England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice, The Strand, London WC2A 2LL
		16th February 2011

Wednesday, 16^th February, 2011

HH Judge Pelling QC:

Introduction

1. This is the hearing of the appellant's application for permission to appeal out of time from the order of District Judge Parfitt dated 2^nd July 2010, whereby the District judge imposed a bankruptcy restrictions order on the appellant for a period of 8 years from 2^nd July 2010 to 1^st July 2018. The application for permission came before Vos J on 16^th November 2010, when he ordered that the application for permission was to be determined at a hearing with the appeal to follow if permission was granted.

The Statutory Framework

2. The relevant legislation is contained in Schedule 4A of the Insolvency Act 1986. The procedure is governed by Chapter 28 of the Insolvency Rules. Insofar as is material, Schedule 4A provides:

2(1) The court shall grant an application for a bankruptcy restrictions order if it thinks it appropriate having regard to the conduct of the bankrupt (whether before or after the making of the bankruptcy order).

(2) The court shall, in particular, take into account any of the following kinds of behaviour on the part of the bankrupt…

(d) giving a preference…

4(1) A bankruptcy restrictions order—

(a) shall come into force when it is made, and

(b) shall cease to have effect at the end of a date specified in the order.

(2) The date specified in a bankruptcy restrictions order under sub-paragraph (1)(b) must not be—

(a) before the end of the period of two years beginning with the date on which the order is made, or

(b) after the end of the period of 15 years beginning with that date."

It is common ground before me that it was open to the Official Receiver to apply for a bankruptcy restrictions order by reference to an allegation both of a preference by reference to paragraph 2(2)(d), and also on the basis that a payment had been made to the detriment of the general body of creditors.

3. So far as the procedural requirements in the Insolvency Rules are concerned, by Rule 6.241:

"(1) Where the Secretary of State applies to the court for a bankruptcy restrictions order under paragraph 1 of Schedule 4A to the Act, the application shall be supported by a report by the Secretary of State.

(2) The report shall include—

(a) a statement of the conduct by reference to which it is alleged that it is appropriate for a bankruptcy restrictions order to be made; and

(b) the evidence on which the Secretary of State relies in support of the application."

It is common ground that when considering whether the conduct of a bankrupt justifies the making of a bankruptcy restrictions order, the court is limited to a consideration of the conduct summarised in the statement of conduct contained in the report referred to in Rule 6.241(2).

The Appeal Process

4. This is an appeal to which CPR Part 52 applies. That being so:

(a) the appeal is a review of the decision of the lower court; and as such

(b) an appeal will be allowed only when the Appeal Court considers a decision of the lower court was either

(1) wrong or

(2) unjust because of a serious procedural or other irregularity;

(c) permission to appeal is to be given only where

(1) the court considers there is a real prospect of success, or

(2) there is some other compelling reason why the appeal should be heard.

Whilst this hearing is both for permission and of the appeal itself, if permission is given, the most convenient course is to hear the parties submissions in full before reaching a conclusion as to whether permission ought to be granted or the appeal allowed.

Factual Background

5. The background to the appeal, in summary, is as follows.

(a) In February 2008 judgment was entered against the appellant at Southend County Court in the sum of some £21,000-odd, following a trial. The dispute concerned the construction of an extension to the house of a Mr and Mrs Skingley, the successful claimants. The judgment required payment to be made to Mr and Mrs Skingley within 14 days. No payment has ever been made.

(b) On the material before me, I conclude that at no material time did the appellant have any assets other than a property at 4 Church Crescent at Mountnessing in Essex ("the Property"). On the date when judgment was entered against him, the appellant instructed estate agents to offer the Property for sale.

(c) On 18^th February 2008 Mr and Mrs English agreed to purchase the Property, subject to contract, for £286,000.

(d) On 24^th April 2008 the appellant instructed the agents to put the Property back on the market, and on 2^nd May 2008 the appellant accepted an offer of £240,000 for the Property from Jewelite Trading Limited, a company of which the appellant's mother was apparently a director. About a month later, Jewelite sold the Property to Mr and Mrs English for in excess of the price that they had agreed to pay for the Property originally.

(e) On 8^th May 2008 the appellant was served with a statutory demand by or on behalf of Mr and Mrs Skingley.

