England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
(BRISTOL DISTRICT REGISTRY)
MR JUSTICE CHADWICK

		Royal Courts of Justice Strand London WC2A 2LL
		Wednesday 15 November 1995

LORD JUSTICE MILLETT: This is the judgment of the Court. It follows the hearing of two appeals by Mr. and Mrs. Fitch respectively from orders of Chadwick J on 5th. October 1995 when he refused their applications to rescind bankruptcy orders which had been made against them in the Swindon County Court. The Judge granted a stay of advertisement of the bankruptcy orders but only until 27th. October 1995. We heard the appeals as a matter of urgency on the day before the stay expired. At the conclusion of the argument we announced our decision to allow both appeals and stated that we would give our reasons later. This we now do.

Mr. Fitch is a chartered accountant. Mrs. Fitch is his Wife. Bankruptcy petitions were presented against them by The Co-operative Bank plc on 14th. March 1995, and bankruptcy orders were made against them by Deputy District Judge Exton in the Swindon County Court on 31st. July. Mr. Fitch duly appealed against the bankruptcy order which had been made against him. His appeal was dismissed by His Honour Judge Moseley QC on 25th. August.

Mr. and Mrs. Fitch promptly applied for the bankruptcy orders to be rescinded under Section 375(1) of the Insolvency Act 1986. At the time of their applications there was no ground upon which they could properly seek rescission of the bankruptcy orders, but shortly afterwards they persuaded the petitioning creditor to change its mind and support their applications. These were referred by the District Judge to the Judge, and on 11th. September His Honour Judge Weeks QC adjourned the hearing of the applications until 5th. October in order to allow the creditors of Mr. and Mrs. Fitch to be approached, informed of the applications, and given an opportunity to attend.

The applications were originally listed to be heard in the Swindon County Court before Judge Weekes sitting in Bristol. On 5th. October, however, Judge Weekes was not available and the applications came before Chadwick J. He ordered that the bankruptcy proceedings should be transferred from the Swindon County Court to the High Court, Bristol District Registry, dismissed both applications, refused leave to appeal, and granted a short stay of advertisement of the bankruptcy orders which he later extended until 27th. October. Millett LJ granted leave to appeal on 25th. October and directed that the hearing of the appeals be expedited.

Mr. Fitch's Statement of Affairs disclosed total assets of £240,000, secured liabilities of £444,000 and unsecured liabilities of approximately £60,000. There was thus a deficiency of some £200,000 against secured liabilities, leaving nothing for the unsecured creditors. The petitioning creditor was owed £103,846 secured on land having an estimated value of £30,000. By the time of the hearing before Chadwick J, 5 creditors (including the petitioning creditor) with debts in excess of £120,000 supported the applications to rescind the bankruptcy orders, 5 (including the Inland Revenue) with debts in excess of £330,000 neither supported nor opposed, one with a debt of £8,800 had not yet replied and none opposed. Since the hearing before Chadwick J the last of the creditors to reply has done so; it supports the applications.

The reason which has led the petitioning creditor to change its attitude to the making of bankruptcy orders, and which has evidently commended itself to the other creditors, is that it is now believed that there is a serious risk that the existence of a bankruptcy order against Mr. Fitch will prejudice the recovery of a substantial asset for the estate. If that is the case then it is not in the interests of the creditors that the bankruptcy should continue; and a large body of the creditors appears to accept this.

It appears that Mr. Fitch, in partnership with Mrs. Fitch under the name Paratus Developments, has offered his services as a negotiator to a Jersey company Maldon Holdings Ltd. ("Maldon"). Maldon is concerned in the development of a leisure complex on the island of Tobago. In order to fund the development Maldon is proposing to enter into a joint venture with another group of companies for the production of gold bullion from ore in New Mexico. The mining and processing of the ore require funding which has been sought from a Swiss investor Sofitrac. Some idea of the scale of the venture can be obtained from the entries in Maldon's accounts which place a value on the mineral rights of US$75 million. Mr. Fitch has been concerned as an intermediary to negotiate the obtaining of the funds for the joint venture from Sofitrac. Maldon has agreed to pay a commission to Paratus. The evidence suggests that £248,890 fees have already been earned, but that Maldon is in no position to pay them unless the development proceeds; and that a further £112,500 by way of introductory commission will become payable by Maldon to Paratus if Sofitrac enter into funding arrangements for the gold mining and processing venture. In addition Mr. Fitch estimates that Paratus will become entitled to £150,000 by way of consultancy fees over the two year development period of the complex, and a further success fee of £300,000 on completion of the project. The total amount of such fees is £811,000 of which £248,890 may be regarded as already due, but none of which can realistically be expected to be received if the negotiations with Sofitrac fail.

