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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Smith v Ian Simpson Co & Anor [2000] EWCA Civ 124 (12 April 2000)
URL: http://www.bailii.org/ew/cases/EWCA/Civ/2000/124.html
Cite as: [2000] 3 All ER 434, [2001] Ch 239, [2000] EWCA Civ 124, [2000] BPIR 667, [2000] 3 WLR 495
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Case No: CHBNKF 99/1125
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION MANCHESTER DISTRICT
REGISTRY ON APPEAL FROM THE MACCLESFIELD
COUNTY COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Wednesday 12 April 2000
LORD JUSTICE EVANS
LORD JUSTICE LAWS
and
MR JUSTICE JONATHAN PARKER
- - - - - - - - - - - - - - - - - - - - -
LYNDA ELIZABETH SMITH |
Appellant | |
- and - |
||
(1)
IAN SIMPSON & CO |
Respondents |
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 180 Fleet Street
London EC4A 2HD
Tel No: 0171 421 4040, Fax No: 0171 831 8838
Official Shorthand Writers to the Court)
- - - - - - - - - - - - - - - - - - - - -
MR STEPHEN WHITAKER (instructed by Brindley Twist Taffts & James for the APPELLANT)
MS ANGHARAD START (instructed by Ian Simpson & Co for the RESPONDENTS)
Judgment
As Approved by the Court
Crown Copyright ©
MR JUSTICE JONATHAN PARKER:
This is an appeal by Mrs Lynda Smith against an order made by His Honour
Judge Maddocks sitting as a High Court Judge on 5 October 1999, on appeal from
the Macclesfield County Court. By his Order Judge Maddocks dismissed the
appellant's appeal against a bankruptcy order made against her by Deputy
District Judge Steel on 23 June 1999. Permission to appeal was granted by
Judge Maddocks. The bankruptcy order was made on the petition of a firm of
solicitors, Ian Simpson & Co, based upon a debt of £5956.43 in respect
of legal costs. The petitioner is the respondent to the appeal.
The appeal raises a question as to the meaning and effect of section 271(1)
of the Insolvency Act 1986 ("the Act"), in circumstances where the debtor has,
since the presentation of the petition, tendered the full amount of the
petition debt from his own property and where there are supporting creditors
who, although not eligible to be substituted as petitioner under r.6.30 of the
Insolvency Rules ("the Rules"), would be eligible to apply for a change of
carriage order under r.6.31. The question is whether, if the sum tendered
were accepted by the petitioner, section 271(1) would preclude the court from
thereafter making a bankruptcy order on the petition.
If (as contended on behalf of the appellant) the answer to that question is
Yes, three consequences would follow. First, were the petitioner to refuse to
accept the sum tendered its refusal to do so would be unreasonable, since ex
hypothesi, acceptance would have meant that no bankruptcy order could be
made on the petition and accordingly that the payment could not subsequently be
avoided under section 284(1) of the Act, notwithstanding that it constituted a
disposition of the debtor's own property, and notwithstanding the presence of
supporting creditors. Second, the petition would fall to be dismissed under
section 271(3) of the Act on the ground of unreasonable refusal to accept
payment, unless there were special circumstances present justifying the court
in declining to exercise its discretion under that subsection by dismissing the
petition. Third, in the absence of such special circumstances, no change of
carriage order could be made under r.6.31, despite the presence of supporting
creditors desirous of seeking such an order; in other words, r.6.31 would be
rendered nugatory in such circumstances, notwithstanding that it purports to
empower the court to make a change of carriage order where the petition debt
has been paid out of the debtor's own property. Thus, it is inherent in the
appellant's contentions that r.6.31 is inconsistent with the Act and is to that
extent ultra vires and of no effect.
If, on the other hand (as contended on behalf of the respondent), the answer
to that question is No (that is to say, acceptance of the sum tendered would
not preclude the court from thereafter making a bankruptcy order on the
petition, pursuant to a change of carriage order) then the consequences would
be that the refusal of the petitioner to accept the sum tendered would not be
unreasonable (since, ex hypothesi, if a bankruptcy order were
subsequently to be made on the petition the payment would be liable to be
avoided under section 284(1)), and that it would be open to the petitioner to
apply for a bankruptcy order on the footing that the petition debt remained
unpaid. Alternatively, if for some reason the petitioner did not wish to
proceed with the petition, it would be open to the court to make a change of
carriage order under r.6.31. If such an order were made, the petition would
then proceed on the basis of the original (and unpaid) debt.
Underlying the question at issue is the shorter and more fundamental question
whether a petition debt has been "paid", within the meaning and for the
purposes of section 271(1), where it has been paid out of the debtor's own
resources. If Yes, the appeal succeeds; if No, it fails.
