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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Levy v Legal Services Commission [2000] EWCA Civ 285 (10 November 2000)
URL: http://www.bailii.org/ew/cases/EWCA/Civ/2000/285.html
Cite as: [2000] EWCA Civ 285
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Case No: B3 2000 0534
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION) ON APPEAL
FROM THE HIGH COURT CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 10 November 2000
LORD JUSTICE PETER GIBSON
LORD JUSTICE WALLER
and
LORD JUSTICE JONATHAN PARKER
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RAYMOND LEVY |
Appellant | |
- and - |
||
LEGAL SERVICES COMMISSION |
Respondent |
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
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Miss Marcia Shekerdemian (instructed by Messrs Rosenblatts for the Appellant)
Miss Nicola Rushton (instructed by Messrs Cawdrey Kaye Fireman and Taylor for the Respondent)
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JUDGMENT
(As Approved by the Court)
Crown Copyright
LORD JUSTICE JONATHAN PARKER:
INTRODUCTION
1. This is an appeal by the applicant in the proceedings, Mr Raymond Levy, against an order made by Evans-Lombe J on 4 February 2000 dismissing Mr Levy's appeal from an order made by District Judge Hewetson-Brown on 20 September 1999. The District Judge had in turn dismissed an application by Mr Levy to set aside a statutory demand served on him by The Legal Services Commission (under its then name The Legal Aid Board) I shall refer to The Legal Services Commission hereafter as "the LSC". The LSC is the respondent in the proceedings and the respondent to this appeal. Evans-Lombe J refused permission to appeal against his order, but permission was subsequently granted by Peter Gibson LJ.
THE BACKGROUND
2. By an order dated 19 October 1994 made in ancillary relief proceedings between Mr Levy and his former wife Mrs Jaqueline Levy, Thorpe J ordered (among other things) that Mr Levy pay Mrs Levy's costs of the proceedings. Both Mr and Mrs Levy were assisted persons for the purposes of the Legal Aid Act 1988. The costs payable by Mr Levy under the order were subsequently taxed at £51,876.48. On 4 June 1999 the LSC served a statutory demand on Mr Levy in respect of these costs, with interest. The total sum so demanded (including interest) was £62,732.53.
3. Regulation 91(1) of the Civil Legal Aid (General) Regulations 1989 provides (so far as material) as follows:
"(1) Where in any proceedings to which an assisted person is a party -
(a)...... or
(b) an order ..... is made for the payment of costs to the assisted person,
the [LSC] may take such proceedings in its own name as may be necessary to enforce or give effect to such an order ....."
4. It is common ground that, pursuant to Regulation 91(1)(b), the LSC is entitled to serve the statutory demand in its own name and to present a bankruptcy petition based upon it.
5. On 16 July 1999 Mr Levy applied to set aside the statutory demand under Rules 6.4 and 6.5 of the Insolvency Rules 1986. On 20 September 1999 the District Judge dismissed that application. Mr Levy appealed against the District Judge's order. On 8 October 1999, no payment having been made on account of the sum demanded, the LSC presented a bankruptcy petition against Mr Levy. The petition was subsequently adjourned, first to await the outcome of the appeal before Evans-Lombe J, and then to await the outcome of this appeal. No creditor has given notice of support.
6. On 4 February 2000 Evans-Lombe J dismissed Mr Levy's appeal.
7. Under Rule 6.5(4) of the Insolvency Rules the court may set aside a statutory demand if:
"(a) the debtor appears to have a counterclaim, set-off or cross-demand which equals or exceeds the amount of the debt or debts specified in the statutory demand; or
(b) the debt is disputed on grounds which appear to the court to be substantial; or
(c) it appears that the creditor holds some security in respect of the debt claimed by the demand, and either Rule 6.1(5) is not complied with in respect of it, or the court is satisfied that the value of the security equals or exceeds the full amount of the debt; or
(d) the court is satisfied, on other grounds, that the demand ought to be set aside."
