, after a properly conducted process, nothing was due. That threshold was not met. The fraud case repeated an unsuccessful attempt to relitigate the underlying issue and did not establish dishonesty. Further, the first costs order would probably have been made independently because of the debtor’s deliberate failure to give full and frank disclosure, so the costs orders could not be avoided on the alleged merits of the fraud case.

This was a first-instance bankruptcy petition. The judgment records that an earlier application to set aside the statutory demand was dismissed by ICC Judge Mullen, and that subsequent permission applications were unsuccessful.