Bankruptcy Order - Appealing - Sands v Layne

Author: Simon Hill
In: Article Published: Tuesday 14 June 2022

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Where a bankruptcy order is made, the bankrupt may wish to consider appealing the decision.

This article will consider a few of the points made about appeals in the case of Sands v Layne [2017] 1 WLR 1782 ('Sands')

Bankrupt's standing to pursue an appeal against the bankruptcy order?

In short: yes. The courts, as a matter of practice, permit a bankrupt to appeal against the bankruptcy order.

In Sands, a local authority applied (by way of an petition)[1] for a bankruptcy order against a debtor Mr Layne and a county court district judge made a bankruptcy order against Mr Layne. Mr Layne appealed the bankruptcy order. In an appeal on a subsequent application (on the scope of section 375(1) of the Insolvency Act 1986[2]), the Court of Appeal (Arden LJ, Lewison LJ, McCombe LJ) addressed the question of whether Mr Layne had had '...standing to pursue an appeal against his bankruptcy order?' (paragraph 45)

Arden LJ, who gave the first judgment, said at paragraph 47, that she rejected the submission that: (i) 'Once the bankruptcy order was made, the right of appeal formed part of the estate in bankruptcy which vested in the trustee in bankruptcy under section 306 of the IA 86. The trustee was an officer of the court who could be expected to act fairly in pursuing that right.' (paragraph 46); and (ii) the appeal judge had been '...wrong to entertain any application by [the bankrupt] on the appeal from the bankruptcy order.' (paragraph 46)

Arden LJ said, at paragraph 47:

'Normally, any cause of action which may lead to the recovery of money or other assets which form part of the estate in bankruptcy will form a part of the estate held on statutory trusts following the making of the bankruptcy order: Heath v Tang [1993] 1 WLR 1421. However the right to appeal against a bankruptcy order itself is of a different order as common sense and fairness dictate that the right of appeal against the bankruptcy order should remain with the bankrupt whose status has been fundamentally changed. Moreover, if [counsel for the trustee in bankruptcy] were right on this point, the trustee who decided to appeal against the bankruptcy order would be challenging the very order under which he acquired title to the bankrupt's assets. The courts as a matter of practice permit a bankrupt to appeal against the bankruptcy order: see In re Baron [1943] Ch 177. (The parties cited Wordsworth v Dixon [1997] BPIR 337, but this does not concern an appeal against the bankruptcy order itself.) In the same way, where the court has made an order for the winding up of a company, the company acting by its directors are allowed to appeal against the winding up order even though the powers of the directors have come to an end: see In re Diamond Fuel Co (1879) 13 Ch D 400.'[3a]:

McCombe LJ, who gave the last judgment, said, at paragraph 64:

'I agree with Arden LJ that [the bankrupt] had standing to pursue his appeal, notwithstanding the vesting of his property generally in the Trustee under section 306 of the Act. As In re Baron [1943] Ch 177 illustrates, the debtor retained his right to appeal against his adjudication, even though the effect of it was to vest his estate in his trustee under section 18 of the Bankruptcy Act 1914. It was the individual creditors who were disabled from participation in the appeal in that case.'

Lewison LJ, who gave the second judgment, agreed (paragraph 60) with both judgments (having read the drafts in advance).

Who to Appeal to

Section 375(2) of the Insolvency Act 1986 provides:

'An appeal from a decision made in the exercise of jurisdiction for the purposes of those Parts by the county court or by an insolvency and companies court judge lies to a single judge of the High Court; and an appeal from a decision of that judge on such an appeal lies to the Court of Appeal.'

So an appeal from a (1) County Court district judge (individual insolvency); and (2) Insolvency and Companies Court Judge, is to a High Court Judge.

In Sands, the County Court district judge (individual insolvency)'s decision to adjudicate Mr Layne bankrupt (i.e. the decision to impose a bankruptcy order upon him), had been appealed to a High Court Judge (David Donaldson QC sitting as a deputy judge of the Chancery Division; the 'Deputy High Court Judge')

An appeal brought under s.375(2) is a true appeal, see Vadher v Weisgard [1997] BCC 219[3b];

Position of the Trustee in Bankruptcy

As stated, in Sands, the bankrupt Mr Layne appealed the decision to adjudicate him bankrupt. The permission to appeal/appeal hearing was listed for 29.6.12. On 29.6.12, before the Deputy High Court Judge heard the case, the bankruptcy petitioner (a local authority) came to an agreement with the bankrupt, compromising the appeal. In accordance with the compromise agreement, both parties asked the Deputy High Court Judge that, instead of hearing the permission to appeal/appeal, he should make an order discharging the bankruptcy order. This the Deputy High Court Judge did. The Deputy High Court Judge also made some other orders (together the 'Subject Order'), including that Mr Layne do pay the amount Mr Layne owed the local authority, by agreed instalments. Mr Layne, the debtor/now former bankrupt, also granted the creditor/local authority, a charge over his house (paragraphs 11 and 12). The debtor/Mr Layne went on to performed his obligations under the Subject Order. So, as between the debtor/now former bankrupt and the creditor/local authority, these parties were content with the Subject Order. However, there was a trustee in bankruptcy ('TIB') who was not.