THE PROCEDURAL HISTORY
The petition was presented on 18 March 1999 with a return date of 20 April
1999. On the return date it was adjourned until 23 June 1999.
On 18 June 1999 the appellant gave notice of intention to oppose the making
of a bankruptcy order on the ground that she wished to seek a taxation of the
costs, the subject-matter of the petition. Notices of intention to support the
petition pursuant to r.6.23 were received from five creditors, of whom two were
represented before the Deputy District Judge. The two supporting creditors who
were represented were firstly Premier Sports Media Ltd (a judgment creditor in
the sum of £7324.87, judgment having been obtained on 21 June 1999) and a
Mr McGarvey who claimed to be a loan creditor in the sum of £69,124.32
(demand having been made on 10 May 1999). One further supporting creditor, a Mr
Masterson, claiming to be a creditor for £21,384.19 in respect of
consultancy services, attended the hearing in person.
Immediately prior to the hearing, the appellant's then solicitor, Miss
Edwards of Messrs Taylors, tendered to the respondent's solicitor a banker's
draft in the full amount of the petition debt, conditionally upon the petition
being dismissed. An attendance note made by the respondent's solicitor, the
contents of which are not in dispute, records what transpired. The material
part of the attendance note reads as follows;
"Spoke with [Miss Edwards] re third party funds. She was still unable to tell
me the source of the funds and whether it was a loan or a gift. She told me
that she had a bankers draft for the full amount of the debt but required an
undertaking or guarantee that the petition would be dismissed, which I was
unable to give. She had been expressly instructed by the third party that the
money was not to be handed over until the petition had been dismissed. I could
not agree to request a withdrawal or dismissal on those terms and she therefore
said that she was intending to oppose the petition on the grounds that the debt
was not due."
As appears from the attendance note, the respondent's solicitor was concerned
that the payment (if accepted) might be avoided in the event of a bankruptcy
order being made on the petition.
Although the Deputy District Judge appears to have been aware that a banker's
draft had been tendered and refused, he did not specifically address this
aspect of the matter in his judgment. He confined himself to addressing the
grounds of opposition advanced by the appellant in her notice of opposition
(namely that the debt was not due since the costs had not been taxed). In
the result, he rejected those grounds and proceeded to make a bankruptcy
order.
The appellant appealed, contending (in summary) that the petition should have
been dismissed on the ground that the respondent's refusal to accept a tender
of the full amount of the petition debt was unreasonable.
Judge Maddocks rejected that contention and dismissed the appellant's appeal.
The appellant now appeals to this court, pursuant to the permission granted
by Judge Maddocks.
THE RELEVANT PROVISIONS OF THE ACT AND THE RULES
I start with the relevant provisions of the Act.
Part IX of the Act (in the Second Group of Parts) deals with bankruptcy.
Chapter I of Part IX (containing sections 264 to 282 inclusive) is headed
"Bankruptcy Petitions; Bankruptcy Orders". Chapter II of Part IX (containing
sections 283 to 291 inclusive) is headed "Protection of Bankrupt's Estate and
Investigation of his Affairs".
Section 264 provides that a bankruptcy petition may be presented by a
creditor. Section 266(2) provides that a bankruptcy petition shall not be
withdrawn without the leave of the court. Section 267 provides that, subject
to immaterial exceptions, a creditor's petition may be presented only if, at
the time it is presented, four requirements are met. The requirements are:
that the debt on which the petition is based exceeds the bankruptcy limit
(subs.(2)(a)); that the debt is for a liquidated sum (subs.(2)(b)); that the
debt is one which the debtor appears either to be unable to pay or to have no
reasonable prospect of being able to pay (subs.(2)(c)); and that there is no
outstanding application to set aside a statutory demand served in respect of
the debt (subs.(2)(d)).
Section 268(1) provides that for the purposes of section 267(2)(c) a debtor
appears to be unable to pay a debt only if either he has failed to comply with
a statutory demand served in respect of it within three weeks of service or (if
the debt is a judgment debt) execution on the judgment has been returned
unsatisfied.
I turn next to section 271, the provisions of which are central to this
appeal. Section 271(1) provides as follows:
"(1) The court shall not make a bankruptcy order on a creditor's petition
unless it is satisfied that the debt, or one of the debts, in respect of which
the petition was presented is either-
(a) a debt which, having been payable at the date of the petition or having
since become payable, has been neither paid nor secured or compounded for, or
(b) a debt which the debtor has no reasonable prospect of being able to pay
when it falls due."
Thus, where the court is satisfied that the petition debt has been paid,
secured or compounded for, the court is precluded from making a bankruptcy
order on the petition. As noted earlier, the question which arises on this
appeal is whether, on its true construction, section 271(1) applies where a
payment has been made by the debtor to the petitioning creditor out of the
debtor's own property.
Section 271 (3) provides (so far as material) as follows:
"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.....".
It is an oddity, for which there appears to be no ready explanation, that
section 271(3) makes no reference to an offer by the debtor to pay the petition
debt: it refers merely to offers by the debtor to "secure or compound for" the
petition debt.
I turn next to section 284 (which is to be found in Chapter II of Part IX of
the Act). Section 284(1) provides as follows:
"Where a person is adjudged bankrupt, any disposition of property made by
that person in the period to which this section applies is void except to the
extent that it is or was made with the consent of the court, or is or was
subsequently ratified by the court."
