Pending Bankruptcy Petitions and Making Third Party Debt Orders Final

Author: Simon Hill
In: Bulletin Published: Tuesday 04 June 2019

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Does the existence of a pending bankruptcy petition against a respondent/judgment debtor prevent the Court making final, an interim Third Party Debt Order granted in favour of the judgment creditor? This was one of the issues that arose before Master Cook, sitting in the High Court in State Bank of India v Mallya [2019] EWHC 995(QB) (‘Mallya’)

In Mallya, the State Bank of India (‘Bank’) was a judgment creditor and Dr Mallya was a judgment debtor for £1.142 billion. The Bank then presented a bankruptcy petition against Dr Mallya and he filed a notice of opposition, raising various grounds of resistance (including assertions that the judgment debt was secured). The bankruptcy hearing was anticipated to come on for hearing in December 2019. Then, the Bank applied for a Third Party Debt Order (‘TPDO’)[1]in respect of a debt of about £259,000 owed by a third party to Dr Mallya. At a without notice hearing on the Bank’s TPDO application, the Bank obtained an Interim Third Party Debt Order (‘ITPDO’)[2]. At the return date before Master Cook, the Master had to determine whether (i) the ITPDO ought to be made final; that is, into a Final Third Party Debt Order (‘FTPDO’)(with or without modification), or (ii) the ITPDO ought to be discharged and application dismissed, or (iii) the application ought to be adjourned to a further hearing after the bankruptcy hearing, with the ITPDO continuing in the intervening period.

Dr Mallya opposed the ITPDO being made final on a number of grounds, summarized by the Master, at paragraph 7, as including[3]‘Ground 1’:

‘1. having started bankruptcy proceedings based on the judgment debt of £1.142 billion it is (and was) not open to the [Bank] to seek to pursue a TPDO as this is fundamentally inconsistent with the policy of the bankruptcy regime, which is to ensure the assets of a bankrupt are distributed pari passu among all unsecured creditors, 

The Master rejected Ground 1. The Master stated, at paragraph 15:

‘I do not accept [Dr Mallya’s counsel’s] submission that the existence of the bankruptcy proceedings is fatal to the [Bank’s] application. In my judgment the fact of the bankruptcy petition is a matter which is relevant to the Court’s discretion to make the ITPDO final.’

The Master drew parallels with where a Court is asked to make final, an interim charging order, when the judgment debtor was likely to be made bankrupt imminently. The Master referred to Sandu v Sidu [2012] B.P.I.R. 456 (‘Sandu’), where Vos J heard an appeal relating to a hearing to make a interim charging order final. 

In Sandu, Vos J said at paragraph 19, referring to the Registrar:

What she had to do was to exercise her discretion as to whether to make a charging order final when she knew that a bankruptcy was imminent and she knew that a bankruptcy notice had been served and she knew that a petition was likely to be presented, as indeed it was. It is not imperative and it is not mandatory for the Registrar in that position to refuse to make an interim charging order final. She has to weigh up the various factors and consider the interests of unsecured creditors together with the interests of the judgment debtor and the judgment creditor.’[4]

It was common ground in Mallya that the Court of Appeal in Roberts Petroleum Ltd v Bernard Kenny Ltd [1982] 1 WLR 301(CA) (‘Roberts Petroleum’) had set down the principles to be applied when exercising the discretion whether to make final an ITPDO under CPR 72.8 (seemingly mutatis mutandis):

‘[1.] The question whether a charging order nisi should be made absolute is one for the discretion of the court. 

2. The burden of showing cause why a charging order nisi should not be made absolute is on the judgment debtor. 


3. For the purpose of the exercise of the court's discretion there is, in general at any rate, no material difference between the making absolute of a charging order nisi on the one hand and a garnishee order nisi on the other. 

4. In exercising its discretion the court has both the right and the duty to take into account all the circumstances of any particular case, whether such circumstances arose before or after the making of the order nisi. 

5. The court should so exercise its discretion as to do equity, so far as possible, to all the various parties involved, that is to say, the judgment creditor, the judgment debtor, and all other unsecured creditors. 

6. The following combination of circumstances, if proved to the satisfaction of the court, will generally justify the court in exercising its discretion by refusing to make the order absolute: 

(i) the fact that the judgment debtor is insolvent; and 

(ii) the fact that a scheme of arrangement has been set on foot by the main body of creditors and has a reasonable prospect of succeeding.