(f) The net proceeds of sale of the Property came to £111,120 odd, and were received by the appellant on 14^th May 2008. On that date the appellant paid £93,420 of the proceeds to his mother. The remainder was paid away as to £6,500 odd to a firm of solicitors by way of rent for a home for the appellant and his children, £5,000-odd which was transferred to a business account controlled by the appellant, and £3,000-odd which was drawn down as cash, apparently to discharge some credit card debts.

(g) On 6^th June 2008 a bankruptcy petition was presented by Mr and Mrs Skingley against the appellant, and on 1^st August 2008 the appellant was made bankrupt.

(h) On 29^th June 2009 the Official Receiver issued the application for a bankruptcy restrictions order to be made against the appellant.

6. In accordance with the rules to which I have referred at the outset of this judgment, the report of the Official Receiver in support of the application identified the allegations on which the application was based. The terms of that statement, as set out in the report, were as follows:

"Between 14 May 2008 and 1 August 2008 John Going disposed of £111,121 whist subject to a County Court Judgment for £21,415 plus costs, which remained unsatisfied as at the date of the bankruptcy order. In particular;

On 6 February 2008 a County Court Judgment was made against John Going in the sum of £11,067 plus interest and costs. A statutory demand for £21,415 was served upon him on 8 May 2008.

On 14 May John Going received £111,121 from the sale of his solely owned property into his bank account. He subsequently transferred £93,420 to a relative in repayment of an existing debt and £5,000 to a building company.

John Going cashed a cheque for £3,000 on 15 May 2008 and transferred £6,550 to another person on 29 May 2008. He has stated he used the remainder of the funds for everyday living expenses.

As at the date of the bankruptcy order the judgment remained unsatisfied totalling £65,292. His other non associated creditors totalled £63,430 resulting in a total deficiency of £128,722."

It is apparent from this allegation that

(a) it relates to a period between 14^th May and 1^st August 2008,

(b) it relates to the transfer to "a relative" – actually his mother – of £93,420, and

(c) to three other dispositions which are referred to in the summary of allegations (and which I refer to hereafter collectively as "the minor payments").

As will be apparent from its terms, the allegations do not refer at all to the sale of the Property or the circumstances of such sale, which in any event took place in a period outside that identified in the allegations section of the Official Receiver's report. Although the report referred in terms to the minor payments, by the time the application came before the district judge, they had ceased to form any, or any significant, part of the Official Receiver's case. There was no mention of the minor payments in the Official Receiver's skeleton submissions for the hearing before the district judge, and it is probably for this reason that, aside from one passing reference (to which I will refer in detail hereafter), no mention is made of the minor payments, and no substantive conclusion is reached concerning them in the district judge's judgment.

7. The appellant's claimed obligation to pay his mother in preference to his other creditors depends upon the effect of an exchange of letters between the appellant and his mother that took place in August 2007. It is common ground that this correspondence passed between the appellant and his mother, and it is not disputed by the Official Receiver that the transaction to which it relates took place.
8. On 25^th August 2007 the appellant's mother wrote to the appellant in these terms:

"I am arranging a £50,000 loan from Barclays Bank, for my home improvements, but I feel it is more important that you should have the funds at your disposal, hopefully easing the pressure that you are obviously under, but I should like some form of agreement for the money, plus the £25,000 that you have had already, making it seventy five thousand pounds. You know how much I love you, and do not want to hurt your feelings, but a few years ago I loaned you £12,000. I cannot remember whether it was for the house or credit cards. Also I paid Aunty Marie £3,200 that I financed on your behalf in 2003.

I would really like you to pay me the £25,000 now, but I will not insist on this being paid immediately, but delay payment if you can give me some sort of assurance that I will not lose this money, and the £50,000 I'm willing to give you. What I mean by assurance is that I must have some sort of guarantee over your property in which you are living so that when it is sold I will get the money from the money that you receive. This money will also be guaranteed from your property so the total of £90,000 is guaranteed from your property. You will appreciate that I require this security because not only am I delaying payment of the current £40,000, but also lending you more money…

Please do not be offended at my asking for agreement."