Subsection (3) provides that the relevant period for this purpose is the period
between the presentation of the petition and the vesting of the bankrupt's
estate in the trustee, following the making of the bankruptcy order.
Finally, so far as the Act is concerned, section 412 gives the Lord
Chancellor power, with the concurrence of the Secretary of State, to make rules
"for the purposes of giving effect to Parts VIII to XI of [the] Act". The
Rules are made pursuant to that section.
I now turn to the relevant Rules.
I turn first to r.6.30, which provides for substitution. It is in the
following terms:
" (1) This rule applies where a creditor petitions and is subsequently found
not entitled to do so, or where the petitioner -
(a) consents to withdraw his petition to allow it to be dismissed, or consents
to an adjournment, or fails to appear in support of his petition when it is
called on in court on the day originally fixed for the hearing, or on a day
when it is adjourned, or
(b) appears, but does not apply for an order in the terms of the prayer of his
petition.
(2) The court may, on such terms as it thinks just, order that there be
substituted as petitioner any creditor who-
(a) has under Rule 6.23 given notice of his intention to appear at the hearing,
(b) is desirous of prosecuting the petition, and
(c) was, at the date on which the petition was presented, in such a position
in relation to the debtor as would have enabled him (the creditor) on that date
to present a bankruptcy petition in respect of a debt or debts owed by him to
the debtor, paragraphs (a) to (d) of section 267(2) being satisfied in respect
of that debt or those debts."
Where an order for substitution is made, the petition is amended by
substituting the name of the new petitioner for that of the original petitioner
and by substituting the new petitioner's debt for that of the original
petitioner. If a bankruptcy order is in due course made on the amended
petition, section 284(1) will operate to avoid all dispositions of the debtor's
property since presentation of the petition (i.e. presentation by the original
petitioner) other than those which have been validated by the court.
As noted earlier, it is common ground in the instant case that none of the
supporting creditors was eligible to be substituted as petitioning creditor.
I turn next to r.6.31, which enables the court in certain circumstances to
give a supporting creditor the carriage of the petition. R.6.31 provides as
follows:
"(1) On the hearing of the petition, any person who claims to be a creditor
of the debtor, and who has given notice under Rule 6.23 of his intention to
appear at the hearing, may apply to the court for an order giving him carriage
of the petition in place of the petitioning creditor, but without requiring any
amendment of the petition.
(2) The court may, on such terms as it thinks just, make a change of carriage
order if satisfied that -
(a) the applicant is an unpaid and unsecured creditor of the debtor, and
(b) the petitioning creditor either -
(i) intends by any means to secure the postponement, adjournment or
withdrawal of the petition, or,
(ii) does not intend to prosecute the petition, either diligently or at all.
(3) The court shall not make the order if satisfied that the petitioning
creditor's debt has been paid, secured or compounded for by means of -
(a) a disposition of property made by some person other than the debtor, or
(b) a disposition of the debtor's own property made with the approval of, or
ratified by, the court.
(4) A change of carriage order may be made whether or not the petitioning
creditor appears at the hearing.
(5) If the order is made, the person given the carriage of the petition is
entitled to rely on all evidence previously adduced in the proceedings."
In contrast to an order for substitution under r.6.30, an order under r.6.31
giving a supporting creditor the carriage of the petition does not involve any
amendment to the petition. The petition proceeds in the name of the existing
petitioner, based upon the existing petitioner's debt. It is particularly to
be noted that paragraph (3) of r.6.31 provides that the court shall not make an
order for carriage of the petition by a supporting creditor if it is satisfied
that the petition debt has been paid, secured or compounded for otherwise than
by means of a disposition of the debtor's own property (unless such disposition
has been validated by the court under section 284(1)). In this respect, r.6.31
differs from section 271(1), which draws no express distinction between a
payment, securing, or compounding for, which involves a disposition of the
debtor's own property and one which does not.
R.6.32 is directed to a situation where a petitioning creditor applies for
the petition to be dismissed, or for leave to withdraw the petition pursuant to
section 266(2). R.6.32 provides as follows:
"(1) Where the petitioner applies to the court for the petition to be
dismissed, or for leave to withdraw it, he must, unless the court otherwise
orders, file in court an affidavit specifying the grounds of the application
and the circumstances in which it is made.
(2) If, since the petition was filed, any payment has been made to the
petitioner by way of settlement (in whole or in part) of the debt or debts in
respect of which the petition was brought, or any arrangement has been entered
into for the securing or compounding it or them, the affidavit must state-
(a) what dispositions of property have been made for the purposes of the
settlement or arrangement, and
(b) whether, in the case of any disposition, it was the property of the
debtor himself, or of any other person, and
(c) whether, if it was the property of the debtor, the disposition was made
with the approval of, or has been ratified by, the court (if so, specifying the
relevant court order).
(3) No order giving leave to withdraw a petition shall be given before the
petition is heard."