The creditors are persuaded that the successful completion of the venture depends on Mr. Fitch, and perhaps to a lesser extent Mrs. Fitch as his partner in Paratus, not being known to be bankrupt. They fear that Sofitrac would be likely to withdraw if it discovered that the person through all the negotiations were being conducted was the subject of an English bankruptcy order. Mr. Fitch would regard himself as bound in honour to disclose the existence of the order, which affected his status, even though he was not seeking to obtain credit for himself or his Wife. Moreover, even if Sofitrac was not deterred by the existence of a bankruptcy order, it is feared that it would prefer to withdraw from the negotiations altogether rather than have to deal with the kind of enquiries which the Official Receiver would be expected to make. Maldon's solicitors have recorded their client's view that the rescission of the bankruptcy orders would remove what it describes as "the very real risk" of Sofitrac terminating its relationship with Paratus which would be "disastrous for Maldon".

The Judge refused the applications for two distinct reasons:-

(1). The application was not an occasion for a rehearing of the appeal from the making of the bankruptcy orders. There had to be some new matter which had not been raised and was not available at the previous hearing. The only matter which could be identified as a change in circumstances since the hearing on 31st. July was the change in the attitude of the petitioning creditor. That change did not derive from any change in the underlying circumstances but from a reappraisal by the petitioning creditor of where its commercial interests lay. The material on which it conducted that reappraisal, however, had been available throughout. The Judge concluded his observations on this aspect of the case as follows:

"But what I might have done if dealing with this de novo is not material. The position is that all of this material was available at the time the bankruptcy order was made; it was put before His Honour Judge Moseley on appeal; and I cannot avoid concluding that its deployment again is nothing other than an attempt to have a further appeal hearing. The place for that is the Court of Appeal."

(2). The Court was being asked to rescind the bankruptcy order so that Mr. Fitch could continue to present himself as a person who was not bankrupt and had not been made bankrupt. That amounted to a deception to which the Court should not be a party. The Judge said:-

"I confess I find an application based upon the need for deception both surprising and distasteful. It seems to me that if the success of this venture does indeed depend on the presentation of Mr. Fitch as a person of unchallenged credit and reliability then it may be better that the venture fails. Certainly I think it better that the venture fails than that the Court lends its aid and approval to such a deception."

Counsel for the Official Receiver, who appeared before us and invited us to dismiss the appeal, did not feel able to support either of the reasons given by the Judge for refusing the applications. I shall deal with each in turn:-

(1). Change of circumstances.

Section 375(1) of the Insolvency Act 1986 reads as follows:

"(1) Every court having jurisdiction [in bankruptcy] may review, rescind or vary any order made by it in the exercise of that jurisdiction."

The Section replaced sections in identical terms in earlier Bankruptcy Acts: see Section 104(1) of the Bankruptcy Act 1883 and Section 108(1) of the Bankruptcy Act 1914. The jurisdiction is unique to insolvency,(having recently been extended from bankruptcy to company winding up), in that it allows the court to review and rescind or vary an order made by a court of co-ordinate jurisdiction. It applies to any order made in the exercise of the bankruptcy jurisdiction. It is available to rescind a bankruptcy order as it was formerly available to rescind a receiving order. The court's power to review and if thought fit rescind a bankruptcy order is, in theory at least, virtually unlimited. It may be contrasted with the power of the court to annul a bankruptcy order under Section 282(1) of the Insolvency Act 1986, which replaced Section 29 of the Bankruptcy Act 1914. This is limited to two situations: (i) where it appears to the court that, on any grounds existing at the time the order was made, the order ought not to have been made; and (ii) where, since the making of the order, the bankruptcy debts and the expenses of the bankruptcy have been duly paid. Except in this second case, the court's power to annul the bankruptcy order must be based on grounds existing at the time of when the bankruptcy order was made.

Similarly, of course, an appellate court can quash a bankruptcy order only if it is satisfied that, on the evidence which was before the court which made the order or on new evidence which is admitted in accordance with the rule in Ladd v Marshall [1954] 1 WLR 1489, the order should not have been made. An application under Section 375(1) is essentially different. It must be based on a change in circumstances since the order was made or, more rarely, on the discovery of further evidence which could not be adduced on appeal.

Before the Judge Mr. and Mrs. Fitch accepted that the bankruptcy orders were rightly made. They based their applications on the fact that circumstances had changed since the orders were made. They did not rely on the mere fact that the petitioning creditor had changed its mind. Once a bankruptcy order has been made, the status of the petitioning creditor is no different from that of any other creditor. Mr. and Mrs. Fitch relied upon the fact that a large body of creditors, which included the petitioning creditor, supported the rescission of the bankruptcy orders, and that none of the known creditors opposed it.