The appellant responded by an undated letter which, insofar as is material, was to the following effect:

"…I actually feel embarrassed that my own mother should be offering me advice and financial help at my age. The boot should be on the other foot. I am very grateful … I am also aware of the £12,000. It's always in the back of my mind, as is the £3,000 from Auntie Marie. I'm not in the least bit offended that you would like some form of security. I am deeply grateful for delaying payment of the current debt and for lending me the extra £50,000 you have very kindly offered to lend me.

In consideration of the £40,000 you have lent me over the last few years and not insisting on payment of this now, and the £50,000 you are going to lend me now, I'm giving you a 60% share of my interest in my house. At present my house is worth about £280,000 and there is a mortgage of about £120,000. This leaves a value of my share of £160,000. If I give you 60% of my share this will amount to £96,000. Property prices have been going up and I feel that they still will go up, so that the total money that you have already lent me and are going to lend me will always be covered. I also promise that I will not sell the property without consulting you first and if you get desperate for the money I will sell the property whenever you want. I will clearly hold 60% of the property for you.

For all your help Mum, I feel it is only fair that I give you interest on the money and will pay this at 10% per annum when I sell the house. I will get the solicitor to pay you directly the 60% interest. If there should be any shortfall in your money I promise you that I will make it up out of my other 40% share. I hope that you will find this acceptable…"

On the basis of this exchange of correspondence at trial, it was conceded by the Official Receiver that £66,672.20 of the payment by the claimant to his mother was a proper payment, because it was accepted that his mother had a 60% beneficial interest in the Property as a result of the declaration contained in the correspondence set out above.

9. The focus of the hearing before the district judge, therefore, was on whether the balancing part of the payment of £26,747.80 was proper or improper. As to this, the appellant's case was that his mother had an equitable charge over the appellant's notional share of the net proceeds of sale, and thus the payment of the further £26,747.80 to his mother could not be improper. The Official Receiver's case was that the appellant's letter was not sufficiently clear to create an equitable charge over his 40% interest in the proceeds of sale, and thus the payment was improper, because, in the circumstances, it was a preference or payment made to the detriment of creditors generally.
10. Given the nature of the application before the district judge, even if he concluded that, in law, the Official Receiver's case was to be preferred over that of the appellant, that was, as I see it at the moment, the beginning not the end of the enquiry, for, as Vos J observed when directing the hearing that I am presently concerned with:

"The contention that the preference accorded by the Appellant to his mother was something that a layman might reasonably be thought to have accorded with a common sense view of his obligations, and if that was so, it might be indicative of a shorter period for the BRO."

The Judgment of the District Judge

11. The application was heard on 23^rd June 2010, and judgment was reserved and handed down on 2^nd July 2010. Having rehearsed at the outset of his judgment the statutory provisions which govern the type of application the district judge was concerned with, the district judge then recorded two concessions by the Official Receiver at paragraph 31 of the judgment, namely that (a) the appellant owed his mother at least £93,420, and (b) the appellant had paid £66,672.20 to his mother because he believed that she was the beneficial owner of 60% of the Property. Although the district judge then proceeded to express some scepticism about the factual basis of these concessions – see in particular paragraphs 36-38 of the judgment – he acknowledged, as he was bound to, that his judgment had to proceed on the basis of the concessions made – see paragraph 39 of the judgment. At paragraph 45 of his judgment, the district judge referred to the correspondence that I have set out above, and to the fact that the Official Receiver had not challenged their legitimacy. The district judge noted that the appellant's letter had not been signed by his mother, and thus, in his view, there was no formal agreement sufficient to satisfy the requirements of section 2(1) of the Law Reform (Miscellaneous Provisions) Act 1989. It is not necessary for me to resolve that issue, because the district judge appears to have accepted at paragraph 48 of the judgment what must have been obvious, namely, that if and to the extent the correspondence did not constitute a formal contract, it would nevertheless give rise to a fairly plain proprietary estoppel.
12. In relation to the point of law identified at the outset, the district judge concluded at paragraph 51 in these terms:

"In my judgment the effect of Mr Going's letter was much as the OR submitted. It only gave rise to an equitable interest in favour of Mrs Going to the extent of 60% of Mr Going's interest in the net proceeds of sale. I reach this conclusion for these reasons:

51.1 The relevant context of the letter was that Mrs Going was already owed substantial sums by Mr Going and she wanted some security if she was to lend more. Mr Going's only asset was the Property and he believed for the reasons set out in the letter that his equity in the asset was worth some £160,000. The total indebtedness for which his mother was asking for security was £96,000.