8. Mr Levy's case is that the statutory demand should be set aside pursuant to Rule 6.5(4)(d), on the ground that his obligation to pay the costs in respect of which the demand is made is not a provable debt in his bankruptcy, and that the statutory demand is accordingly pointless since his failure to comply with it will not lead to the making of a bankruptcy order.
9. Rule 12.3 of the Insolvency Rules, under the heading "Provable debts", provides as follows (so far as material):
"(1) Subject as follows, in .... bankruptcy, all claims by creditors are provable as debts against .... the bankrupt, whether they are present or future, certain or contingent, ascertained or sounding only in damages.
The following are not provable -
(a) in bankruptcy, any fine imposed for an offence, and any obligation arising under an order made in family proceedings or under a maintenance assessment made under the Child Support Act 1991;
(b)......
"Fine" and "family proceedings" have the meanings given by section 281(8) of the Act ...." (Emphasis supplied.)
10. It is common ground that the ancillary relief proceedings in which the order for costs was made were "family proceedings" for the purposes of Rule 12.3(2)(a). However, there is an issue between the parties as to whether Mr Levy's obligation to pay Mrs Levy's costs of those proceedings is an "obligation arising under an order made in family proceedings" within the meaning of Rule 12.3(2)(a). Mr Levy's case is that it is, and that accordingly the obligation is not a provable debt in his bankruptcy. The LSC, on the other hand, contends that on its true construction Rule 12.3(2)(a) does not include orders for costs made in family proceedings, with the consequence that Mr Levy's obligation in relation to costs is a provable debt in his bankruptcy.
11. If Mr Levy's contention that his costs obligation is not a provable debt is correct, a further issue arises as to whether that is a sufficient ground for setting aside the statutory demand under Rule 6.5(4)(d).
THE HEARING BEFORE THE DISTRICT JUDGE
12. Before the District Judge, counsel then appearing for Mr Levy accepted that the court may, in special circumstances, make a bankruptcy order on a petition based on a non-provable debt, but he submitted that where (as in the instant case) the creditor is not asserting the existence of any such special circumstances as would justify the court in taking that course there is no sensible purpose in allowing the matter to proceed and that the statutory demand should be set aside.
13. The District Judge dismissed Mr Levy's application, concluding that Mr Levy's costs obligation was not an obligation "arising under an order made in family proceedings" for the purposes of Rule 12.3(2)(a). He expressed his conclusion thus:
"The obligation arises pursuant to the [LSC]'s statutory contract with the wife's solicitors to conduct a piece of litigation. The fact that that piece of litigation happens to be family proceedings is purely incidental and irrelevant. The [LSC]'s claim arises out of that statutory contract, not the order."
THE HEARING BEFORE EVANS-LOMBE J.
14. Evans-Lombe J rejected the District Judge's analysis, but dismissed Mr Levy's appeal on different grounds. He held firstly that, assuming Mr Levy's costs obligation to be a non-provable debt (i.e. to be an "obligation arising under an order made in family proceedings" for the purposes of Rule 12.3(2)(a)), it would nevertheless be premature to set aside the statutory demand on that ground since the court hearing the petition might, if satisfied as to the existence of special circumstances justifying such a course, make a bankruptcy order on the petition notwithstanding that the petition is based on a non-provable debt. (This aspect of the case has been referred to in argument as "the Timing Question"). Evans-Lombe J held secondly that in any event, on the true construction of Rule 12.3, the expression "any obligation arising under an order made in family proceedings" in Rule 12.3(2)(a) is limited to substantive obligations (e.g. lump sum orders or orders for periodical payments) and does not include orders for costs, with the consequence that Mr Levy's costs obligation is a provable debt. (This aspect of the case has been referred to in argument as "the Construction Question").