Prior to the events on 29.6.12, on 22.9.11 (so c.9 months earlier), a TIB had been appointed, thereby vesting that TIB with the bankrupt's bankrupt estate. He[3c]:

(i) had not been made a party to any of the appeal proceedings; and

(ii) had not been told, by either of the parties, that they proposed to ask the court to make/approve the Subject Order. 'The ... [TIB] was informed of the progress of the permission application, including the hearing date for 29 June 2012...' (paragraph 13), but not the compromising of the permission to appeal/appeal.

Two issues arose for consideration in the Court of Appeal, relating to this:

(1) whether the TIB should have been joined as a party to the 'application' for the Subject Order?

(2) whether, had the TIB been joined to the 'application' for the Subject Order, he could properly have opposed the application on the basis of potential prejudice, if the bankruptcy order is set aside, to other creditors?

Joinder

As to issue (1) joinder, the Court of Appeal took the view that the TIB should have been joined as a party to the 'application' for the Subject Order.

Arden LJ said, at paragraph 51:

'I consider that the [TIB] ought to have been joined so that provision could be made for his costs and expenses out of the assets held by him as [TIB]. There is also the risk that the [TIB] may not hear that the order has been made setting the bankruptcy order aside so that he continues to incur costs for no purpose.'

(since the TIB's claim for the TIB's costs and expenses had not been dealt with, this issue was remitted back to the High Court, for the High Court to deal with[4])

Agreeing with Arden LJ judgment on joinder, McCombe LJ said, at paragaph 66, that 'Clearly...the Trustee ought to have been joined as a party to the application for the subject order.'

'Application' opposable?

As to issue (2) 'Application' opposable? Arden LJ noted the TIB's concern; that '...[the local authority] and Mr Layne came to an agreement which had the effect of putting an end to the bankruptcy and giving [the local authority] security for the amounts owed to it, even if other creditors were unpaid.' (paragraph 52)

Arden LJ dealt with this as follows, at paragraphs 53 to 55:

'In my judgment, a creditor who applies for a bankruptcy order is in control of the proceedings even though the order when made will constitute a collective remedy for the payment of all the debtor's provable debts. It follows that the court may allow him to withdraw the application, though if there is another creditor who wishes to pursue the bankruptcy order, the court may substitute his name as applicant in his place under rule 6.3 of the Insolvency Rules 1986 (SI 1986/1925). The court is not bound to refuse to allow him simply because the debtor is insolvent.

Likewise...section 271 of the [Insolvency Act 1986] permits the court to dismiss a bankruptcy application (which would be by way of petition) where the creditor refuses a reasonable offer of security even if the debtor is insolvent and unable to pay his debts in full. It provides:

"(3) The court may dismiss the petition if it is satisfied that the debtor is able to pay all his debts or is satisfied - (a) that the debtor has made an offer to secure or compound for a debt in respect of which the petition is presented, (b) that the acceptance of that offer would have required the dismissal of the petition, and (c) that the offer has been unreasonably refused; and, in determining for the purposes of this subsection whether the debtor is able to pay all his debts, the court shall take into account his contingent and prospective liabilities."

Accordingly, I do not consider that the [TIB] would have succeeded if he had opposed the application for the court to make the subject order on the ground that other creditors would be prejudiced. His only claim would have been that the order should make proper provision for his costs and expenses.

While McCombe LJ agreed with Arden LJ on this on the facts, for McCombe LJ did not want to be understood as deciding that this is '...the inevitable result in every such case.'[5]; (paragraph 66). Again, Lewison LJ agreed (paragraph 60) with both judgments.

SIMON HILL © 2022

BARRISTER

33 BEDFORD ROW

NOTICE: This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.

[1] Arden LJ said that it was an application for a bankrutpcy order (made by way of petition). In Sands v Layne [2017] 1 WLR 1782, Arden LJ said, at paragraph 20:

'The judge further held that, even if he had jurisdiction to make an order, the application would fail because the court could dismiss an application (which would be by way of petition) for a bankruptcy order where there was a reasonable offer of security.'

And at paragraph 54, Arden LJ said

'Likewise, as the judge thought arguable, section 271 of the IA 86 permits the court to dismiss a bankruptcy application (which would be by way of petition) ...'

Seemingly, the 'application' for the Subject Order is a different thing.

[2] What the Court of Appeal decided on the scope of section 375(1) was that:

'...section 375(1) permits a court to review an order made by a court of the same level, whether sitting on appeal or at first instance.' (paragraph 25). This is a submission that Arden LJ agreed with, at paragraph 27.

