England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand London WC2A 2LL
		3 February 2010

1. JUDGE PURLE: This is an appeal from an order of District Judge Freeborough made at the Croydon County Court as long ago as 1 August 2006. For a variety of reasons it has taken a considerable amount of time for that appeal to come before this court. The principal reason is that the appeal was stayed in December 2006 on the application of the appellant. The stay was lifted on 5 October 2009 by Mr Justice Floyd. The matter comes before me upon the basis of an amended notice of appeal which simplified the grounds.
2. The appellant is the Trustee in Bankruptcy of Sharon Lesley Sumpter; the respondents are the bankrupt, or now former bankrupt, and her husband, Robert George Sumpter. Mr Sumpter has appeared before me in person and effectively represents the interests of his wife as well.
3. On 2 May 2006 an application was heard by District Judge Freeborough in the Croydon County Court, which the respondents did not attend, seeking possession of their home in Horley. At that hearing the trustee put in a witness statement, paragraph 14 of which reads as follows:

"There are now produced at pages 48-50 of my Bundle a schedule showing the estimated amount required to discharge all costs and liabilities as at 28 November 2005 together with a schedule of the creditors who have proved in the bankruptcy. The court will note that the total sum required to effect payment is circa £25,571.00. The calculation is however subject to an increase in the legal costs of my solicitor of and occasioned by the necessity of proceeding with this application."

4. He went on to explain that the value of the property was thought to be in the region of £250,000, which was supported by a drive-by valuation. After making allowance for the mortgage due there was said to be an equity of around £170,685.83. Fifty per cent of that was Mrs Sumpter's and therefore vested in the trustee. That equated to £85,342.92. Clearly, had the sale the trustee was seeking then occurred, that would have been sufficient to discharge all of the bankruptcy liabilities (including costs and remuneration) estimates of which were, as I have said, set out in the schedule.
5. The pre-bankruptcy creditors amounted to the relatively modest sum of £4,846, to which statutory interest down to 28 November 2005 was added in the sum of £646. It was thus evident, and should have been appreciated by the District Judge, that the statutory interest would increase the figure shown in the schedule down to and beyond the date of the hearing before him.
6. The other amounts making up the £25,000-odd consisted of estimated costs, remuneration and expenses of a sum slightly in excess of £20,000. This is alarmingly high, but depressingly familiar in the context of bankruptcy.
7. Various assumptions were made in the schedule including that the trustee's remuneration would be fixed in accordance with rule 6.138(2)(b) of the Insolvency Rules 1986 to cover the firm's time costs. There was also an estimated figure for solicitors' costs of £500 (which did not include any of the costs of the possession application and hearing) and DTI fees calculated in accordance with the statutory scale rate of 17 per cent of realisations between £2,000 and £590,235.
8. It is quite clear that the figure of £25,571 was not written in stone. It was largely an estimate so far as the trustee's professional fees and other costs were concerned, and was out of date. Moreover, the letter (also dated 29 November 2005) under cover of which the figure of £25,571 was communicated (with Mrs Sumpter's consent) to Mr Sumpter expressly embodied a proviso that the funds were received within 28 days, though subsequent correspondence from the trustee's solicitors after the 28 days still made reference to the £25,571..
9. When the matter came before the District Judge on 2 May 2006 he made the following order. First, he declared that the property in question was held by Mr and Mrs Sumpter upon trust beneficially for each of them in equal shares. No one challenges that declaration. He then ordered a sale of the property and paragraph 3 of the order provided as follows:

"The First and Second respondents to deliver up possession of the said property to the Applicant to facilitate such a sale on 30 May 2006 unless the sum of £25,571.00 is paid to the Applicant by that date."