15. The Judge approached the Timing Question on the footing that the expression "any obligation arising under an order made in family proceedings" in Rule 12.3(2)(a) has the widest meaning, and includes Mr Levy's costs obligation. After referring to the judgment of Chadwick J in Russell v. Russell [1998] BPIR 259, in which Chadwick J concluded that although the court had jurisdiction to make a bankruptcy order on a petition based on a non-provable debt it would only exercise that jurisdiction in special circumstances, and to a judgment of mine in Galloppa v. Galloppa [1999] BPIR 352, the Judge continued as follows:
"This decision [i.e. Russell v. Russell] together with the judgment of Mr Justice Jonathan Parker in the Galloppa case is clear authority for the proposition that an order in family proceedings may form a valid petitioning debt for the purposes of a bankruptcy petition. It may be that when the petition comes to be heard, at which point the court may be informed of the other debts for which the debtor is liable, the Bankruptcy Court may conclude that it is inappropriate to make a bankruptcy order based on a non-provable petitioning debt. Alternatively, as happened in the Russell case, it may decide to do so because of special circumstances such as the existence of other provable debts of the debtor. It should not be overlooked that where a solvent husband declines to pay a sum ordered to be paid by him in Family proceedings, an administration of his estate in bankruptcy can still be of use to a wife notwithstanding she cannot prove in respect of orders for matrimonial support. The effect of the bankruptcy order is to deliver the husband's affairs to be administered by a trustee in bankruptcy who, having paid his creditors will produce a surplus available to be garnisheed by the wife.
Not until a petition is presented and comes to be heard will it be known whether "special circumstances" exist justifying the making of a bankruptcy order notwithstanding that the petitioning debt is based on an order in family proceedings. It seems to me, therefore, that the challenge mounted by Mr Levy to the statutory demand was an inappropriate challenge to make at the stage of statutory demand although clearly appropriate if the amount of that demand was subsequently used to base a bankruptcy petition when such petition came to be heard. In my judgment the District Judge would have been justified in dismissing the application to set aside the statutory demand on this ground and for this reason his order should stand."
16. The Judge then turned to the Construction Question. In this connection he referred once again to the judgment of Chadwick J in Russell v. Russell.
17. In Russell v. Russell the wife presented a bankruptcy petition based on an indebtedness arising under an order made in family proceedings for payment of a lump sum and costs. Chadwick J held that notwithstanding that the order for payment of a lump sum was on any basis a non-provable debt, special circumstances existed in that case which justified the making of a bankruptcy order. So far as the costs element of the order was concerned, it appears that the question whether Rule 12.3(2)(a) applies to orders for costs was not specifically argued before Chadwick J. However, in the course of his judgment Chadwick J said (at page 264E):
18. Later in his judgment in Russell v. Russell, Chadwick J referred, without further comment, to the fact that the LAB had lodged a proof in respect of costs. It seems clear, therefore, that although the point was not developed before him Chadwick J considered that orders for costs in family proceedings do not fall within the expression "any obligation under an order made in family proceedings" in Rule 12.3(2)(a), and are accordingly provable debts.
19. After referring to Russell v. Russell, Evans-Lombe J quoted an observation to the opposite effect by Sir John Vinelott in Re a Debtor; JP v. A Debtor [1999] BPIR 206. In the course of his judgment in that case, Sir John Vinelott said (at page 215H):
"Although Chadwick J refers to the fact that a proof had been lodged by the [LSC] in respect of costs, I do not think that this passage can be read, as was suggested by Miss Shekerdemian who appeared for the husband, as a decision that an order for costs made in proceedings for ancillary relief is capable of ranking for a dividend. Prima facie, such a liability arises under an order made in matrimonial proceedings as much as an order to pay a lump sum or for periodic payments to the extent of accrued arrears. The point was not raised before Chadwick J. I have not heard argument as to whether the [LSC] would be in a better position than a wife in whose favour an order has been made."
20. Evans-Lombe J then continued:
"Insolvency Rule 12.3 is the product of the reform of bankruptcy legislation flowing from the Cork Report and which is now contained in the Insolvency Act and Rules 1986. Under the Bankruptcy Act 1914 the definition of provable debts was contained in section 30 which, by subsection (3), subject to the exceptions contained in the other subsections or section 30 made provable "all debts and liabilities, present or future, certain or contingent" to which the debtor was subject at the date of the receiving order or became subject thereafter before his discharge. Subsection (6) of section 30 provided, as an exception to the general rule in subsection (3), debts of which the value or liability was, in the opinion of the Court, incapable of being fairly estimated. Claims arising from Family proceedings are not specifically mentioned. A series of decisions dealing with claims resulting from Family proceedings established the principle that, whereas lump sum orders were provable as being defined indebtedness, sums becoming due under periodical payment orders were not."