The fact that the affidavit in support of an application to dismiss, or for
leave to withdraw, a petition must state whether any payment which may have
been made to the petitioning creditor involved a disposition of the debtor's
own property, and, if so, whether the disposition was sanctioned by the
court, is a clear indication that those who drafted the rule regarded that
information as relevant to the questions whether the petition should be
dismissed or whether leave should be given to withdraw it. As in the case of
r.6.31, r.6.32 draws a distinction between a payment, securing or compounding
for which involves a disposition of the debtor's own property, and one which
does not: a distinction which is not drawn in terms in section 271(1).
THE ARGUMENTS BEFORE JUDGE MADDOCKS
Before Judge Maddocks, Mr Stephen Whitaker of counsel (appearing for the
appellant, as he does in this court) submitted that on its true construction
section 271(1) draws no distinction between a payment which involves a
disposition of the debtor's own property and one which does not, and that no
bankruptcy order can be made on a petition where the petition debt has been
paid out of the debtor's own property. He submitted that in so far as there
is a conflict between the Act and the Rules, the Act must prevail and the Rules
(and in particular r.6.31) are to that extent ultra vires and of no
effect. It follows, he submitted, that there were no good grounds for the
petitioning creditor's refusal to accept the tender of the banker's draft in
the instant case, since acceptance of the tender would have required the
dismissal of the petition.
In support of his submissions before Judge Maddocks, Mr Whitaker relied (as
he does in this court) on the decision of Chadwick J (as he then was) in Re
Purvis [1997] 3 All E.R.663. In that case the petitioning creditor had
agreed to apply to withdraw the petition on terms that the debtor paid off the
petition debt by instalments. At the date of the hearing, only the first
instalment had fallen due for payment, and it had been paid. The petitioner
applied for leave to withdraw the petition, but a supporting creditor applied
for a change of carriage order pursuant to r.6.31. Chadwick J dismissed the
application for leave to withdraw the petition, made a change of carriage order
and adjourned the petition until a date after the date upon which the final
instalment of the petition debt fell due. He held that, notwithstanding that
section 271(1) prohibited the making of a bankruptcy order where the petition
debt had been paid, it did not require the dismissal of the petition. He
accordingly directed an adjournment of the petition, on the ground that until
the petition debt had been paid in full there remained some purpose in
proceeding with the petition.
In the course of his judgment Chadwick J approved the explanation of the
purpose of r.6.31 given by the learned editors of Muir Hunter on Personal
Insolvency. The material part of the notes to r.6.31 reads as follows:
"The provisions of this Rule are entirely new, and seem designed to ensure
that, once a bankruptcy petition is presented, the petitioning creditor cannot
safely allow himself to fail to prosecute it diligently, or alternatively to
receive payment from the debtor's property or security thereover, or to
compound for the debt, where some other creditor has given notice of intention
to appear at the hearing under r.6.23, in case that creditor applies for change
of carriage of petition order."
Chadwick J went on to comment that the learned editors had doubts whether
that purpose could be achieved, quoting a further passage from the notes, as
follows:
"Even in the case of a petition debt which has, prior to the hearing, been
paid in full out of the debtor's own property, it would seem as ineffective for
the court to make a change of carriage order in favour of another creditor,
since payment of the petition debt would preclude the making of a bankruptcy
order under s. 271(1)". (Emphasis supplied.)
Chadwick J continued:
"In my view the editors of Muir Hunter are substantially correct, both as to
the purpose of the new rule and as to its limitations. It seems to me clear
that the purpose of the rule was to prevent a creditor from using the
presentation of bankruptcy petition as a means of exerting pressure on a
debtor to pay him at the expense of other creditors, by enabling the court to
give the carriage of the petition to one of those other creditors in
circumstances where the petitioning creditor is not prosecuting the petition
for the benefit of creditors generally. But the rule must be applied within
the framework of the Act itself. It cannot be relied on to contradict or
circumvent the provisions of the Act. The power under section 412 of the Act
is to make rules for the purpose of giving effect to relevant parts of the Act.
Section 271(1) contains a prohibition against making a bankruptcy order unless
satisfied that the debt has been neither paid nor secured or compounded for.
Section 271(5) contains a specific saving provision in relation to the
amendment of a petition which is not apt to include proceeding under a change
of carriage order. I am satisfied that, where the original petitioning
creditor's debt has been paid, secured or compounded for prior to the making of
a change of carriage order under r.6.31, the court has no power to make a
bankruptcy order." (Emphasis supplied.)
Thus it follows from Chadwick J's reasoning that if the petition debt had
been paid by the debtor in one lump sum rather than by way of instalments,
s.271(1) would have precluded the court from thereafter making a bankruptcy
order, and there would have been no scope for a change of carriage order; and
that it was only the fact that the petition debt had not as yet been paid in
full which justified making such an order and adjourning the petition. In the
instant case, by contrast, the full amount of the petition debt was
tendered.
Counsel appearing for the respondent before Judge Maddocks relied primarily
on the fact that before the Deputy District Judge the appellant had not relied
on the tender of the bankers' draft as a ground for dismissing the petition,
submitting that since the hearing before Judge Maddocks was a true appeal it
was not open to Judge Maddocks to adjudicate on a point not raised below.