51.2 The letter sets out the calculations by which Mrs Going to be adequately secured if Mr Going transferred 60% of his net equity. It was only as an afterthought by way of further assurance that Mr Going went on to make the additional promise as to what he would do if there was any shortfall. The material distinction in the letter is between the net equity that would be paid to Mrs Going regardless and a personal promise by Mr Going that he would make up any shortfall.

51.3 This distinction between a proprietary interest and a personal promise is reinforced by the promise in the letter that Mr Going would instruct his solicitor to pay the 60% directly to Mrs Going. This is a clear demonstration that so far as concerns that part of the net proceeds they were to be treated as Mrs Going's money. The same was not to apply to the balance, the 40%, which would be paid to Mr Going.

51.4 It would have been open to Mr Going to promise his mother that she would be repaid whatever was owing to her from any sale of his Property but he didn't do that. For whatever reason Mr Going broke down his equity in the Property (i.e. his rights after repayment of the existing mortgage) into two parts: 60% promised to his mother and 40% which would remain his.

51.5 This analysis takes into account and is not undermined by the existence of the words out of my other 40% share. In my view this is nothing more than recognition by Mr Going that the likely source from which he would need to repay his mother would be the balance of the money to be got from the Property. It did not of itself create any right or interest in that 40% in favour of Mrs Going.

51.6 If the intention was to promise that Mrs Going would get security over the whole of the Property then there would have been no need for the clear and very much worked out 60/40 split in the letter. Reasonably considered such a split is only consistent with the construction I have placed on the letter.

52. As I have indicated I did not have the benefit of detailed submissions from both sides as to the manner in which the correspondence created equitable rights but I find that Mr Going's letter gave rise to a proprietary estoppel in favour of Mrs Going that he would pay her 60% of the net proceeds of sale from his Property which was crystallised by her reliance on it in advancing further sums to Mr Going over the months that followed the exchange of correspondence in August 2007. The mechanism, by which the court would have recognised that equity, if it was relevant, was by way of a constructive trust in her favour. In the event such a trust did not arise because Mr Going voluntarily paid at least that 60% and more to his mother.

53. For the reasons I have set out above no such equity arises in relation to the 40% balance of the net proceeds: the words used by Mr Going in his letter were insufficiently clear to give rise to any promise upon which a proprietary estoppel could be founded even if Mr Going and his mother proved the other elements of such an estoppel. On the contrary the words used, properly construed in the context, amounted to nothing more than a personal promise of payment.

54. It follows that so far as concerns the balance of the monies paid to Mrs Going that, on the basis of the concessions made by the OR, she was nothing more than a general creditor with the same status as, amongst others, Mr and Mrs Skingley."

13. The district judge gave no consideration, at least expressly, to whether the appellant might have believed he was under an obligation to pay any sum outstanding to his mother in preference to his other creditors, even if technically he was not under such an obligation. Under the heading "The conduct issue", the district judge concludes that the appellant was determined "to do all that he could so as to avoid having to pay anything to Mr and Mrs Skingley" – see paragraph 58 of the judgment.
14. There were a number of other findings made against the appellant by the district judge. They included (a) that he sold the Property in order to retain control of both the sale and the sale proceeds in the knowledge that he was likely to be made bankrupt – see paragraphs 62 and 64 of the judgment; (b) he paid his mother the whole of what was due to her because he would rather pay her than Mr and Mrs Skingley, when he should have paid her only 60% of the net proceeds at sale – see paragraphs 65 and 66 of the judgment; (c) that the appellant was motivated by a sense of grievance against Mr and Mrs Skingley – see paragraph 67 of the judgment. Then at paragraphs 68 to 72 of the judgment the district judge said this:

"68. Since the OR conceded that it was no part of the conduct alleged against Mr Going that the sale of the Property was carried out at an undervalue I do not consider that aspect of the matter save as part of the circumstances surrounding the sale. However, those circumstances as set out above, when combined with the findings I have made regarding Mr Going's intention not to pay anything to Mr and Mrs Skingley leave a strong suspicion regarding that sale.