21. The Judge then quoted a passage from the judgment of Balcombe LJ in Woodley v. Woodley [1994] 1 WLR 1167, at 1178, in which Balcombe LJ said he could see good policy grounds (the quotation in the Judge's judgment as handed down wrongly reads: "... no policy grounds") for saying that a lump sum order made in family proceedings should (like damages for personal injuries) be both provable in bankruptcy and yet not be released on discharge. The Judge noted that these sentiments were echoed by Sir Donald Nicholls V-C in Re Mordant [1996] 1 FLR 334.
22. The Judge then continued:
"The question therefore becomes one of whether it is possible to construe Insolvency Rule 12.3(2)(a) as not including a debt arising from an order for costs in Family proceedings notwithstanding the width of the words "any obligation" used in the subsection. To do so it is necessary to give the subsection a purposive construction namely that the purpose of the section was to exclude from proof in bankruptcy orders giving substantive relief such as lump sum orders and periodical payments orders but not costs orders consequent on any proceedings pursuant to which the substantive orders were made. After some hesitation I have come to the conclusion that such a construction, though placing a special meaning on the word "obligation", is possible, that I should follow the lead of Chadwick J in the Russell case and not that of Sir John Vinelott in Re a Debtor and that I should construe the section accordingly. There is, perhaps, some significance in the fact that the subrule also excludes from proof "any fine imposed for an offence" but not any costs ordered by the Court imposing the fine, and an assessment under the Child Support Act without mentioning costs. Applying the sui generis [sic] rule of construction, it is possible to argue that orders for costs in Family proceedings should not therefore fall within the subrule. Where it is possible to discern a statutory purpose in altering the law so as to make all debts arising from substantive obligations resulting from orders in Family proceedings not provable, it is very difficult to discern a statutory purpose in selecting orders for costs in Family proceedings from amongst all other orders for costs so as to make them not provable. On this second ground it seems to me that the order of the District Judge can be upheld."
23. The Judge accordingly dismissed Mr Levy's appeal.
THE ARGUMENTS ON THIS APPEAL
24. In support of this appeal, Miss Marcia Shekerdemian of counsel (for Mr Levy) submits that the Judge was wrong in relation both to the Timing Question and to the Construction Question.
25. Miss Sherkerdemian turned first to the Construction Question, since if it be the case that Mr Levy's costs obligation is a provable debt, then there can be no grounds for setting aside the statutory demand and the Timing Question will not arise.
26. Miss Shekerdemian's short submission on the Construction Question is that it is simply not possible to construe the words "any obligation arising under an order made in family proceedings" in Rule 12.3(2)(a) in a restrictive sense, so as to exclude a particular category of obligation arising under an order made in family proceedings, namely an order for costs. In any event, she submits, even if it were open to the court to ignore the clear meaning of the Rule and adopt a "purposive" approach to its construction, there is no logical reason why a lump sum order should be non-provable whereas a costs order made in family proceedings should be provable. She submits further that there is no scope in the instant case for the application of any such rule of construction as the Judge sought to apply.
27. As to the Timing Question, Miss Shekerdemian felt constrained to accept that the court has jurisdiction to make a bankruptcy order on a petition which is based on a non-provable debt, for the reasons which Chadwick J gave in Russell v. Russell. At the same time, she submitted that it is difficult if not impossible to identify the kind of special circumstances which would justify the court in taking such a course; and that even if Chadwick J was correct in concluding that the circumstances which he found to exist in Russell v. Russell were sufficient for that purpose, it is not suggested by the LSC that similar circumstances exist in the instant case.