Although Judge Maddocks does not make specific reference to this submission in
his judgment, it is plain that he rejected it since he proceeded to hear
argument on the substantive point and to address the point in his judgment.
On the substantive point, it was submitted on behalf of the respondent that
it was open to the court to make a change of carriage order, and that, given
the possibility that the payment, if accepted, might subsequently be avoided by
the operation of section 284(1), the petitioner's refusal to accept it was
reasonable.
THE JUDGMENT OF JUDGE MADDOCKS
Judge Maddocks rejected Mr Whitaker's submissions, holding that s.271(1) did
not preclude the making of a bankruptcy order in circumstances where the
petition debt had been paid out of the debtor's own property. He accordingly
differed from the reasoning of Chadwick J in Re Purvis (above).
In the course of his judgment Judge Maddocks said this (at page 6E of the
transcript):
"Turning to the rules, there is no doubt that a different result is achieved.
The scheme here is that the petitioning creditor is precluded from accepting
payment if it is made from the debtor's own property without the approval of
the court. One can see good reason for that, but superficially at least, it is
in conflict with section 271 and should therefore, as Mr Whitaker submits, be
rejected as being outside the power conferred by section 412.
That is not, however, a conclusion to be reached lightly. The rules are
made by the Lord Chancellor, after consultation with the Rules Committee, the
composition of which is set out in Section 413. The court cannot readily
attribute it to them a misunderstanding of the Act to which the rules were to
give effect.
Looking at the whole of Part IX, it is, I think, material to note the overall
scheme. Sections 267 and 268 establish the conditions for the presentation of
a creditor's petition, in particular, by service of a statutory notice
affording the creditor a period of 21 days within which to pay. Once a
petition has been duly presented, the position is changed, first by section
266(2) under which the petition cannot be withdrawn with the leave of the
court; secondly, by the freezing effect of section 284, under which, in the
event of a bankruptcy order, any disposition of the debtor's property between
the date of presentation of the petition and the order is void. Further
restrictions may be imposed by the court during this period under section 285.
It must also be noted that the remedy sought by the petition, once it is
issued, is a class remedy for the benefit of all creditors.
The scheme of the Act in imposing these restrictions over the interim period
does not indicate that the court was to exercise control in the interests of
the class, that is, all creditors who would be entitled to prove in the
bankruptcy, whether or not they had placed themselves in a position
immediately to present their own petitions.
It seems to me, therefore, that rules which serve the purpose of controlling
any disposition by the debtor during this period, serve the purpose of giving
effect to this Part of the Act.
R.6.31 and 6.32 are clearly designed for this purpose. They require that the
creditor cannot accept a payment out of the debtor's own property without the
sanction of the court.
Section 271 still takes effect, but the condition for its operation can only
be achieved if payment is made by a third party (without affecting the debtor's
own property) or with the approval of the court, which would be in a position
to consider the effect upon other creditors and the creditors as a class."
Judge Maddocks went on to distinguish re Purvis on the facts, whilst
acknowledging that he had reached a result which differed from that which
Chadwick J would have reached on the same facts. His judgment concluded:
"I am faced directly with the question whether the court should have dismissed
the petition by reason of the tender of immediate payment of the debt in full.
In the face of opposition from other creditors, the court was in my judgment
entitled to refuse to allow the withdrawal or dismissal of the petition, and to
make a bankruptcy order, unless it was satisfied that the other creditors were
not prejudiced. Upon that footing, the order was properly made."
THE ARGUMENTS ON THIS APPEAL
In this court Mr Whitaker has substantially repeated the arguments which he
addressed to Judge Maddocks. He submits that the respondent's refusal to
accept a tender of the full amount of the petition debt ought to have led the
Deputy District Judge to dismiss the petition under section 271, on the footing
that either section 271(1)(a) or section 271(3) was satisfied. In support of
his submission in relation to section 271(1)(a), he relies on Re Purvis
(above). As to section 271(3), he submits that although the subsection makes
no express reference to payment of the petition debt (it refers only to
securing or compounding for), nevertheless on the true construction of section
271 as a whole tender of the full amount of the petition debt is to be treated
as payment in full for the purposes of section 271(1). Alternatively, he
submits that a tender of the full amount of the petition debt is an offer to
"secure" the debt for the purposes of section 271(3). In any event, he
submits, if acceptance of the sum tendered would have allowed the petitioning
creditor to be paid in full without recourse from any other creditor - on the
footing that section 271(1) would preclude the court from thereafter making a
bankruptcy order on the petition - to refuse the offer must have been
unreasonable.
