England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BANKRUPTCY COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		24/10/2006

Mr. Justice Evans-Lombe :

1. I have to deal with two appeals the first against an order of Mr Registrar Rawson of the 18^th April 2005 in which, on the application of John Kelmanson ("the Trustee"), the Trustee in bankruptcy of Anthony John Charles Holtham ("Mr Holtham") the Registrar ordered the sale of certain leasehold property at 156 Devonshire Road Forest Hill London ("the property") which had been part of the bankrupt estate of Mr Holtham and in which he was residing. The order of Mr Registrar Rawson was made in the absence of Mr Holtham and of anyone appearing on his behalf. The second appeal is against the order of Mrs Registrar Derrett dated the 19^th July 2005 dismissing the application of Mr Holtham seeking a review of Mr Registrar Rawson's order with the object of discharging it and dismissing the trustee's application for possession and sale of the property.
2. There is no record of the judgment of Mr Registrar Rawson but there is a note of the judgment of Mrs Registrar Derrett made by Mr Pryce counsel for the trustee who appeared at the hearing and before me. The background facts of the case are set out in the witness statement of Michael Ellis, the trustee's solicitor, dated the 8^th March 2005 supplemented by a further witness statement of his dated the 18^th April 2005. These two witness statements and their exhibits constitute the only evidence before either of the Registrars.
3. The property comprised the unexpired period of a long lease of the property to which rights to acquire a new lease attached under sections 39 and 56 of the Leasehold Reform, Housing and Urban Development Act 1993. Mr Holtham acquired the property on the 7^th December 1994 with the assistance of a mortgage loan from Lloyds Bank plc. A bankruptcy order was made against Mr Holtham in this court on the 23^rd June 1995. Initially the Official Receiver was trustee in bankruptcy of Mr Holtham in default of the appointment of an outside trustee. It appears that by the time of the bankruptcy, by reason of a collapse in the property market, the value of the property had reduced to less than the amount secured upon it by the mortgage. Accordingly there was no incentive upon the Official Receiver to sell the property for the benefit of creditors. Mr Holtham continued to reside in the property after the bankruptcy order. He received an automatic discharge from bankruptcy on the third anniversary of the making of the bankruptcy order. He has continued to reside at the property until today.
4. It appears that, notwithstanding his bankruptcy, Mr Holtham has continued to make payments of the instalments becoming due under the mortgage, before his discharge, from his after acquired earnings, and, after his discharge, from his earnings generally. However, by reason of the recovery in property values the property now has a value of between £110,000 and £130,000 as set out in Mr Ellis' witness statement of the 8^th March 2005. The amount required to redeem the mortgage is rather more than £30,000 and the estimated sum required to pay Mr Holtham's bankruptcy debts in full is approximately £90,000. His estate, is, therefore approximately solvent.
5. The trustee was appointed trustee in bankruptcy of Mr Holtham in place of the Official Receiver on the 12^th January 2004. By force of section 306 the Insolvency Act 1986 the property had been vested in the Official Receiver from the commencement of the bankruptcy. The effect of the appointment of the trustee was to re-vest the property in him. By an ordinary application dated the 8^th March 2005 the trustee commenced proceedings against Mr Holtham for a declaration that the property was vested in him and for an order that it be sold and that Mr Holtham concur in such sale delivering vacant possession of it for that purpose, the proceeds to be paid to the trustee for the benefit of the creditors.