28. Miss Nicola Rushton of counsel (for the LSC) adopted the reasoning of the Judge on both the Construction Question and the Timing Question.
29. As to the Construction Question, Miss Rushton submits that there is a qualitative difference between orders made in family proceedings which make financial provision for one party or the other, and orders for payment of the costs of family proceedings. Orders for costs made in family proceedings are not (she submits) made by way of provision for the payee party; they are merely designed to reimburse the payee party pro tanto in respect of his or her legal costs. She submits that this distinction in quality between financial provision on the one hand and costs orders in family proceedings on the other lies at the heart of the policy consideration which (as she submits) dictates that words in Rule 12.3(2)(a) which are, on their face, wholly general words, are to be construed in a restrictive sense.
30. On the footing that, contrary to her submission on the Construction Question, Mr Levy's costs obligation is non-provable, Miss Rushton then turned to the Timing Question. She submits that it is not for the LSC at the statutory demand stage to establish special circumstances such as would or might justify the court hearing the petition in making a bankruptcy order. She submits that the Judge was right to say, in effect, wait and see, since only when the petition comes to be heard will it be known whether the requisite special circumstances exist justifying the making of a bankruptcy order.
CONCLUSIONS
The Construction Question
31. I can, for my part, see no scope whatever for construing the words "any obligation arising under an order made in family proceedings" (I stress the word "any") in Rule 12.3(2)(a) as excluding a particular type of obligation arising under an order made in family proceedings. To my mind, such a construction would involve rewriting the Rule. Moreover, even if the terms in which the Rule is expressed allowed some scope for a "purposive" construction such as is suggested by Miss Rushton (which in my judgment they do not), I am far from satisfied that it is illogical for costs orders in family proceedings to be treated for bankruptcy purposes in the same way as lump sum orders. On the contrary, there seems to me to be much to be said for the view that it is logical that they should be treated in the same way. Apart from anything else, if the party in whose favour financial provision is made in matrimonial proceedings (whether or not that party is legally aided) has to prove in the bankruptcy of the unsuccessful party for the costs of the proceedings, there must be a risk that the overall financial balance between the parties intended to be reflected in the court order may be significantly distorted.
32. As to the Judge's intended reference to the ejusdem generis rule, I confess that I am unable to identify in Rule 12.3(2) any genus which might serve to bring that rule into play. Nor, for that matter, can I discern any context elsewhere in the Act or the Rules which compels a construction of Rule 12.3(2)(a) which is contrary to the plain meaning of the words used.
33. I accordingly conclude that Chadwick J's indication in Russell v. Russell - an indication given without the benefit of detailed argument - to the effect that costs orders in family proceedings create provable debts was incorrect, and that Sir John Vinelott's preliminary view to the contrary is correct. It follows that in my judgment Evans-Lombe J reached the wrong conclusion on the Construction Question.
The Timing Question
34. On any footing, a bankruptcy order made on a petition which is based on a non-provable debt is an anomaly, since (as Chadwick J pointed out in Russell v. Russell) the trustee has, by definition, no functions to perform in relation to the petitioner. His function is to get in, realise and distribute the bankrupt's estate in accordance with the provisions of Chapter IV of the Insolvency Act 1986 (see ibid. section 305(2)), and section 324 of the Act provides that whenever he has sufficient funds in hand for the purpose he shall, subject to a retention to cover expenses, "declare and distribute dividends among the creditors in respect of bankruptcy debts which they have respectively proved". Consequently, a creditor with a non-provable debt will receive no distributions in the bankruptcy, and the trustee will owe no duties towards him. It would therefore seem surprising if the Act confers jurisdiction on the court to make a bankruptcy order on a petition based on a non-provable debt. However, as I indicated earlier, Miss Shekerdemian felt constrained to accept that the Act does give the court such jurisdiction. Was she right to do so?
35. As Chadwick J pointed out in Russell v. Russell (at pp.263-4), section 264 of the Act provides that a bankruptcy petition may be presented against an individual by one of the individual's "creditors". "Creditor" is defined in section 383 of the Act as meaning (so far as material):
"(a) in relation to a bankrupt .... a person to whom any of the bankruptcy debts is owed ....