Miss Angharad Start of counsel, who appears for the respondent on this
appeal, bases her argument on the proposition (accepted by Judge Maddocks) that
bankruptcy is a class remedy, in that the scheme which underlies the bankruptcy
regime is that on the making of a bankruptcy order the property of the debtor
as at the date of presentation of the bankruptcy petition is to be ring-fenced
so as to be potentially available for creditors, subject only to such
dispositions of the debtor's property since that date as have been sanctioned
by the court under section 284(1). She submits that a payment made in
circumstances where it will be avoided if a bankruptcy order is subsequently
made on the petition is not a payment at all; alternatively it is a payment
which is, in effect, conditional on the dismissal of the petition. She submits
that the appellant's construction of section 271(1) runs entirely counter to
the underlying scheme and policy of the Act, which is aimed at preserving the
debtor's property for the benefit of all his creditors. She submits further
that if the appellant's construction is right, supporting creditors who are not
eligible to be substituted as petitioning creditor would be better advised to
present their own petitions, in order to avoid the risk of prejudice by reason
of the debtor paying the petition debt out of his own property and thereby
bringing the bankruptcy proceedings to an end.
In support of her submissions, Miss Start prays in aid authorities decided
under the law relating to bankruptcy which existed prior to the coming into
force of the Act, that is to say the Bankruptcy Act 1914 ("the 1914 Act").
Under the 1914 Act there was no direct equivalent of section 284(1). Rather,
the bankruptcy was deemed to relate back to the first available act of
bankruptcy, and the title of the trustee to the debtor's property similarly
took effect retrospectively as from that date (see section 37 of the 1914 Act).
In consequence, all subsequent transactions with the debtor were invalidated
save transactions entered into before the date of the receiving order and
without notice of the commission of an act of bankruptcy or transactions
otherwise protected by the 1914 Act. Miss Start cited a number of
authorities, and in particular the decision of this court in Brook v.
Emerson (1907) 95 LT 821 - a case decided under the Bankruptcy Act 1883 -
in which it was held that the petitioner was not required to accept payment of
the petition debt from the debtor. Farwell LJ observed that for the court to
compel the petitioner to accept the payment would be "contrary to the spirit of
the Bankruptcy Act 1883".
Miss Start seeks also to raise two further arguments, in respect of which a
respondent's notice has been served. She contends firstly that in the
circumstances there was no tender of immediate payment in full, since the offer
of the bankers' draft was conditional upon the respondent undertaking to
procure the dismissal of the petition - an undertaking which, as the attendance
note to which I referred earlier records, the respondent's solicitor was unable
to give. Secondly, she seeks to contend that the provision of a bankers' draft
did not in the circumstances amount to a tender which could reasonably have
been accepted. She seeks to adduce further evidence to support these two
additional points.
So far as further evidence is concerned, in my judgment there is no good
reason why the evidence now sought to be adduced could not have been available
before Judge Maddocks, and under Ladd v. Marshall principles I would not
allow this evidence to be adduced on this appeal. In any event, I find
difficulty in seeing what relevance it might have to the issues which arise on
the appeal.
Nor do I find it necessary to address the additional points sought to be
raised by Miss Start in the respondent's notice. I am content to proceed on
the basis (a) that the tender of the bankers' draft was equivalent to a tender
of cash, and (b) that in the circumstances, as accepted by Mr Whitaker, the
cash is to be treated as belonging to the appellant.
CONCLUSIONS
For the sake of simplicity, references hereafter to payment by the debtor
mean payment by the debtor out of his own property, and include a securing of,
or compounding for, the petition debt which involves a disposition of the
debtor's own property. Similarly, references hereafter to payment by a third
party mean payment otherwise than out of the debtor's own property, and include
a securing of, or compounding for, the petition debt which does not involve a
disposition of the debtor's own property.
At the outset, it is clear that since the Rules were made pursuant to section
412 of the Act (that is to say, "for the purpose of giving effect to Parts VIII
to XI of [the] Act"), the provisions of the Act must prevail over those of the
Rules. Accordingly, to the extent that the Rules are inconsistent with the
Act they are ultra vires and of no effect.
On the appellant's construction, section 271(1) is inconsistent with the
Rules in that whereas section 271(1) makes no express distinction between
payment by the debtor and payment by a third party, rr.6.31 and 6.32 do make
such a distinction. In particular, r.6.31(3) provides expressly that the
court shall not make a change of carriage order if it is satisfied that the
petition debt has been paid by a third party. It is clearly implicit in this
provision that the court may make a change of carriage order where there
has been payment by the debtor. If the appellant's
construction of section 271(1) is right, therefore, r.6.31(3) is to that extent
ultra vires and of no effect.
So is section 271(1) to be construed in the manner contended for by the
appellant? In addressing this question, three initial points may be made.
In the first place, section 271(1) plainly has to be read and construed in the
context of the Act as a whole (and, in particular, Part IX of the Act). In
the second place, a strictly literal construction of section 271(1) would seem
to render not only r.6.31 but also r.6.30 (substitution) nugatory in
circumstances where there has been a payment by the debtor prior to the
hearing, since the effect of the payment would be to preclude the court from
thereafter making a bankruptcy order on the petition, thus leaving no scope for
an order for substitution. The fact that such a far-reaching and damaging
consequence for supporting creditors has not been contended for by the
appellant is immaterial. In the third place, as Judge Maddocks rightly
observed, bankruptcy is a class remedy for the benefit of all the debtors'
creditors. The class nature of the remedy, and the underlying scheme and
policy of Part IX of the Act that on the making of a bankruptcy order the
property of the debtor as at the date of presentation of the petition is to be
available for his creditors, is nowhere more clearly apparent that in section
284(1) of the Act.