7. In the absence of the combination of circumstances referred to in (6) above, the court will generally be justified in exercising its discretion by making the order absolute.’[5]

Common ground though this was, it does not completely capture the state of the law as it now is. While the House of Lords decision [1983] 2 AC 192, reversing the Court of Appeal result, is not considered to affect the authoritative nature of principles 1 to 5 principles[6], Lord Brightman in Roberts Petroleum in the House of Lords said principle 6 (i) was the relevant principle; principle 6 (ii) above was not an additional requirement to principle 6(i)[7]. Furthermore, later authority has undermined the importance of principle 2[8].

It follows that the insolvency of the judgment debtor can be a sufficient reason for refusing to make a FTPDO, since the effect of a FTPDO is to prefer the judgment creditor/applicant for TPDO, over the judgment debtors general body of unsecured creditors. 

Facts of Mallya

On the facts in Mallya, the Court elected to adjourn off the issue, to be listed after the hearing of the bankruptcy petition, continuing the ITPDO in the intervening period.  At paragraph 24, the Master said:

In the circumstances I have concluded that the ITPDO should remain in force and that the application for a final order should be adjourned until after the hearing of the bankruptcy petition.’ 

This third way, rather than make the ITPDO final, or discharged the ITPDO and dismiss the application, is the same approach as was favoured in Sandu. In Sandu, Vos J upheld the Registrar’s decision to continue an interim charging order to a date after the hearing of a potential bankruptcy hearing[9].

Conclusion

A judgment creditor to a judgment debtor already facing a pending bankruptcy petition, can apply to Court for a TPDO against a debt owed to the judgment debtor. It is a matter of discretion for the Court whether, on a return date, it will make the ITPDO into a FTPDO. When exercising this discretion, the law follows the same principles as where a judgment creditor seeks that an interim charging order be made final; that is, following the principles set down in Roberts Petroleum, mutatis mutandis. When exercising this discretion, the Court is striking a balance between:

‘…two well-established principles of law…first, that 

"a judgment creditor is in general entitled to enforce a money judgment which he has lawfully obtained against a judgment debtor by all or any of the means of execution prescribed by the relevant rules of court." 

And, secondly, that 

"when a judgment debtor, whether he be a natural person or a corporate body, has become insolvent, all the unsecured creditors should be treated equally, each receiving the same proportionate share of the inadequate fund available as all the others." 

Here the law attempts to find the boundary between:

(1) allowing an individual enforcement processes to progress to its conclusion, with the advantage thereby gained by the individual creditor, at the expense of any future general body of unsecured creditors - should the debtor enter a collective insolvency regime, and

(2) ensuring that, where the judgment debtor is insolvent and to enter a collective insolvency regime, like bankruptcy, the statutory distribution scheme imposed by collective insolvency regimes will not be unjustifiably frustrated. 

Mallya is an example of the Court being faced with this tension, and the law finding this boundary. Merely having a pending bankruptcy petition does not mean the respondent (the judgment debtor) is insolvent; conversely, it may turn out that the judgment debtor was insolvent.

The approach that was favoured by the Court in Mallya and Sandu, was to adjourn the issue of whether to make the ITPDO final, until after the bankruptcy hearing (when the issue of whether the respondent/judgment debtor’s estate will enter the proposed collective insolvency regime will be determined). This approach protects the judgment creditor defeasible TPDO right in the intervening period, by leaving the ITPDO in place, until the solvency of the judgment debtor is better understood.

SIMON HILL © 2019

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]Formerly, this type of order was known as a Garnishee Order. The third party was known as the ‘Garnishee’, that is, the person who owed money to the judgment debtor, but was ordered by the Court to pay the sum owed, not to the judgment debtor, but to the judgment debtor’s judgment creditor.  

[2]Formerly, the interim nature of an order was called ‘nisi’. So, for example, formerly an Interim Third Party Debt Order was a ‘Garnishee Order Nisi’ order. The Garnishee Order Nisi was then made ‘absolute’.

[3]For completeness, making the ITPDO final was opposed on 4 grounds. The additional 3 grounds were:

‘2. the application for a TPDO is oppressive in that the ITPDO freezes only 

£258,559.79, a very small proportion of the judgment debt, in circumstances where the Claimants have effective security over assets worth £1.6 billion.