10. It should be noted that there was no application before the District Judge regarding the trustee's remuneration, the trustee's solicitors' costs or the other costs and expenses set out in the schedule. Nor was there any application to annul the bankruptcy, which is perhaps unsurprising, as the bankruptcy liabilities remained unpaid (and there was no firm proposal to repay or secure them) and there was nothing irregular about the bankruptcy order itself. The only application was the trustee's application for possession, brought more than 12 months after the vesting of Mrs Sumpter's half share in the trustee. The District Judge was accordingly obliged, absent exceptional circumstances, to assume that the interests of creditors outweighed all other considerations: section 335A(3) of the Insolvency Act 1986. Neither of the Sumpters attended or put forward any evidence of exceptional circumstances. On the face of it, therefore, the trustee was entitled to a possession order.
11. The District Judge however proceeded on the basis of ordering possession unless the whole of the bankruptcy liabilities were paid off. This presupposed that the bankruptcy liabilities were all ascertained, which, as I have said, was not the case.
12. There is a transcript of the hearing which opened by District Judge Freeborough saying that the way forward was to make the order sought:

"… unless the sum of [and here are the important words] whatever the amount is declared the bankruptcy debt, £25,000, is paid …"

13. Then he moved on to the declaration and returned at letter C of the page of the transcript that I am reading from to say this:

"I think one of the ways forward is deliver up possession by a particular date unless the sum of - such and a such a sum - has been paid"

He then explained: "In effect it is said that in order to clear the debts, it is £25,000", to which he later added: "It is £25,000 plus costs."