In my judgment, to construe section 271(1) in the manner contended for by the
appellant would result in section 271(1) being inconsistent not only with
rr.6.31 and 6.32 but also with section 284(1). Further, such a construction
would run counter to the scheme and policy of the Act to which I have
referred.
Section 284(1) renders "any" disposition of the debtor's property made
after the date of presentation of the petition voidable, in the sense that it
will be avoided on the making of a bankruptcy order unless validated by the
court. It is in my judgment inconsistent with that provision, as with the
scheme and policy of the Act, that the debtor should be in a position to bring
the petition to an end by paying the petition debt, in the face of supporting
creditors desirous of seeking a bankruptcy order. To use Farwell LJ's
expression in Brook v. Emerson (above), that would in my judgment be
contrary to the spirit of the Act.
Nor, in my judgment, does the express wording of section 271(1) compel the
construction contended for by the appellant. The subsection provides that
the court shall not make a bankruptcy order unless it is satisfied that the
debt "has been neither paid nor secured or compounded for". In my
judgment what the subsection is referring to, when read in context, is a
payment which is unconditional in the sense that it is not liable to be avoided
in the event that a bankruptcy order is made: that is to say, a payment which
is not vulnerable to the operation of section 284(1). If section 271(1) is
construed in that way, it is consistent with section 284(1), with the Rules,
and with the scheme and policy of the Act.
By contrast, if the appellant's construction is correct section 271(1) would
have the (to my mind) surprising effect that the jurisdiction of the court to
make a bankruptcy order is removed by a disposition which would be liable to be
avoided under section 284(1) had a bankruptcy order been made on the
petition.
It also seems to me to be of significance in this connection that the
inclusion of the reference to unreasonable refusal of an offer in section
271(3)(c) plainly recognises that there may be circumstances in which the
petitioner will not be acting unreasonably in refusing an offer,
notwithstanding that the offer, if accepted, "would have required the dismissal
of the petition" (see s.271(3)(b)). In such circumstances, the court has no
discretion to dismiss the petition unless it is satisfied that the debtor is
able to pay all his debts (see the opening words of s.271(3)). Thus, it
appears to be implicit in section 271(3) that there may be circumstances in
which the petition may remain on foot, notwithstanding that, for example, the
debtor has offered to pay the petition debt in full. That, however, is
inconsistent with the appellant's construction of section 271(1), for (as Mr
Whitaker asserts) on the appellant's construction of section 271(1) there can
be no good reason for the petitioner refusing to accept payment of the full
amount of the petition debt by the debtor, since acceptance would mean that the
court was precluded by section 271(1) from thereafter making a bankruptcy order
on the petition and accordingly that the payment would not be vulnerable to the
application of section 284(1). So the appellant's construction of section
271(1) seems to me to give rise to inconsistencies not only between section
271(1) and section 284(1) but also between section 271(1) and section 271(3).
In my judgment, this is a further reason for preferring the construction of
section 271(1) for which the respondent contends.
For the reasons I have attempted to express, therefore, I agree with Judge
Maddocks and I respectfully differ from the reasoning of Chadwick J in Re
Purvis. I would accordingly dismiss this appeal.
LORD JUSTICE LAWS:
I agree that this appeal must be dismissed. However my lords Evans LJ and
Jonathan Parker J, whose judgments I have had the advantage of reading in
draft, differ in their reasoning en route to this conclusion upon the
specific issue, how s.271(1)(a) of the Insolvency Act 1986 should be construed.
I need say no more than that, with great respect, I find the reasoning of
Jonathan Parker J. compelling, and I entirely agree with it.
LORD JUSTICE EVANS:
I also agree that the appeal should be dismissed.
The view of the facts most favourable to the appellant is that his solicitor
tendered payment of the debt due to the petitioning creditors by means of a
banker's draft in their favour, but the tender was refused.
The fact that the tender was made only at the door of the Court does not
deprive it of its character as such, though that circumstance may be relevant
to the question whether it was reasonable or unreasonable for the creditors to
refuse it.
The appellant's first argument is that section 271(1) required the Court to
dismiss the Petition because the debt was "paid, secured or compounded"
notwithstanding that the tender was refused. The submission is supported by
the suggestion made in Muir Hunter on Personal Insolvency in a note on s.271(3)
-
"It is not clear, under clause (b), what would be the kind of offer, the
acceptance of which would have required the dismissal of the petition, and no
guidance is given on this issue. The offer must be something other than the
tender of payment in full with costs, for that situation is covered by section
271(1)(a) ...." (3-095, 23 February 1998 page 3051)
In agreement with Jonathan Parker J., however, I cannot see how a tender which
is refused can be regarded as equivalent to payment. "Paid" implies acceptance
of the tender, just as securing or compounding the debt requires the creditor's
agreement of terms offered by the debtor.