 ‘3. the application for an ITPDO was a deliberate ploy on the part of the Claimants to thwart Dr Maylla’s ability to meet his ordinary living and reasonable legal expenses permitted under the terms of the [World Wide Freezing Injunction], 

4. there had been a failure on the part of the Claimants to make full and frank disclosure when applying without notice for the ITPDO of the matters set out at [(i)] to (iii) above such that the ITPDO should be set aside.’

The Master dealt with ground 4 first, the issue of whether the ITPDO be set aside by reason of the alleged non-disclosure? After referring to Blair J in 

 Merchant International Company v Natsionalna Aktsionerna Naftogaz Ukrainy [2014] EWHC 391 (Comm), paragraphs 68 to 71, and Morris J in BCS Corporate Acceptances Ltd v Terry [2018] EWHC 2349 (QB), paragraph 71, Master Cook concluded that, at paragraph 11: 

‘…there is a duty on the applicant for a TPDO to provide accurate evidence and there is a duty of disclosure. The scope of duty of disclosure will depend upon the circumstances of the application with greater disclosure being required where the grounds for making an order are debatable or the consequences of making an order may be severe.’

On the facts in State Bank of India v Mallya [2019] EWHC 995(QB), Master Cook said, at paragraph 15:

In this case the grounds for making an ITPDO were strong. There was an undisputed and unpaid judgment for a substantial sum, of money and a stay had been refused. In other words, it was not material for the Court to know of the bankruptcy petition at this stage of the process.’ 

Later, Master Cook said, in State Bank of India v Mallya [2019] EWHC 995(QB), at paragraphs 18 and 19:

‘In my judgment the proper time to consider the issue of existing bankruptcy proceedings in the case of a TPDO is on further consideration of the application under CPR 72.8. For the reasons given by Blair J in Merchant it would be wrong to import the case-law applying to disclosure in the case of freezing orders. To do otherwise would be to turn an established routine paper process into something far more elaborate. There has been a failure to disclose the existence the bankruptcy proceedings at the outset of the application however I am not satisfied that the failure was material to the Court’s consideration of the ITPDO. 

For similar reasons I reject [Dr Mallya’s counsel’s] submissions concerning the failure to disclose the [World Wide Freezing Injunction] or the settlement offer (made by a co-debtor) relied upon by Dr Mallya to support his contention that there is effective security of £1.6 billion in the context of the paper application for an ITPDO.

[4]When Vos J said ‘bankruptcy notice’ in this quote at paragraph 19 to Sandu v Sidu [2012] B.P.I.R. 456, it may be that he meant to say ‘statutory demand’. 

[5]As to principle 6 (i) - in Roberts Petroleum Ltd v Bernard Kenny Ltd [1983] 2 A.C. 192, a corporate insolvency case, the judgment debtor company has entered liquidation. Lord Brightman, in the House of Lords, said, at 208:

‘The basic question, therefore, which confronts the court when it is faced with an application by an execution creditor to convert an order nisi into an order absolute in a case such as the present is whether the asset in question should fall outside the statutory scheme which, by virtue of the liquidation, is then in existence, or should be subject to that scheme. In the absence of persuasive authorities, I would myself have thought that the court should exercise its discretion so that the asset falls within the statutory scheme. The purpose of the further consideration of the order nisi is to enable the court to review the position inter partes. At the date of the order nisi the court has made no irrevocable decision. If therefore the statutory scheme for dealing with the assets of the company has been irrevocably imposed on the company, by resolution or winding up order, before the court has irrevocably determined to give the creditor the benefit of a charging order, I would have thought that the statutory scheme should prevail. Unquestionably that would be the position if the winding up order or resolution had preceded the order nisi: see section 228 (compulsory liquidation) and Westbury v. Twigg & Co. Ltd. [1892] 1 Q.B. 77 (voluntary *209 liquidation). To my mind the position should be the same if liquidation commences after the order nisi but before the court has committed itself to a final order. I do not see why a creditor should gain an advantage merely because he has a revocable order for security at the time when the statutory scheme comes into existence. 