If this had been the position on 31st. July the bankruptcy petition would have been dismissed. The fact that the underlying circumstances which led the creditors to support the rescission of the bankruptcy orders had been known at the time the orders were made did not prevent their change of attitude from being both new and relevant. Since it had occurred since the making of the bankruptcy orders it was a factor which could not be taken into account on an appeal or on an application under Section 228(1). The Judge was wrong to stigmatise the applications as an attempt to have another appeal hearing. Section 375(1) provided the only means of giving effect to the creditors' wishes that the bankruptcies should be discontinued.

(2). Proposed deception.

There was no evidence from which the Judge could properly conclude that Mr. and Mrs. Fitch intended to embark on a course of deception if the bankruptcy orders were rescinded. Mr. Fitch was acting merely as an intermediary. He was seeking to obtain funding for his principals, not for himself. His own creditworthiness was not directly relevant, and he was unlikely to be asked about it. He would feel bound to disclose the existence of the bankruptcy order to Sofitrac if it was not rescinded, since this would affect his status. But he saw no need to volunteer the facts that he was unable to pay his debts, that a bankruptcy petition had been presented against him, or that a bankruptcy order had been made and subsequently rescinded. He would not by his silence be presenting himself as a person who "was not bankrupt and had not been made bankrupt" or as a person "of unchallenged credit and reliability". His silence would not constitute a representation at all, much less a misrepresentation. It would, of course, be a different matter if he were asked about his creditworthiness; but there is no reason to suppose that Mr. Fitch is likely to be asked about this or that he would misrepresent the position if he were.

Accordingly, the Judge exercised his discretion on an erroneous basis, and we must exercise it ourselves. The Official Receiver urged us to do so by refusing the applications, on the ground that the jurisdiction to rescind a bankruptcy order is an exceptional one and that the authorities under the former Bankruptcy Acts show that it is one which should be exercised only where the circumstances are closely analogous to a scheme of arrangement.

Apparent support for this proposition may be found in cases under the former Bankruptcy Acts. In Re Izod [1897] 1 QB 241 CA the debtor presented his own petition and a receiving order was made upon it. An arrangement was subsequently entered into under which the debtor's father paid the creditors 10s. in the pound and the creditors released their debts. The creditors withdrew their proofs of debt, and the debtor applied for the receiving order to be rescinded. The Official Receiver did not make any objection to the conduct of the debtor or ask for a public examination, and the registrar rescinded the receiving order. The Official Receiver appealed to this Court and contended that the registrar had no jurisdiction to rescind a receiving order merely on the ground that a private arrangement had been made with the creditors; alternatively, if there was jurisdiction, it was wrongly exercised. None of the members of the Court doubted the existence of the jurisdiction or that Section 104 of the Bankruptcy Act 1883 gave the bankruptcy court an absolute discretion to rescind or vary any of its orders. By a majority the Court held that a receiving order may properly be rescinded where the debtor has afterwards come to a private arrangement with his creditors, but emphasised that the court will act only with great caution and under special circumstances which make it clear that the arrangement is for the benefit of the creditors and where the debtor has not been guilty of any misconduct in connection with his insolvency.

Re Izod was distinguished in Re A Debtor No. 12 of 1970, [1971] 1 WLR 1212 CA. In that case a bankruptcy petition was presented against the debtor and a receiving order was made upon it. He afterwards assured his creditors that he would pay them in full. The petitioning creditor was content with his assurance, but the other creditors were not. Despite their opposition the debtor applied to the registrar for the receiving order to be rescinded and the registrar rescinded it. On appeal the debtor argued that although there was no scheme of arrangement or composition (and could not be having to the weight of opposition), and no ground upon which an adjudication could be annulled, nevertheless there were exceptional circumstances which justified the rescission of the receiving order. Not surprisingly this Court held that there were no such exceptional circumstances. It was merely a case of a debtor who had gained the belated sympathy of the petitioning creditor though not of all those who had submitted proofs, but who could make no concrete offer to his creditors.

In the course of giving the judgment of the Court, Russell LJ distinguished Re Izod on the ground that in that case there was a de facto scheme of arrangement approved by all the creditors and arrived at in the course of proceedings subject to the scrutiny of the Official Receiver who did not oppose the application or insist upon a public examination. He concluded:

"In our judgment the exceptional circumstances that justify the exercise of the power under Section 108(1) to rescind a receiving order and set aside the bankruptcy must be such as are closely analogous to the expressly recognised circumstances which enable a bankruptcy to be halted or annulled."

