Bankruptcy Petitions – Judgments Needed for Petitions

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Although there is no technical requirement for a judgment to apply to put a debtor into bankruptcy (as confirmed by the Supreme Court in Harrahill vs. Cuddy[1]), the court has a very wide discretion to refuse to issue a summons in bankruptcy. Therefore, a plaintiff will generally rely on a judgment to support a bankruptcy petition.

Background

In the very recent case of Leonard And Woods Development Limited v SH[1]the Court noted that “an unusual aspect of the claims is that they are not based on any judgment, but rather the plaintiff is relying on a settlement agreement.”

The particular facts of this case were that, although summary proceedings had been initiated by the applicant company, it informed the Court that it was not pursuing the litigation due to concerns about how long it might take and whether a judgment would be enforceable. Accordingly, the Petitioner requested that the Defendants be declared bankrupt on the basis of a settlement agreement between the parties and reserved its position on the procedure pending the outcome of the bankruptcy petition.

It was submitted to the Court that following the Supreme Court’s decision in Harrahill vs. Cuddy he is open to requesting the issuance of a subpoena, even without trial. However, it has been recognized that “the debt must be uncontested if one is certain of holding the summons unassailable.”

The law

Section 8 of the Bankruptcy Act 1988 (as amended) sets out the circumstances in which the court may grant a summons in bankruptcy and section 8(b) requires that the debt be a liquidated sum. In considering what constitutes a “liquidated sum”, Leonard and Woods endorsed the view that:

there should be no doubt that the sum claimed in the bankruptcy summons, in the case where no judgment is held, is indisputable. This would presumably only occur in the case of a debt that has been acknowledged by the debtor or, or where proof of acknowledgment is forthcoming.[2]

The Court determined that the issue is whether the debt is explicitly recognized[3] by the respondents. In that case, with respect to one of the respondents, the Court was satisfied that the settlement agreement already in place was a “sure way to establish the debt claimed by the plaintiff“and that a liquidated sum was due and payable to the applicant company.

Leonard and Woods confirmed that when a debt is disputed in any way, a judgment is required before bankruptcy proceedings can begin.

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