69. That suspicion is in no way alleviated by the evidence of Mr Going and his mother about the sale. On the contrary I found their evidence about the sale and the circumstances in which it occurred wholly unsatisfactory. In particular, I regard as self-serving Mr Going's explanation that he was ready to accept an offer £40,000 less than the abortive sale because he considered the property market might fall because there were problems in the country.

70. The reality was that the value of around about £280,000 was demonstrated by the original offer from Mr and Mrs England to purchase at that level and then again by the price of £288,000 which Mr and Mrs England paid to purchase it from Jewelite. Against this background Mr Going seems to have agreed in a little over a week once the Property went back on the market on 24 April 2008 to a sale at £40,000 less than he was hoping to get for it.

71. Furthermore this sale, which by reason of price and timing alone required a better and more detailed explanation, was in favour of a company controlled by a relative (albeit quite distant), of which Mrs Going had been a director some years before and whose business, according to Mrs Going, was operating a nightclub. I should add that a witness statement was put in by Mr Going from a Mr West, who describes Jewelite Trading as 'one of my companies' through whom he purchased the Property. Mr West did not attend to give evidence and his statement did not allay any of the concerns arising from the property transaction. Mrs Going's ready explanation that she didn't have anything to do with the company and knew nothing about its business while she was a director added to the concerns regarding the transaction rather than assuaging them.

72. It follows that I regard the dealings with the Property as part and parcel of Mr Going's conduct directed at not paying anything to Mr and Mrs Skingley or of preferring the interests of himself and his mother over and above those of his general body of creditors and in particular of Mr and Mrs Skingley."

15. Following on from these findings, the district judge then expressed his conclusions in summary form at paragraph 73 in these terms:

"In the light of what I have set out above I conclude that Mr Going's conduct makes it appropriate to grant a bankruptcy restrictions order. The OR has proved the particular conduct set out in the report and that includes in summary: (a) the giving of a preference so far as concerns the payment of £26,747.80; (b) the payment of nothing to Mr and Mrs Skingley in circumstances when monies were available to Mr Going; and (c) bringing about a quick sale of his Property in circumstances where it was inevitable that he would go bankrupt and thus avoiding any independent consideration of his arrangements with his mother prior to realising his only asset and making substantial payments to her."

The Grounds of Appeal

16. There are seven grounds identified in the grounds of appeal. It is common ground that these break down into three generic heads: (a) grounds 1 to 3, which challenge the district judge's conclusions concerning whether the appellant's mother was an unsecured creditor for £26,747.80; (b) grounds 4 to 5, which challenge the district judge's conclusion that the appellant should be made the subject of a bankruptcy restrictions order, or, alternatively, for as long as 8 years; and (c) grounds 6 to 7, which challenge the district judge's conclusion that he was entitled to take account of the appellant's conduct in relation to the sale in concluding that the appellant ought to be subjected, first, to a bankruptcy restrictions order and, secondly, to one for a period of 8 years. (I refer to these issues hereafter, to the extent necessary, as the first, second and third issues respectively.

The First Issue

17. In substance, there are two issues that arise here, being (a) whether, on a true construction of the correspondence referred to above, the appellant created a valid equitable charge over his share of the proceeds of sale for so much of the sum due to his mother as was not repaid by her recovering 60% of the net proceeds of sale of the Property as and when the Property was sold, or (b), if that was not the effect of the correspondence, whether the appellant would nevertheless be estopped from denying that such was the case as against his mother. The appellant's case is that the appropriate test to be applied is that identified by Lord Wilberforce in Swiss Bank Corporation v Lloyd's Bank [1982] AC 584. It is common ground, as I understand it, that this is the test to be applied. I was also told by counsel for the Official Receiver that if the appellant's letter (to which I have referred above) satisfies the test identified in the Swiss Bank Corporation case, then it is accepted that the agreement does not otherwise fail because of any formal deficiency arising out of the form of the letter. It is nevertheless contended by the Official Receiver that (a) on true construction the letter does not satisfy the test identified by Lord Wilberforce in the Swiss Bank Corporation case, but, in any event, (b) even if it does, it was nonetheless open to the district judge to make a bankruptcy restrictions order against the appellant by reference to the minor payments, although it is accepted that the appropriate penalty in those circumstances would have been in the range of 2 to 5 years.
18. I turn now to the Swiss Bank Corporation case. The facts of the case appear from the headnote. The key point was that in an agreement between Swiss Bank Corporation and an entity identified as "IFT" there was a covenant that IFT would observe all the conditions attached to a Bank of England consent given pursuant to the then applicable Exchange Control Act, one of which required that the sum to be loaned was to be repaid out of the proceeds of sale of the securities to be purchased with the proceeds of the loan. Swiss Bank Corporation sought a declaration that it was entitled to be considered an equitable chargee of the securities purchased with the loan by reason of the covenant in the loan agreement to comply with the Bank of England conditions. This argument succeeded at first instance, but failed at every stage thereafter up to and including the House of Lords. In the House of Lords the respondent's case (as identified in the summary of submissions made by counsel) was as follows:

"The whole of the appellants' argument rests on a fundamental misconception of the requirements of condition (vii) of the Bank of England conditions. On their true construction, conditions (vi) and (vii) of the Bank of England's conditions, although positive in form, were negative in substance and merely restricted I.F.T. in the sources from which it might, without the further consent of the Bank of England, lawfully pay sums due to S.B.C. In particular, (i) they did not impose a positive obligation on I.F.T. to pay interest and other charges out of the income of the foreign currency securities or at all; (ii) they did not impose a positive obligation on I.F.T. to repay principal out of the sale proceeds of the foreign currency securities or at all; (iii) they did not impose a positive obligation on I.F.T. to apply the income or sale proceeds of the foreign currency securities in or towards payment of sums due to S.B.C.; but (iv) they merely prohibited I.F.T. from paying sums due to S.B.C. otherwise than out of such income or sale proceeds."

In rejecting the claimant's claim in that case, Lord Wilberforce, who delivered the only substantive opinion before the House, identified the applicable general principle at page 613 A-E in these terms:

"I do not doubt the correctness of the principles of law upon which these appellants, S.B.C., rely and which were stated by the learned judge. These are best summed up in the well-known passage from the judgment of the Privy Council in  Palmer v. Carey  [1926] AC 703, 706-707, delivered by Lord Wrenbury:

'The law as to equitable assignment, as stated by Lord Truro in Rodick v. Gandell  (1852) 1 De G.M. & G. 763, 777, 778, is this: "The extent of the principle to be deduced is that an agreement between a debtor and a creditor that the debt owing shall be paid out of a specific fund coming to the debtor, or an order given by a debtor to his creditor upon a person owing money or holding funds belonging to the giver of the order, directing such person to pay such funds to the creditor, will create a valid equitable charge upon such fund, in other words, will operate as an equitable assignment of the debts or fund to which the order refers." An agreement for valuable consideration that a fund shall be applied in a particular way may found an injunction to restrain its application in another way. But if there be nothing more, such a stipulation will not amount to an equitable assignment. It is necessary to find, further, that an obligation has been imposed in favour of the creditor to pay the debt out of the fund. This is but an instance of a familiar doctrine of equity that a contract for valuable consideration to transfer or charge a subject matter passes a beneficial interest by way of property in that subject matter if the contract is one of which a court of equity will decree specific performance.'

But I find it impossible to extract from the documents any agreement with S.B.C. on the part of I.F.T. to repay the loan out of the F.B.I. securities."

In identifying his reasons for rejecting the claim by SBC, Lord Wilberforce drew attention to the following at paragraphs 613F to 614B:

"In my opinion:

1. Condition (vii) is perhaps capable of two meanings. It might create an obligation to apply the loan portfolio to repayment of the loan and for no other purpose. Or it might create an obligation to repay the loan only out of the loan portfolio and not from any other fund unless authorised. Which of these it is to bear must depend upon the nature of the document in which the condition appears. In a commercial contract, between lender and borrower, the first meaning would be appropriate, possibly the more appropriate of the two. But in a document emanating from the Bank of England, in a context of exchange control, the second is the only one possible. The Bank of England would have no interest whatever in protecting a foreign lender: its concern would be, and certainly was, to prevent foreign currency (Swiss francs) acquired at the official rate from being sold with the investment currency premium. In my opinion condition (vii) imposes nothing more than a negative restriction preventing I.F.T. from repaying the loan otherwise than out of the sale proceeds of the F.I.B.I. securities or other investment currency if approved by the Bank of England.