(b) in relation to an individual to whom a bankruptcy petition relates .... a person who would be a creditor in the bankruptcy if a bankruptcy order were made on that petition ...."
36. Section 382(1) of the Act defines "bankruptcy debt" as meaning (so far as material):
"(a) any debt or liability to which he is subject at the commencement of the bankruptcy ...."
37. It is to be noted that that definition makes no distinction between provable and non-provable debts. A non-provable debt is a debt to which the bankrupt is subject at the commencement of his bankruptcy, and thus falls within the definition. Hence in the instant case Mr Levy's costs obligation is a "bankruptcy debt", entitling Mrs Levy (and, by virtue of Regulation 91(1) of the Civil Legal Aid (General) Regulations, the LSC) to present a bankruptcy petition based upon it.
38. I therefore agree with Chadwick J in Russell v. Russell that since the Act plainly allows a creditor with a non-provable debt to present a bankruptcy petition based upon that debt, it must follow that the court has jurisdiction under the Act to make a bankruptcy order on such a petition. Accordingly in my judgment Miss Shekerdemian was right to accept that that jurisdiction exists.
39. In what circumstances, then, will the jurisdiction be exercised? In Russell v. Russell, Chadwick J referred to the need for "special circumstances". At p.265F of the report he said:
"In the absence, therefore, of some special circumstances it seems to me that, as a matter of discretion, it will not usually be appropriate to make a bankruptcy order on a petition presented by a wife in respect of a debt which arises under a lump sum order made in family proceedings."
40. He went on to conclude that special circumstances existed in that case justifying the making of a bankruptcy order. He identified three such special circumstances, as follows:
"First, this is a husband who has been found by the court to have been less than frank in disclosing to the court particulars of his income and capital.
Secondly, this is a debtor who has failed to pay the costs ordered to be paid in [other proceedings].
Thirdly, this debtor has failed to pay the costs which have been taxed in the matrimonial proceedings ...."
41. It is apparent from the nature of the special circumstances which he identified that Chadwick J regarded misconduct by the debtor as a relevant factor in determining whether a bankruptcy order should be made on a petition based on a non-provable debt. For my part, I find it difficult to see why misconduct by the debtor should be relevant in this context. However badly or irresponsibly the debtor may have behaved, the position still remains that the petitioning creditor has no financial interest in the bankruptcy process. Nor in my judgment, does the debtor's failure or refusal to pay other debts (whether provable or non-provable) constitute a "special circumstance" in this context. If the debts are non-provable, then non-payment of them is a matter outside the bankruptcy regime; if they are provable, then the creditor concerned has his remedy.
42. To my mind, the fact that the debtor may have so misconducted his affairs that it may be said that he (in effect) deserves to be made bankrupt cannot justify the making of a bankruptcy order on a petition based on a non-provable debt.
43. It was suggested in argument (indeed it was suggested by Evans-Lombe J in the passage from his judgment which I quoted earlier, in which he refers to an administration of Mr Levy's estate in bankruptcy still being of use to Mrs Levy notwithstanding that she cannot prove in the bankruptcy) that a petitioning creditor with a non-provable debt may nevertheless have a legitimate interest in initiating a bankruptcy if there is a prospect of a surplus being available after all proving creditors have been paid in full. In my judgment, however, it would be an abuse of the bankruptcy process to have recourse to it for that purpose. The fundamental purpose of the bankruptcy regime is the distribution of the bankrupt's estate rateably among proving creditors: that is its raison d'etre. To seek to use the bankruptcy regime for the purpose of establishing a surplus after the proving creditors have been paid in full is, in my judgment, to seek to use it for a collateral purpose and is not permissible.