14. He clearly took the figure of £25,000 (rounded down for ease of exposition) from the schedule. Had proper attention been paid to paragraph 14 of Mr Pick's statement, or to the heading in the schedule itself (which indicated that the figures were estimates), or the covering letter that I have mentioned, he would have appreciated that there was no certainty in that sum. The statutory interest on the bankruptcy debts continued to increase, and the solicitors' costs of the possession application (though referred to by the District Judge) were then ignored. The trustee's remuneration (which is regarded by Mr Sumpter, and presumably Mrs Sumpter also, as excessive) might have been more or less. There is a procedure within the bankruptcy for assessing remuneration when challenged, and, had there been a challenge, it would have been for the trustees to justify their remuneration, but no process has yet been undertaken to do that.
15. I am bound to say, though this is not the order that is appealed from, that I consider the approach of the District Judge to have been misconceived. He was effectively treating the application before him as a mortgagee's possession action, dealing with the bankruptcy liabilities as mortgage arrears. There might have been some justification for that approach had Mrs Sumpter been applying for an annulment on the grounds that all the bankruptcy debts had been or were about to be paid or secured, and all that remained was to ascertain the trustee's costs and remuneration, but that was not the application before him, and the costs (if challenged) would in that event have to be secured as required by section 282(1)(b) of the Insolvency Act 1986.
16. In fact, it appears that Mr Sumpter was hoping to clear the bankruptcy liabilities. Mr Sumpter's assumption following the District Judge's order (perhaps understandably in the light of contemporaneous correspondence) was that what he would get in return for the £25,571 (which he then commenced to take steps to raise) would be the trustee's interest in the property. However the trustee could not without more properly dispose of that interest, which was worth something in the region of £85,000, for as little as £25,000. Nor was the District Judge ordering or sanctioning a sale of the half share then vested in the trustee.
17. A sale of the trustee's half share for less than full value might properly have been effected so long as the bankruptcy liabilities were all discharged out of the proceeds and Mrs Sumpter consented. However, it was not appropriate for the District Judge effectively to suspend the order to allow a period for payment of a specific figure in circumstances where the evidence indicated that the figure in question was uncertain as it was not up-to-date, included estimated amounts and might therefore not be enough.. As I have said, the approach in that respect was flawed. What the District Judge should have done was make an unconditional possession order to take effect on a fixed date and if, in the meantime, either Mr Sumpter, Mrs Sumpter or other family or friends raised a sufficient sum to pay off or secure the debts (including what the trustee was claiming for remuneration and costs) Mrs Sumpter could have applied for an annulment and (if necessary) directions to regulate the trustees' conduct, preventing him from selling (and suspending the possession order) until the annulment application was heard.
18. The approach of the District Judge was largely adopted at his own initiative. That is not a criticism of him, but the solicitors' representative attending the hearing for the trustee (not Counsel appearing before me today) was not forewarned, and failed to draw to the District Judge's attention the errors the District Judge was making in assuming that the November Schedule was up-to-date and accurate.
19. Shortly after the hearing the trustees' solicitors wrote to the court pointing out the mistaken assumption, and a further hearing took place on 1 August to review the previous order in the light of the latest calculations. What the trustee's solicitors sought to do was amend the figure in the previous order to put in what they said were the correct figures. The District Judge refused to amend the figure of £25,571 and extended the time for payment of that sum to 31 October 2006. This was the best part of a year after the original estimate and the continuing running of statutory interest was not addressed.
20. The District Judge was plainly concerned by what he saw as the ever increasing burden of costs being loaded on to the bankruptcy which he considered had undermined Mr Sumpter's attempts to raise the sum specified in the previous order. There does seem to have been a real possibility that Mr Sumpter could have raised the £25,571, though he would have needed to charge the property for that purpose, which he was not entitled to do without the trustee's concurrence. As I have said, Mr Sumpter was proceeding on the assumption that he was buying the trustee's half share, though this was never agreed to by the trustee, nor did the District Judge's order require it.
21. At the further hearing, at which Mr Sumpter as well as the same representative of the trustee's solicitors was present, the District Judge took a very firm line from the outset. He summarised his reasons at the end of the hearing. There was no formal judgment. There was debate upon a revised schedule which showed that the estimated amount required to discharge liabilities and costs in full was £35,787. That included a substantially increased figure for trustee's remuneration, again estimated, and for the trustee's solicitors' costs. There was also an increased figure for DTI fees.
22. It is evident from the transcript of the hearing that the District Judge proceeded on the basis that the difference of approximately £11,000 between the previous estimate and the new one was largely if not wholly referable to DTI fees. In fact that was not the case and his decision was undoubtedly flawed in that respect.
23. The District Judge also seems to have proceeded on the basis that no DTI fees would be payable because money was to be provided by a third party. However, the previous order required payment to the applicant in his character as trustee, and, as the money was not (at least in Mr Sumpter's eyes) being provided to secure an annulment but to purchase the trustee's half share following the proposed remortgage, any monies received by the trustee as a result of this exercise would on the face of it arise in the course of carrying out his functions, thus requiring payment into the Insolvency Services Account and attracting the statutory fee of (then) 17 per cent on realisations. In this connection also, I note that the trustee in an early letter to Mrs Sumpter dated 23 May 2005 clearly stated that should it be necessary for the property to be used to raise the required funds, either by a re-mortgage or sale, the DTI would deduct fees of 17% on all realisations.
24. The District Judge said this at the end of the hearing to the solicitors' representative appearing for the trustee:

"… the figure originally was correct because Mr Sumpter is a third party. He was not the bankrupt, it was Mrs Sumpter who was the bankrupt. So, this was third party monies, the DTI do not get their fee, and in those circumstances because you have asked for this to be reviewed the whole business has put the borrowing and other arrangements out of kilter, and that is very, very unfortunate which is why I have made no order as to costs. That is your report back to your principal. OK. Are you going to don a tin hat and flack jacket when you see them?"

To this question came the reply from the solicitors' representative:

"I am going to make a sharp exit home, actually, sir."