2. As a matter of contract between S.B.C. and I.F.T., clause 3 (b) of the loan agreement is nothing more than a clause, usual in such agreements designed to ensure that the lender complies with all necessary exchange and control regulations. It cannot convert condition (vii) from an exchange control negative stipulation into one of a different character. There is in fact no agreement with S.B.C. as to the manner of repayment of the loan except that it will be repaid in conformity with Bank of England consent and exchange control regulations."

19. In this case, it was submitted on behalf of the appellant, at paragraph 4.7 of counsel's skeleton submissions, as follows.

"A's case was and is that there is nothing unclear or uncertain about the wording of these letters. Quite the contrary, they are unusually clear and precise considering that they are written by 2 lay persons. The intention (and legal effect) of the letters was twofold: (1) A agreed to hold the Property upon trust as to 60% for Mrs A and 40% for himself; and (2) A further agreed that in the event that the Property was sold and the net sale proceeds were insufficient to repay Mrs A's debt out of her 60% interest, he would pay the balance out of his 40% interest. Having accepted (1), it is not understood why R does not accept (2)."

The respondent's position, in summary, was that

(a) the words were not sufficiently clear to create an equitable charge applying the principle as identified by Lord Wilberforce;

(b) the analysis of the district judge was correct, because it was consistent with the fact that both thought that 60% of the Property was hers and 40% of the Property was his; and

(c) that given the terms of the correspondence, it would not be unconscionable for the appellant to pay 60% of the proceeds of sale to his mother and leave her to proof for any additional amount in his bankruptcy.

Discussion

20. First, I accept as obviously correct that, in construing the effect of the letters, regard must be had to the factual matrix down to the date when the letter was sent, i.e. all the facts known to both parties to the transaction (here the appellant and his mother), and that no regard is to be had to facts and matters arising after that date for the purpose of construing the agreement contained in the letters to which I have referred. In addition, regard must obviously also be had to the terms in which the parties expressed themselves.
21. With those requirements clearly in mind, it is next necessary to identify the question that has to be answered. In my judgment, the question that has to be answered is whether what was set out in the appellant's letter constituted, in its context, an agreement on the part of the appellant that, if and to the extent any sum remained due to the appellant's mother after she had received 60% of the net proceeds of sale on the sale of the Property, any such shortfall would be paid to her out of a specific fund coming to the appellant, namely his 40% share of the proceeds of sale.
22. In my judgment, the language used by the appellant is the first factor to be considered. The material part of his letter read: "If there is any shortfall in your money, I promise you that I will make it up out of my other 40% share." In my judgment, this language is consistent with an intention on the part of the appellant to charge his share of the proceeds of sale of the Property, in which otherwise his mother would have no interest, with payment of any shortfall. The language used by the appellant fulfils the requirement that there must be shown to be "an agreement between a debtor and a creditor that a debt owing shall be paid out of a specific fund coming to the debtor". It is common ground that the appellant was a debtor to his mother for the sum of £90,000-odd, or would be once the £50,000 that she was offering to lend had been advanced. There can be no doubt that the portion of the proceeds of sale representing the appellant's 40% interest in the Property is a " … specific fund coming to … " the appellant. Finally, there is no doubt that the exchange of letters constituted an agreement which imposed upon the appellant the obligation to pay the debt out of the specific fund identified.
23. Although counsel for the Official Receiver was disposed to argue the contrary, I do not accept that the reasons that led Lord Wilberforce to conclude that the equitable charge doctrine he referred to in his judgment did not apply to the specific facts of the SBC case have any application to the facts of this case. Indeed, I consider this case to be, for all material purposes, equivalent to the position that would apply in relation to a commercial loan agreement, to which Lord Wilberforce refers in paragraph 1 at page 613F-G. The fact that the agreement is between mother and son is not material in this context. It is entirely clear from the terms of the letters that the appellant's mother wanted to achieve a guarantee of repayment of the whole sum, and wanted the comfort of a formal agreement. Thus, the familial context in which this agreement was reached is, as I see it, immaterial.
24. Save in one respect, the relevant factual matrix is all consistent with an agreement to the effect I have mentioned. The material factors that emerge from the factual background are the following:

a) The appellant had borrowed money from his mother in the past.