The main thrust of [the judgment creditor/charging order nisi holder’s] argument is that the order nisi imposes an immediate charge, which is correct, and that therefore at the date of the commencement of the liquidation the assets were already outside the statutory scheme. That proposition, by reference to that date, is also correct. The liquidator was unable, at that date, to collect those assets by going into possession, because the receiver was already in possession. But the weakness of the argument to my mind is that [the judgment creditor/charging order nisi holder’s] had no more than a defeasible charge at the date of the commencement of the liquidation, so that the right of the receiver to retain the asset as against the liquidator was only a defeasible right. Neither the precarious existence of the charge nor the precarious possession of the receiver seems to me to afford a convincing reason for consolidating the position of the judgment creditor vis-à-vis the general body of unsecured creditors and thereby defeat quoad that asset the statutory scheme which was already in full force and effect. So, unless there is convincing authority pointing to a different conclusion, I would regard the intervention of the statutory scheme as a sufficient and indeed decisive "cause to the contrary….

I think that that tentative conclusion accords with the general sense of those sections of the Act of 1948 which preclude inroads into the assets of a company once liquidation has begun.’ 

[6]These principles were not challenged in the House of Lords. The House of Lords decision is reported in the Official Law Reports. In that report, it records the Appellant Defendants contentions, thus:

The decision of the Court of Appeal may be summarised as follows: (1) that the question whether a charging order nisi should be made absolute is one for the discretion of the court; (2) that the burden of showing cause why a charging order nisi should not be made absolute is on the judgment debtor; (3) that in exercising its discretion the court should take into account all relevant circumstances, whether such circumstances arose before or after the making of the charging order nisi; (4) that the court should so exercise its discretion as to do equity, so far as possible, to all the various parties involved, i.e. the judgment creditor, the judgment debtor and all other unsecured creditors; (5) that "The following combination of circumstances, if proved to the satisfaction of the court, will generally justify the court in exercising its discretion by refusing to make the order absolute: (i) the fact that the judgment debtor is insolvent; and (ii) the fact that a scheme of arrangement has been set on foot by the main body of creditors and has a reasonable prospect of succeeding" [1982] 1 W.L.R. 301 , 307…

…The defendants do not dispute the propositions summarised in (1) to (5) above…’

However, note: (1) the numbering for these principles changes as between the above list and those set down by Lord Brandon in Roberts Petroleum Ltd v Bernard Kenny Ltd [1982] 1 W.L.R. 301,  at 307; the use of brackets/no brackets, is used to distinguish the lists in this article; (2) see later for Lord Brighton in House of Lords in Roberts Petroleum Ltd v Bernard Kenny Ltd [1983] 2 A.C. 192 in respect to the correctness of principle (5).

[7]In Roberts Petroleum Ltd v Bernard Kenny Ltd [1983] 2 A.C. 192, a corporate insolvency case, the judgment debtor company has entered liquidation. Lord Brightman, in the House of Lords, said, at 208:

‘I can see no logic in an additional requirement "such as a scheme of arrangement, formal or informal, agreed or being negotiated amongst creditors"; I have taken these words from Burston Finance Ltd. v. Godfrey [1976] 1 W.L.R. 719, 734, to which I refer later. 

And at 213, Lord Brightman said:

‘My Lords, I return to the point at issue; whether Bristow J. correctly held that the liquidation of [judgment debtor], that is to say the imposition on the assets of an insolvent company of the statutory scheme for the distribution of those assets among the unsecured creditors, was a "sufficient cause" for not converting the order nisi into an order absolute. I think that he was correct, for the reasons which I have stated. I reach this conclusion without any regret. First, it may help to avert an unseemly scramble by creditors to achieve priority at the last moment. Secondly, it establishes a clear working rule, and avoids the uncertainties of an inquiry as to whether a scheme of arrangement "has been set on foot ... and has a reasonable prospect of succeeding" (per Lord Brandon of Oakbrook [1982] 1 W.L.R. 301, 307). I would allow this appeal, discharge the order absolute which was made by the registrar and restored by the Court of Appeal, and also discharge the order nisi.’

[8]Though it does not seem to have been an issue in State Bank of India v Mallya [2019] EWHC 995(QB), doubt has been thrown on the principle that ‘The burden of showing cause why a charging order nisi should not be made absolute is on the judgment debtor’. - see National Guild of Removers and Storers Ltd v Jones (t/.a ATR Removals) [2012] EWCA Civ 216. 

[9]See State Bank of India v Mallya [2019] EWHC 995(QB), paragraph 16.