Arden LJ's reasoning included, at paragraphs 43:

'...I would interpret the words "Every court" in section 375(1) as including the High Court, whether it is sitting at first instance or on appeal. I do not consider that this produces a wider result than Parliament could have intended since a practical limitation to ensure respect for the hierarchy of courts is found in the words "order made by it".

Separately, she did find a limitation to section 375(1). Arden LJ said, at paragraph 43:

'It is not open to the High Court to review an order made by the county court or vice-versa. This appears to have been the position before the Insolvency Act 1986 (see In re Hughes (1887) 4 Morr 73)...'

And in paragraph 44:

'The exceptional jurisdiction in section 375(1) has been deliberately confined to review, rescission or variation of orders "made by" courts in the same level of the hierarchy of courts.'

As an aside, she did call for this limitation to section 375(1) to be looked at, by those who recommend law reform. Arden LJ said, at paragraph 43:

'...those responsible for recommending insolvency law reform may wish to consider whether a restriction on orders made by different courts serves any useful purpose for the future.'

McCombe LJ said of section 375(1), at paragraphs 62-63:

'I see no reason why the section should be thought not to confer on the court a power to review its orders made in the exercise of any part of its jurisdiction, whether at first instance or on appeal. The process of bankruptcy administration is an evolving one. Circumstances change and events arise after the making of orders, even on appeal, that may not have been foreseen when the original orders were made. Convenience seems to me to dictate that the court should have wide power to review its own orders, at whatever stage in the bankruptcy they may have been made.

I see nothing shocking in a High Court Registrar in Bankruptcy having jurisdiction to review, rescind or vary an order made in the High Court, even if that order was originally made by the High Court judge. However, depending on the circumstances, it may be thought convenient or politic for an application to review (etc) an order of a High Court judge to be listed before the same or another High Court judge. In general terms, I favour the view of section 375 that commended itself to Mr Prosser QC sitting as a deputy judge of the High Court in In re Cahillane [2016] 1 WLR 45.'

For completeness, Mr Prosser QC sitting as a deputy judge of the High Court in In re Cahillane [2016] 1 WLR 45 found that a High Court judge sitting at first instance could exercise the court's powers under section 375(1) in relation to an order previously made by the High Court on appeal.

Note High Court Registrar in Bankruptcy are now called Insolvency and Companies Court Judges.

[3a] In re Baron [1943] 1 Ch 177, there is little discussion or recognition, that the case was settling a proposition. An official receiver had applied for an adjudication against the debtor, which the Court had made. The debtor had then lodged an appeal against that adjudication. The Court was more mindful to determine whether the debtor creditors, could be parties to the appeal, as each being a 'person aggrieved' under the then applicable legislation. Morton J said, at 179:

'...I cannot see that any person other than the official receiver and the debtor is a proper party to this appeal.'

The other judge, Uthwatt J, agreed with Morton J.

[3b] In Vadher v Weisgard [1997] BCC 219, Chadwick J heard 2 joined appeals against two separate bankruptcy orders (made against a husband and wife, on the petition of the same petitioner/IVA supervisor). Chadwick J said, at 221:

'It is accepted, as it must be, that this appeal to me - brought under s. 375(2) of the Insolvency Act 1986 and r. 7.4(2) of the Insolvency Rules 1986 (SI 1986/1925) - is a true appeal and that I should not interfere with the district judge's order unless satisfied that he had exercised his discretion on a wrong principle, or had taken into account matters which he should not have taken into account or had failed to take into account matters which he should have taken into account. It is not open to me, on an appeal of this nature, to set aside the district judge's order on the basis that I might myself have exercised the discretion differently.'

[3c] The person holding the positon of trustee in bankruptcy changed several times. But that does not seem relevant to the point being made.

[4] The upshot from the fact that the trustee in bankruptcy ('TIB') had not been told/a party, and the Subject Order did not deal with it, was that the Court of Appeal remitted this issue back to the High Court, for the High Court to determine how the TIB's properly incurred costs and expenses of administering the bankrupt estate (between, presumably, 22.9.11 and 29.6.12) should be paid. Arden LJ in Sands v Layne [2017] 1 WLR 1782 said, at paragraph 51:

'I would therefore allow the appeal on this issue and remit the case to the High Court to determine how the [TIB's] proper costs and expenses should be paid.'

McCombe LJ said, at paragraph 61:

'I too consider that this appeal should be allowed and that the matter should be remitted to the High Court to deal with the issue of the Trustee's costs and expenses.'

One imagines the only candidates liable to be required to pay the TIB's fees, was: (i) Mr Layne; and (ii) the local authority.

[5] A fuller quote of what McCombe LJ said, in Sands v Layne [2017] 1 WLR 1782, on this, is:

'I also agree that in the present case, the [TIB] would not have succeeded if he had opposed the application on the basis of potential prejudice to other creditors. However, I would not wish to say, in deciding on this appeal, that that would be the inevitable result in every such case.' (paragraph 66)