Commercial property — Legal charge — Security for loan — Valuation — Default in interest payments — Lender seeking to enforce debt by bankruptcy proceedings — Debtor’s application to set aside statutory demand — Whether debtor should be allowed to call evidence to establish lender was fully secured creditor — High Court holding that district judge entitled to deal summarily with application on incomplete valuation evidence — Court of Appeal upholding that decision
The debtor held a commercial property known as Greshams Buildings, Avonmouth, Bristol, on a long lease. On June 5 1991 the debtor executed a first legal charge on the property in favour of lenders to secure payment of moneys advanced under a loan facility. The debtor defaulted on the interest payments. The lenders decided to enforce their debt by bankruptcy proceedings rather than by enforcing their charge. On September 30 1992 they served a statutory demand. As required by r 6.1(5)(a) of the Insolvency Rules 1986, the demand specified the value put on the security at the date of the demand in the sum of £650,000.
The debtor complained that the value of £650,000 was too low. He contented that the lenders were fully secured creditors and thus were entitled neither to rely on the statutory demand nor to present a petition in bankruptcy. He applied to set aside the statutory demand supporting his application by an affidavit in which he asserted as his grounds for the application that the lenders in their demand had undervalued the property by nearly a third. He exhibited a report to the affidavit from surveyors attributing an open market value of £950,000 to the report. At the first hearing a deputy judge had two surveyors’ reports from the lenders’ experts one of which gave a current open market value of £450,000. The case was adjourned for three weeks with a direction that the debtor should serve any further expert valuation evidence. At the adjourned hearing the debtor expected to be allowed to adduce oral evidence from his surveyor and to cross-examine the creditors’ experts since he had not filed any further evidence. The district judge refused permission to do so and went on to dismiss the application. On appeal, the High Court declined to overrule the district judge’s decision to deal summarily with the application. The debtor appealed.
Held The appeal was dismissed.
1. The effect of the judge’s decision did not mean that the debtor could never thereafter challenge the creditor’s estimate of value. Section 271(1) of the Insolvency Act 1986 precluded the court from making a bankruptcy order unless it was satisfied that the debt had been neither paid nor secured.
2. It appeared that r 7.5 and 7.7 of the Insolvency Rules 1986 gave the court hearing the petition ample power if it saw fit to determine the value of the security on proper evidence from both sides.
3. The court hearing the application to set aside the statutory demand was given a wide discretion under r 6.5(3) to dismiss an application on the incomplete evidence before it without adjourning it for further evidence. Further the court could, if it saw fit, still be free to go into questions of value on the hearing of the petition. In those circumstances it was impossible to hold that the judge’s conclusion was wrong.
Roger Kaye QC (instructed by JW Ward & Son, of Bristol) appeared for the debtor; Charles Auld (instructed by Teacher Stern Selby) appeared for the lenders.