6. That application came on for hearing before Mr Registrar Rawson on the 18^th April. Mr Holtham had instructed solicitors and counsel and counsel was instructed to appear at the hearing on his behalf. It appears that counsel mistakenly thought that the hearing was to commence at 2pm on that day and not 12pm as listed. When informed of his error counsel, Mr Macpherson, who appears for Mr Holtham on the appeals, was unable to get before the Registrar in time for the hearing. A telephone call was made to the Registrar's chambers but he decided to proceed with the case in the absence of Mr Holtham or anyone to represent him and, having read the witness statements of Mr Ellis, made the orders sought by the application but with, in addition, a provision that Mr Holtham had leave to apply to discharge the order on 7 days notice in writing.
7. In a letter dated the 20^th April Mr Macpherson wrote to the Registrar explaining his error and the causes of it. In due course an application was made under CPR rule 3.1, 23.11 and 39.3 and Sec 375 of the Insolvency Act to discharge the order of Mr Registrar Rawson. It is that application which came on before Mrs Registrar Derrett on the 19th July 2005. At that hearing it was argued on behalf of Mr Holtham that he was entitled to resist the trustee's application for possession of the property because to seek to obtain an order for possession and sale approximately 10 years after the commencement of his bankruptcy constituted a breach of his rights to a fair and expeditious administration of his estate to which he was entitled under Article 6 of the European Convention for Human Rights and Fundamental Freedoms ("the Convention") and of his right to a home and family life under Article 8.
8. Mrs Registrar Derrett treated the application before her as an application to review under section 375 and dismissed it because in her view there was no evidence before her of any new circumstances of which Mr Registrar Rawson had not been aware of at the time he made his order. It seems to me, and, after some discussion, it was accepted by both parties, that the fact that Mr Holtham had not been present or represented before Mr Registrar Rawson, whereas before Mrs Registrar Derrett he was both present and represented by solicitors and counsel able to support his opposition to the order sought by the trustee, constituted a material difference between the hearings before the two Registrars so allowing a review of the order of Mr Registrar Rawson under section 375; see the judgment of Laddie J in Papanicola v Humphries [2005] EWHC 335 see also the decision of the Court of Appeal in re Cohen [1950] 2 All ER 36 at page 40, a decision under section 108 of the 1914 Act. As the Registrar found CPR 39.3 could not apply in the absence of fresh evidence.
9. I was told that there is no authority which deals with the question of whether CPR rules 3.1 and 23.11 apply to final orders. If they do it would seem to me that a judge can never be functus officio. Be that as it may it seems to me to be preferable that application to review orders of Bankruptcy Courts should proceed under Section 375, a section specifically designed for that purpose. Such is probably the effect of Insolvency Rule 7.51(i) which applies the CPR to insolvency proceedings save where inconsistent with the Insolvency Rules.
10. Mr Holtham's application of the 21^st April 2005 to set aside Mr Registrar Rawson's order had three bases for the relief being sought: the first basis was that Mr Holtham had failed to attend on the 18^th April as a result of an innocent error by those who were to represent him: secondly, that he had acted promptly in applying to set aside Mr Registrar Rawson's order: thirdly that he had a good defence to the Trustee's application under Article 6(i) and 8 of the Convention. It follows from what I have said earlier in this judgment that I accept the first two of those submissions. It would, perhaps, have been better had those advising Mr Holtham filed formal evidence explaining their absence from the hearing before Mr Registrar Rawson but I had before me Mr Macpherson's letter of the 20^th April addressed to the Registrar. However before setting aside that Registrar's order I must be satisfied that Mr Holtham has a defence to the relief being sought by the Trustee which stands a reasonable chance of success. I therefore move on to consider the third submission of Mr Macpherson.
11. Early in his submissions to me Mr Macpherson conceded that the plea of Article 8 of the Convention added nothing to the strength of his client's defence which stood or fell on his submissions based on Article 6.
12. Sofar as material to this judgment Article 6(1) provides as follows:-