25. The hearing concluded very shortly thereafter, resulting in the order which is now under appeal. The District Judge, as I have said, extended time to 31 October 2006, making no order as to costs.
26. Nowhere in the hearing, or in the reasons he gave, did the District Judge consider the interests of the creditors. They are no closer to being paid today then they were at the outset of the bankruptcy. Moreover the order that he made (and refused to review) fixing the sum to be paid at £25,571 turned the estimates into figures written in stone. They may be too much, they may be too little. In this connection, I note that the trustee in a letter dated 5 September 2005 recorded that the creditors approved his remuneration on a time cost basis. If, therefore, as the trustee contends, and may well turn out to be the case, the true figures for costs and remuneration are greater than the figures set out in the November 2005 Schedule, then, as costs and remuneration rank ahead of any payment to unsecured creditors, the creditors will lose out, and will not be paid in full. They mat not be paid anything. Moreover, as the figure of £25,571 in the original order was meant to ensure that the creditors were paid in full, it seems to me that the District Judge should have reviewed his earlier order in order to prevent it from having an effect radically different from that which was intended. In assuming that the differences between the 2 schedules were largely if not wholly referable to DTI fees, the District Judge erred, even if he was otherwise correct that DTI fees were not chargeable. Had he approached the matter from the standpoint of creditors, he should have appreciated the inappropriateness of his original order and should, for the reasons I have given, have simply made an order for possession, deleting the provision for payment by a certain date. This was not, strictly speaking, what he was asked to do; he was asked by the trustee's solicitors to increase the figure in his previous order. However, their approach was understandably informed by what the District Judge had previously ordered, which I have held to be misconceived.
27. As it happens the payment of £25,571 was not made, despite the extension granted by the District Judge. This may be, at least in part, because the trustee appealed the District Judge's ruling, given that Mr Sumpter required the co-operation of the trustee to remortgage the property.
28. The strict position today therefore is that there is an enforceable order for possession, and steps were taken to enforce it following non-payment of the £25,571 within the time limited. Execution of a warrant for possession has however been suspended pending this appeal. In those circumstances, it may be that I could simply dismiss the appeal on the grounds that it has become academic, as there is an enforceable order for possession. However, what Mr Comiskey for the trustee fears, understandably given the suspension of the warrant of possession, is that when the matter goes back to the county court there will be further argument for extending the time for payment again, and that if the appeal is dismissed that may encourage the county court to proceed upon the basis that the figure of £25,571 is correct . In my judgment that would be most unsatisfactory.
29. What I propose to do therefore is to allow the appeal as it does seem to me that the District Judge should have reviewed his earlier decision. His objective when making his original order was to ensure that all the bankruptcy debts were paid. It is self evident that he did not succeed in that objective, if only by reason of the statutory interest which continued to run after 25 November 2005, and continues to run today.
30. Moreover, as I have said, he should have appreciated, when he came to review the matter that his objective was incapable of fair achievement by the form of order adopted by him because of the inclusion of estimates. He should therefore have made an unconditional order for possession and should have deleted from paragraph 3 of the first order the words, "Unless the sum of £25,571 is paid to the applicant by that date". In the circumstances I allow the appeal, discharge the District Judge's order of 1 August 2006 and order that the words that I have just mentioned be deleted from the order of 2 May 2006.
31. The effect is that the order for possession can now be enforced. The warrant for possession that has been stayed pending the outcome of this appeal will now take effect.
32. I should finally add that I do not doubt that the District Judge had jurisdiction to review his previous order (as he rightly recognised) under section 375(1) of the Insolvency Act 1986, and that it is appropriate for me now to exercise that jurisdiction. In considering that question, I have had regard to the general guidance summarised in Papanicola v Humphreys [2005] 2 All ER 418. It seems to me that the trustee has satisfied the onus of establishing exceptional circumstances justifying a review. The District Judge by his first order mistakenly failed to appreciate that his order had a radically different effect from that which was intended. The further material before him on 1 August 2006 made this clear. The interests of the creditors required this mistake to be corrected. The fact that the representative of the trustee's solicitors present at the first hearing did not alert the District Judge to this error is a matter of regret, but the creditors should not suffer as a result, and the oversight on her part was explicable, as she cannot have been expecting the District Judge to approach the matter in the way he did, which was, for the reasons I have given, flawed. The review was sought speedily thereafter.
33. I shall now invite argument on the issue of costs and any other consequential matters.

[After hearing further submissions, it was ordered as follows

Possession within 28 days. The trustee shall have his costs in the bankruptcy both here and below.]