44. In what circumstances, then, might the court be persuaded to exercise its jurisdiction to make a bankruptcy order on a petition based on a non-provable debt? Since the jurisdiction exists, I have to accept that there may be wholly exceptional cases where the court will be persuaded, in its discretion, to do so. I confess, however, that I find it extremely difficult to foresee the circumstances in which that may occur, since, for reasons already given, the jurisdiction itself seems to me to be wholly anomalous. As at present advised, the only situation in which I can envisage that there might be a possibility of the court making a bankruptcy order on a petition based on a non-provable debt is where a supporting creditor with a provable debt obtains a change of carriage order pursuant to Rule 6.31. The effect of such an order is that, in contrast to the situation where a supporting creditor is substituted as petitioner and the petition is amended accordingly, the petition remains unamended but the creditor who has obtained the change of carriage order has the carriage of the petition in place of the petitioning creditor. But I am far from saying that a change of carriage order would necessarily be made in such circumstances, or that, if it were to be made, the court hearing the petition would necessarily make a bankruptcy order.
45. Subject to that possibility (if it be such) I find myself unable to envisage any circumstances in which the court could properly make a bankruptcy order on a petition based on a non-provable debt.
46. Returning to the instant case, and to the Timing Question, as I noted earlier the LSC does not suggest that any "special circumstances" exist in the instant case such as might persuade the court to make a bankruptcy order on a petition based on the statutory demand. That being the case, I can see no reason why the statutory demand should be allowed to stand and the bankruptcy process to continue. It seems to me that Rule 6.5(4)(d) is designed to meet just such a situation. Subparagraphs (a), (b) and (c) of subrule (4) are all directed at cases in which there is no real prospect of a bankruptcy order being made on a petition based on the indebtedness the subject of the statutory demand, and subparagraph (d) is in my judgment similarly directed. The philosophy underlying the jurisdiction to set aside a statutory demand appears plainly from the terms of Rule 6.5(4). It is to prevent the presentation of bankruptcy petitions which have no real prospect of success. In my judgment, the instant case falls fairly and squarely within Rule 6.5(4)(d).
47. I accordingly conclude that there is no basis in the instant case for the "wait and see" approach adopted by the Judge, and that the statutory demand should be set aside pursuant to Rule 6.5(4)(d).
48. I would therefore allow this appeal.
Lord Justice Waller.
49. I agree that the appeal should be allowed for the reasons given by Lord Justice Jonathan Parker and Lord Justice Peter Gibson.
Lord Justice Peter Gibson
50. I agree that this appeal must be allowed. As we are differing from the judge, I add a few words of my own on each of the two points on which the judge decided the case.
The Construction Question
51. The short question which arises is whether "any obligation arising under an order made in family proceedings" in r. 12.3.(2)(a) of the Insolvency Rules 1986 includes an obligation arising under an order for costs made in family proceedings. It is common ground that there is no other case in which the point was both in issue and argued. In Russell v Russell [1998] BPIR 259 at p. 264 Chadwick J. was clearly of the view that a costs order made in family proceedings did create a provable debt. In Re a Debtor, JP v A Debtor [1999] BPIR 206 at p. 215 Sir John Vinelott was no less clearly of the opposite view.
52. Like Jonathan Parker L.J. I prefer the view of Sir John Vinelott, who, as the former chairman of the Insolvency Rules Committee when the Insolvency Rules were drafted, was particularly knowledgeable in this area.
53. The purposive construction which the judge applied rests on the purpose attributed by him to r. 12. 3 (2)(a), viz. to exclude from the bankruptcy obligations under matrimonial orders giving substantive relief. But the validity of that depends on whether that limited purpose can properly be extracted from the language of the rule. I have to say that I do not understand how the judge could discern that to be the purpose when the only guide to that purpose, the actual language used, is that any obligation arising under an order made in family proceedings is not to be a provable debt. That does not seem to me to allow the court to exclude some obligations arising under such an order. Further I do not see why those drafting r. 12.3(2)(a) could not properly take the view that when substantive obligations under orders made in family proceedings are to be excluded from provable debts, so should costs orders made in those proceedings. They may well affect materially the ability of the spouse to meet the substantive obligations. The fact that it is the Legal Services Commission which is seeking in this case to enforce the costs order cannot make any difference to the construction of r. 12.3(2)(a), which must have the same meaning whether or not the party awarded the costs is legally aided.