"6(i) In the determination of his civil rights and obligations…everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law…"

13. Mr Holtham's complaint under Article 6 is that the delay in administering his bankrupt estate by the Official Receiver, initially, and latterly by the Trustee, the result of which has been that steps have only recently been taken to realise his interest in the property, has meant that Mr Holtham has come to assume that he would be left in possession of the property and that no attempt would be made to realise its value for the benefit of creditors. This assumption has meant that Mr Holtham has not taken any steps to use his post bankruptcy order earnings to purchase another house for himself and has continued from those earnings to make the mortgage instalment payments on the property in order to avoid the mortgagee taking possession to sell it to pay off the mortgage debt. His most serious complaint, however, is that as a result he has missed the benefit of the nationwide rise in house property prices.
14. What is now Section 283A of the Insolvency Act 1986 was inserted in that Act by Section 261(1) of the Enterprise Act 2002. The effect of that Section was to require a trustee in bankruptcy to make up his mind in a period of three years from the commencement of the bankruptcy whether to realise for the benefit of creditors any interest of the bankrupt in a dwelling house which was his sole or principle residence. In the event that the trustee fails during that period of three years to realise that interest or to apply to the court for orders which will lead to such realisation, the dwelling house in question re-vests automatically in the bankrupt who will, in the vast majority of cases, have obtained his discharge. Transitional provisions contained in sub-sections 7 to 10 of Section 261 deal with similar circumstances arising in bankruptcies which commenced before the coming into force of that Section of which the bankruptcy in question in this case is one. Those sections provide that for such bankruptcies a similar regime to that contained in the new Section 283A shall apply to any interest of the bankrupt in a dwelling house which was his sole or principle residence as if the bankruptcy commenced on the coming into force of Section 261. In the present case the trustee's application for possession and sale of the property was made within that three year period. It follows that as at today the property remains vested in the Trustee but if the Trustee's application for possession and sale ultimately fails it will re-vest in Mr Holtham.
15. The Trustee's application for an order for possession and sale of the property was made under the Trusts of Land and Appointment of Trustees Act 1996 on the basis that the Trustee was a "person who is a trustee of land or has an interest in a property subject to a trust of land" within Section 14(1) of that Act. Documents of title to the property are not in evidence but the witness statement of Mr Ellis indicates that, prior to the bankruptcy order, Mr Holtham was absolutely entitled to the leasehold interest comprised in the property. In my view the vesting of the bankrupt's property in the trustee in bankruptcy under Section 306 puts the Trustee in the same position as Mr Holtham was in relation to the property. Mr Holtham owned the property absolutely. The trustee in bankruptcy is not a person falling within sub-section 1(1) of the 1996 Act. A trustee in Bankruptcy, although called a trustee, is not a trustee of the assets comprised in the estate for the creditors or the bankrupt. He holds the assets subject to statutory duties to liquidate them and distribute their proceeds in satisfaction of the debts pari passu and any surplus to the bankrupt. In my view the application fell to be made under Section 363(2) of the Insolvency Act 1986 which provides:-

"363(2) Without prejudice to any other provision in this Group of Parts, an undischarged bankrupt or a discharged bankrupt whose estate is still being administered under Chapter IV of this Part shall do all such things as he may be directed to do by the court for the purposes of his bankruptcy or, as the case may be, the administration of that estate."

16. Pursuant to that sub-section Mr Holtham can be ordered to deliver up possession of the property to the Trustee for the purposes of a sale of the property for the benefit of the creditors notwithstanding that the has been discharged from his bankruptcy. It follows from this conclusion that, contrary to the submissions of Mr Macpherson, Section 335A of the Insolvency Act 1986 is not engaged because it was unnecessary for the Trustee to apply for relief under Section 14 of the 1996 Act. It was Mr Macpherson's submission that the alleged breach of Mr Holtham's rights under Article 6 of the Convention resulting from the delay in the administration of his bankrupt estate was "an exceptional circumstance" within sub-section (3) of Section 335A thus rebutting the presumption that the court should only consider the interest of the creditors when deciding whether to make an order for sale. In the absence of any evidence of persons other than the bankrupt having an interest in the property this submission was always misconceived because sub-section (ii)(c) of Section 335A excludes "the needs of the bankrupt" from consideration in any event and there is no evidence of anyone apart from the bankrupt and his creditors having any interest in the property.
17. I will however go on to consider whether Article 6 of the Convention is capable of conferring any defence on Mr Holtham against the Trustee's claim for possession and sale of the property. In my judgment it cannot do so for the following reasons:-

i) The administration of a bankrupt's estate is not a process which results in the determination of the civil rights and obligations of the bankrupt either before or after his discharge within Article 6(1) of the Convention. The administration of the estate of a bankrupt is a process whereby his assets are gathered in, liquidated and applied for the benefit of the creditors any surplus being returned to the bankrupt. The judgment of the European Court of Human Rights in the case of Mitchell & Holloway v The United Kingdom 36 EHRR 52 p 951, relied on by Mr Macpherson is of no relevance to this case. That case was dealing with delays in the resolution of a contract claim which would have, and did, determine the civil rights and obligations of the parties to the proceedings arising under the contract in question.

