S271 Insolvency Act 1986 provides that a bankruptcy petition may be dismissed if the court is satisfied that a debtor can pay his debt, or has made an offer to secure or compound the debt, the acceptance of which offer would lead to the petition being dismissed and that the offer has been unreasonably refused. But what is a reasonable refusal?

This was the issue in Ross and another v Commissioners for HM Revenue and Customs (HMRC), in which statutory demands were served on the debtors in respect of unpaid tax. No application to set the demands aside was made and the petitions were presented. The debtors offered charges over various properties by way of security for payment. HMRC rejected the offers for a number of reasons including there was no guarantee as to when payment would be made; they were not resourced to monitor and administer property sales; and the debtors had had a significant length of time to raise funds which they could have secured on the properties.

The court held that the test to be applied in deciding whether a refusal was reasonable was whether a reasonable creditor, in the position of the petitioning creditor and in the light of the particulars of the case, would have accepted or refused the offer. In considering an offer, a creditor is entitled to have regard to its own interests which did not have to be balanced against those of the debtor. There was a risk of institutional oppression however if a rigid policy was unthinkingly applied and debtors were fobbed off with inadequate or generalised justification to policy. Here, however, the decision had not been unreasonable as it was highly material that HMRC did not have the resources to act as mortgagees. Its primary function was to collect tax, not to act as an institutional lender. The bankruptcy orders would be made.

Things to consider

On the facts of this case, the decision may well have been different had the creditor been an institutional lender, rather than HMRC. However, all the circumstances and history of the case would still have to be taken into account before a refusal would be said to be unreasonable. A creditor is not obliged to accept an offer to secure or compound a debt under any circumstances.