54. Nor do I think that the judge was right to find justification for his construction in the application of the ejusdem generis rule. That rule applies when an enumeration of particular things having some common characteristic is followed by general words (e.g. "A, B, C and other D"), the general words being construed as limited by that common characteristic. But here one has merely a particular thing, "any fine", followed not by general words but by another particular thing, "any obligation", which is further limited by having to be either "under an order made in family proceedings" or "under a maintenance assessment". I see no scope for the application of the rule.
55. I therefore conclude that an obligation in respect of costs which arises under an order made in family proceedings falls within r. 12.3(2)(a) and is not a provable debt.
The Timing Question
56. The question whether Mr. Levy's challenge to the statutory demand is premature is one on which the judge neither heard nor invited any argument. And yet the judge's affirmative answer to that question formed the first ground on which he decided the appeal from the District Judge. I think it regrettable that the judge's decision was based on a point on which Mr. Levy was given no opportunity to make submissions.
57. It was the judge's view that the challenge to the statutory demand was an inappropriate challenge to make at the stage when the statutory demand was made "although clearly appropriate if the amount of that statutory demand was used to base a bankruptcy petition when such petition came to be heard." As I understand him, the judge was accepting that the fact that the debt was not provable was a valid objection to any bankruptcy order being made. Somewhat inconsistently, the judge earlier appeared to suggest that a wife as creditor with a non-provable debt might properly be interested in obtaining a bankruptcy order as its effect was to deliver the husband's affairs to be administered by a trustee in bankruptcy who having paid the creditors would produce a surplus available to be garnisheed by the wife.
58. The statutory scheme to my mind is plain: a bankruptcy order is designed to vest the debtor's assets in the trustee to enable the trustee to pay the provable and proved debts of the debtor (s. 324 Insolvency Act 1986). A non-provable debt is entirely outside the statutory scheme. I own to finding it puzzling that the 1986 Act contemplates that a non-provable debt is a bankruptcy debt (as defined in s. 382; see in particular s. 281 (5)(b)). But, that being so, it would appear that Chadwick J. was right in Russell v Russell to say that a creditor with a non-provable debt may present a bankruptcy petition based upon that debt. However, like Jonathan Parker L.J., I find it extraordinarily difficult to conceive of any circumstances in which the court would make a bankruptcy order on a petition founded on such a debt. And if the court will not make such an order (save in some wholly exceptional circumstance) on the hearing of the petition, it would be strange if it was inappropriate for the debtor to seek to free himself of the threat of bankruptcy by an application to set aside the statutory demand based on such a debt. The presentation of a petition may have seriously adverse effects on the debtor, and in my judgment it would be wrong to deny him the opportunity at the statutory demand stage to avoid that harm by having the statutory demand set aside when it is based on a non-provable debt which is highly unlikely to lead to a bankruptcy order. There is no suggestion that any special circumstances for making a bankruptcy order based on a non-provable debt exist in the present case.
59. In my judgment there is no realistic prospect of a bankruptcy order being made on the non-provable debt on which the Legal Services Commission's petition is based. The statutory demand should therefore be set aside now.
60. For these as well as the reasons given by Jonathan Parker L.J., with which I am in entire agreement, I would allow the appeal and set aside the order of the judge.
Order: Appeal allowed and the order of the District Judge and the statutory demand set aside. The costs of the Legal Services Commission to be set-off against the debt owed by Mr Levy. Leave to appeal to the House of Lords refused. Bankruptcy proceedings to be transferred to the High Court. Bankruptcy petition dismissed with costs, but with a stay pending determination by the House of Lords of the petition - if successful must ask the House of Lords to continue with the stay. Legal Services Commission to pay costs of application to the District Judge and to the judge, to be assessed on a standard basis, if not agreed, and an order for the costs incurred while Mr Levy was an assisted person, but with the set-off referred to above. Costs of the appeal.