A further feature of the present case is that the offer of payment is alleged
to have been conditional upon the Petition being dismissed by the Court. Even
if tender was equivalent to payment, this payment could not be unconditional
until after the Court made its order.
For these reasons, section 271(1) did not operate directly so as to require
the Court to dismiss the Petition. Alternatively, Mr Whitaker submits that the
creditor's refusal of the draft was unreasonable, so that the Court should have
dismissed the petition under section 271(3).
It is questionable in the first place whether section 271(3) applied in the
present case. It refers only to offers to secure or compound the debt, and I
doubt whether an offer to pay the debt, that is to say, an offer of cash or a
draft which could be regarded as equivalent to cash, is within the scope of the
sub-section.
Secondly, the creditor's refusal of the tender may be regarded as reasonable
in the present case where there was proper room for doubt whether the Court
would be required to dismiss the Petition under section 271 sub-sections (1) or
(3).
Ultimately, however, the appeal raises the issue whether section 271(1) does
apply, so that the Petition must be dismissed, when payment is made out of the
debtor's own funds, using that phrase as shorthand for the type of payment
which is the subject of section 284(1) - "any disposition of property made by
[the debtor]".
I am not at all clear why payment by means of a banker's draft, which
constitutes the bank's personal undertaking to pay the debt from its own
resources, counts as a disposition of property made by the debtor out of his
own funds, although any disposition made by him to the bank would clearly be
avoided under section 284(1) if it took place during the relevant period.
However, I respect the judgment of the Divisional Court in Re Salaman (a
bankrupt) (1983) 127 S.J. 763, and Mr Whitaker accepts that the draft
should be regarded as the debtor's own funds.
Section 271(1) does not distinguish between payments which are liable to be
avoided under section 284(1), if a bankruptcy order is made, and those which
are not. The question therefore is whether "paid" in section 271(1) should be
given its full literal meaning, so that any payment which extinguishes the
debt, from whatever source, deprives the Court of power to make the order, or
whether it is limited to payments which are not liable to be avoided under
section 284(1), if an order is made.
There is no machinery in the Act for making a bankruptcy order, if the
petitioning creditor has disqualified himself from seeking the order under
section 271(1)(a), that is to say, by (accepting) payment or agreeing to secure
or compound the debt. One such procedure is introduced by Rule 6.31 of the
Insolvency Rules, which permits a carriage order of the Petition to be made in
favour of another creditor.
The Rules cannot alter the correct interpretation of the statute, but they
add the authority of their draftsmen to the proposition that section 271(1)(a)
should be construed as excluding payments out of the debtor's own funds, as
being liable to be avoided under section 284(1), and presumably excluding
arrangements to secure or compound the debt out of the debtor's own funds
also.
Nevertheless, I find this a surprising result. It places a substantial gloss
on the words "neither paid nor secured or compounded for" in section 271(1)(a)
which are not expressly qualified. It has the effect that any agreement
between the petitioning creditor and the debtor requires approval by the Court,
which retains the power to make a bankruptcy order on the Petition and in
respect of the petitioner's debt, though in the name of another creditor or
creditors who are not entitled to be regarded as petitioners in their own right
at the date when the order is made. Moreover, the carriage order is
unnecessary, because the petitioning creditor becomes unpaid by reason of
section 284(1)when the order is made, assuming only that he continues to seek
repayment. Rule 6.31, it may be argued, is intended to have effect when the
petitioning creditor seeks to withdraw the Petition, or is reluctant to pursue
it, notwithstanding that his debt remains unpaid and is not secured or
compounded for.
My reaction to this proposition is the same as that of Chadwick J. in the the
passage from his judgment in Re Purvis [1997] 3 All E.R. 663 which has
been quoted by Jonathan Parker J. The underlying philosophy that the Petition
is a form of class action, in that the assets of the debtor as at the date of
Petition are preserved for all creditors, does not provide the answer, in my
view, to the issue of construction which arises under section 271(1(a). The
question is whether the Court may make the bankruptcy order which has that
effect in relation to the date of the petitioning creditor's Petition, in
favour of other creditors who are not able themselves to obtain, under the
provisions of the Act, an order which preserved the debtor's assets for them as
at that earlier date. They have no right to achieve that result under the Act
itself.
This view appears to me to be supported also by the judgment of this Court in
In re Marr (A Bankrupt [1990] Ch. 773 where the debt was regarded as
having been paid without inquiry into the source of the funds with which
payment was made. The judgment may be distinguishable, however, because it was
not cited to us.
For these reasons, I must respectfully disagree with my Lord's acceptance of
the submission that the meaning of "paid etc." in section 271(1)(a) is somehow
limited either by the terms of section 284(1), or of the underlying philosophy
of the Act, or of the terms of the Insolvency Rules.
I agree, however, that the appeal should be dismissed.
(Order does not form part of the approved judgment)