We do not read that passage as laying down a rule of law to the effect that a receiving order could be rescinded only where the circumstances were closely analogous to a scheme of arrangement. It is to be observed that, in an earlier passage of the same judgment, Russell LJ deprecated the use of the expression "the rule in Re Izod", and we do not believe that he was intending to substitute another rule to similar effect. The statutory discretion is in terms unlimited. The effect of a rule of law to the effect alleged would be to distort the nature of the enquiry upon which the Court ought to embark. That enquiry is whether the circumstances justify the rescission of the bankruptcy order, not whether they are sufficiently close to an informal scheme of arrangement. If, contrary to our view, Russell LJ was intending to lay down a rule of law fettering the discretion conferred by the Section, we would not import it into the discretion conferred by Section 375(1) of the 1986 Act. Although that Section is effectively in identical terms, it forms part of a new insolvency regime with a very different philosophy from that which informed the former Bankruptcy Acts.

While, therefore, the discretion is still to be exercised with caution and only in exceptional circumstances, we do not accept that those circumstances are limited in the manner alleged. It remains to consider whether the circumstances of the present case are exceptional and if so whether they justify the rescission of the bankruptcy order. In our opinion they are and do.

The relevant circumstances are these:

(1). The petitioning creditor has changed its mind and no longer wishes the bankruptcies to continue.

(2). A substantial body of the creditors supports the proposal to rescind the bankruptcy orders and none opposes.

(3). The creditors' attitude is dictated by the fact that they no longer believe that the continuance of the bankruptcies is in their commercial interests, of which they are the best judges.

(4). Their belief is supported by evidence which indicates that, if the bankruptcy orders are not rescinded, not only will Mr. and Mrs. Fitch be unable to earn further fees from which to pay their debts, but even fees already earned will be likely to prove to be uncollectable.

(5). There is no suggestion that either Mr. or Mrs. Fitch has been guilty of any misconduct or that there is any public interest to be served by the continuation of the bankruptcy orders.

(6). Apart from the fees due from Maldon there are no uncharged assets of any significance, so that, save in respect of the fees which are presently uncollectable, the rescission of the bankruptcy orders is not likely to result in an immediate scramble for assets by the creditors.

In our judgment, everything points in favour of the rescission of the bankruptcy orders. There is nothing analogous to an informal scheme of arrangement, because the creditors have been offered nothing and have offered no moratorium in return. The danger of a scramble for assets which would often arise in such a situation is largely though not entirely absent. The creditors are, in our view, entitled to be protected from the danger that the fees now or to become payable by Maldon will be diverted or made the subject of garnishee or other process of execution. The proper way of achieving this is for Mr. and Mrs. Fitch to assign the benefit of their contracts with Maldon for the benefit of their creditors. This can be achieved without the making of bankruptcy orders. It would, however, be appropriate to leave the petitions on foot so that they may be restored, either by the petitioning creditor or by any other creditor, with a view to putting the necessary arrangements in place for the protection of the creditors in the absence of bankruptcy orders.

The arguments which have persuaded the creditors to support, or at least not to oppose, the rescission of the bankruptcy orders, largely affect Mr. Fitch and not Mrs. Fitch. Mrs. Fitch is, however, a partner in Paratus, and if her bankruptcy is not rescinded there is the same risk that the Official Receiver would find it necessary to make enquiries of Sofitrac. But even if her bankruptcy would not jeopardise the recovery of fees, it would be anomalous and unfair to leave her bankruptcy on foot if her husband's was rescinded. None of the creditors has treated her bankruptcy as of any significance on its own and independently of the bankruptcy of her husband. They should stand or fall together.

Accordingly we allowed the appeals and rescinded both bankruptcy orders. We did not dismiss the bankruptcy petitions, and would expect them to be restored for further hearing in the reasonably near future, so that arrangements may be put in place for securing the interests of the creditors in the fees payable by Maldon, failing which consideration may have to be given to the making of fresh bankruptcy orders.

Order: Appeal allowed and order of Chadwick J set aside. Two bankruptcy orders rescinded. Order that the petitions be sent back to Swindon County Court, creditors to be given notice of such order and of the restored date of the hearing of the petitions. Costs of Official Receiver in the administration should be paid by appellants with liberty to apply to the Official Receiver if not paid. The costs before the judge and of the appeal be paid by the Appellants. Legal Aid taxation of appellants' costs as far as appellants' costs are concerned. Costs in favour of Official Receiver not to be enforced without leave of the court.