ii) Mr Holtham had no right to occupy the property enforceable against the Trustee for the time being of his bankrupt estate at any time after the commencement of the bankruptcy and the vesting of the property initially in the Official Receiver and later in the Trustee. As against Mr Holtham the Trustee's right to possession and sale of the property has, at all times since the commencement of the bankruptcy been unchallengeable. There is no evidence as to the Official Receiver's or the Trustee's intentions with relation to the property since the property vested in them. However it seems to me that they cannot be criticised for delaying taking steps to realise the property at a time when its value did not produce an equity over the amount secured by the mortgage on it. It may well be that had Mr Holtham offered to buy the freehold reversion on the mortgage over the property after he had obtained his discharge the Official Receiver would have sold it to him for a modest amount. Neither the Official Receiver nor the Trustee can be blamed for delaying taking steps to realise the property on a rising property market when the result of doing so has been that the creditors may receive payment in full of their debts or something very near it. The trustee in bankruptcy's primary duty is to the creditors. Had the Official Receiver taken steps to remove Mr Holtham when the property was subject to negative equity there would, no doubt, have been complaints by Mr Holtham that to do so was oppressive without achieving anything for the creditors. All of this illustrates that Mr Holtham's complaints are far removed from Article 6 (1).

iii) It is not said that there has been any delay in the prosecution of the Trustee's claim for possession in this court which engages Article 6 (1). Even if it could be said that the delay in commencing those proceedings was in some way a breach of Article 6 (1), which in my view it cannot, it is clear that the remedy for a breach of the article would be against the United Kingdom to compensate Mr Holtham for any loss which he was able to prove flowed from such delay. The remedy given by the court in the Mitchell & Holloway case illustrates this point. It follows that any finding of the court in favour of Mr Holtham for breach of Article 6 (i) cannot affect the Trustee's right to terminate Mr Holtham's possession of the property vested in the Trustee for the purpose of selling it for the benefit of Mr Holtham's creditors. In the absence of any evidence of persons other than Mr Holtham having any interest in the property no questions arise under Article 8 such as arose in Barca v Mears [2005] BPIR 15 or [2004] EWHC 2170

iv) I have no evidence of the extent and timings of the payments Mr Holtham made in respect of the instalments becoming due under the mortgage of the property. It seems to me clear that, to the extent that Mr Holtham, after his discharge, paid off the mortgage debt and interest, he is entitled to be subrogated to the mortgagee's security but he will have to give credit for a notional rent in respect of his occupation of the property over the same period. There will have to be an equitable accounting and, to the extent that such accounting shows Mr Holtham a credit he will be entitled to receive that amount from the proceeds of sale of the house ranking equally with the mortgagees. The most recent case of which I am aware where similar problems were dealt with is the decision of Lawrence Collins J in re Byford (deceased) [2003] EWHC 1267 or [2003] BPIR 1089. The subject is dealt with in Muir Hunter on Personal Insolvency at paragraph 3-652. The same may be true of payments made by Mr Holtham before his discharge but here the position is more complicated because the payments, presumably from his own earnings, may constitute after acquired property which the Trustee is still in a position to claim; see Section 307 of the Insolvency Act 1986. The effect of all of this is that Mr Holtham has a remedy under insolvency law, without engaging Article 16, for the fact that during his occupation of the property since the commencement of the bankruptcy he has benefited his bankrupt estate by making payments discharging the mortgage instalments on the property.

18. For these reasons, in my judgment, this appeal fails save to the extent that the order of Mr Registrar Rawson should be varied so as to include orders for the accounts and enquiries necessary to determine the extent to which Mr Holtham is entitled to be subrogated to the mortgagees security in the manner which I have described in sub-paragraph iv) above.