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Court clarifies significance of interests of creditors in bankruptcy proceedings

Out-Law Legal Update | 04 Jul 2019 | 11:43 am | 2 min. read

The High Court in England has granted an appeal allowing a bankruptcy petition to be adjourned to give the debtor time to receive an anticipated income from a mining project.

  • Due consideration must be given to interests of creditors as a class in bankruptcy proceedings
  • Balancing the views of different creditors is a separate exercise to ascertaining whether the debtor demonstrated credible evidence of a reasonable prospect of being able to pay debts
  • Jonathan Digby-Rogers v Speechly Bircham LLP [2019] EWHC 1568 (Ch)

All creditors except for the petitioning creditor opposed the bankruptcy order. The appeal was allowed on the basis that the interests of the class of creditors as a whole must be properly taken into account, including the views of opposing creditors.

This ruling confirms the need to consider the interests of creditors, both for and against bringing bankruptcy proceedings. While this is a balancing test at the court's discretion, the views of creditors and the reasons behind such views can hold significant weight and ultimately affect the outcome of the ruling.

In May 2015, law firm Speechly Bircham LLP obtained judgment for £167,266 against Jonathan Digby-Rodgers. This represented an estimated 13% of the total £1.25 million debt owed by Digby- Rodgers to his creditors. Part of the debt owed to Speechly was paid in December 2016, but following a further unsuccessful demand for payment, Speechly presented a bankruptcy petition against Digby-Rogers in early 2017.

At the initial hearing Digby-Rodgers asked the court to delay the petition to allow him time to receive an anticipated fee of $2.5m from a Mongolian mining project he was involved in. He claimed that a bankruptcy order would not benefit his creditors as he did not have any other assets. The fee, which would be his only asset of any value, depended on his ongoing involvement in the project, which would be terminated if a bankruptcy order was granted as he would lose credibility as an adviser.

The bankruptcy petition was opposed by Digby-Rodgers' eight other creditors, who had investigated the mining project and took the anticipated payment seriously. Creditor Paul Leatherdale, who was the largest creditor by value, had significant professional expertise in international finance projects and was confident of payment of the fee. The court granted various time extensions to Digby-Rogers, with the petition being adjourned five times, as he maintained that payment for the project would be made imminently.

At the sixth hearing Digby-Rodgers was unable to persuade the judge that bankruptcy proceedings should be considered as a class remedy and take into account the interests of his other creditors by delaying the petition further. The judge granted the bankruptcy order by applying the test that there was no "reasonable prospect" that Digby-Rodgers would receive payment in "reasonable time".

Digby-Rodgers successfully appealed. It was found on appeal that while the first judge was entitled to conclude there was no reasonable prospect of an imminent payment, he should have taken the interests of all creditors into account, including those who both supported and opposed the bankruptcy order. This was a separate concern from the issue as to whether there Digby-Rogers would receive payment of the fee within a reasonable time, and required different considerations.

The judge concluded that considering the interests of creditors as a class, including the weight to be given to their differing views, was a "critical" stage in such a claim, and that the views of the majority creditors had to be taken into account. In this instance, the interests of the creditors who opposed the petition should have been considered as they constituted 87% of the outstanding debts owed by Digby-Rogers; particularly as the issuing of a bankruptcy order would result in a class remedy for all creditors.

There was no evidence from Speechly as to what a bankruptcy order would actually achieve, as it did not provide any evidence to contradict Digby-Rodgers' assertion that no other assets were available. Therefore, as there was significant opposition to the petition, it was necessary to balance Speechly's reasons for wanting a bankruptcy order against the other creditors' inclination against it. The appeal judge granted Digby-Rodgers' appeal.

Additional reporting: Clara Hutchison