(b) £25,000 was due back from the appellant to his mother at the time when the letters were exchanged between them, but he could not afford to pay her, even though she wanted repayment at that time.

(c) It is to be inferred that at the time of the agreement the appellant's only asset of value was the Property. In my judgment, this is to be inferred from the fact that £25,000 was said to be due for repayment to the appellant's mother but he could not repay it, and from the fact that not merely could he not repay the £25,000 that was owing, but also needed to borrow a further £50,000.

(d) The appellant's mother was willing to lend the appellant a further £50,000 which she herself was borrowing, but was prepared to do so only on the basis that the total of the sums lent to the appellant down to 25^th August 2007 and the further sums to be lent by her were to be guaranteed for repayment from the proceeds of sale of the appellant's Property.

(e) Whilst the expectation of the appellant as derived from the language of his letter was that he expected property values to continue to rise and that his mother's 60% interest in the Property would be more than sufficient to enable her to recover the sums lent, the interest thereon that he agreed to pay and something in addition, the need to make provision for what was to happen in the event that that was not so was obvious, and, given the terms of his mother's demand and his own financial situation, the solution equally so.

25. The only factor which might lead to a different conclusion concerns the fact that although the appellant said that he would "get the solicitor to pay you directly the 60%", he did not give a similar commitment in respect of the shortfall. Whilst the point that can be made from this factor has logical attractions, it is, in my judgment, unreal in the circumstances. First, neither party is a lawyer or a commercial or experienced lender, so far as I am aware. It is unrealistic to expect that the language used by the appellant and his mother would be perfect in every respect. That is why it is dangerous to focus on specific sentences without keeping the whole picture clearly in view. Secondly, it is clear from the terms of the letter that the appellant believed at the time that his mother would recover all that was due and possibly more when she received the sum representing her 60% interest in the Property. Thirdly, the words used by the appellant in relation to the instructions to be given by him to a solicitor concerned in the future sale of the Property meant that his agreement in relation to his 40% interest in the proceeds of sale did not create a charge would defeat what his mother had clearly demanded, i.e. a guarantee of payment of the whole sum outstanding from the proceeds of sale of the house.
26. I now turn briefly to the district judge's reasons for coming to a different conclusion as set out in paragraph 51 of the judgment (the whole of which I set out earlier in this judgment). The point made in paragraph 51.1 does not lead to the conclusion that the district judge reached once it is understood that (a) the appellant's mother wanted security for the whole of the sum due to her and (b) what the appellant was providing for was the possibility that at the time the Property was sold it would not achieve the price that he anticipated. Paragraph 51.2 in my judgment, begs the question. Whether what was inserted was an afterthought or not is immaterial. It was the effect of what was inserted that matters. I do not accept that the promise I am concerned with can be dismissed as a mere personal promise for the reasons I have given. Paragraph 51.3 addresses the point made concerning the intended instructions to be given to the solicitor handling the future sale of the Property. I have addressed that point already and need say no more about it. As to paragraph 51.4, I agree that the appellant could have made a promise to the effect identified. However, he did not. In those circumstances, the question that arises is as to the effect of what the appellant actually did. Thus, the point made by the district judge does not assist to resolve the real issue between the parties. The fact that the appellant intended that 40% of the Property should be his is obvious, but immaterial to whether he intended to charge that share with the payment of any of the money lent to him by his mother and interest, save for the obvious point that he could only charge what belonged to him. As to paragraph 51.5, the district judge says that the reference to "out of my other 40% share" was nothing more than a recognition that the likely source of repayment would be that fund. I do not consider that to be the intention to be inferred from the words quoted, for the reasons already given, when viewed in the correct factual matrix, which includes, of course, the position being adopted by the appellant's mother. Paragraph 51.6 is a restatement of the points already made in paragraph 51.4 and requires no further comment.

The Effect Of the Minor Payments

27. It was argued on behalf of the Official Receiver that, in the event I came to this conclusion, I should nevertheless maintain the bankruptcy restrictions order by reference to the minor payments, albeit also reducing the duration of the order. I do not regard that as an appropriate course to adopt. Although there is a reference to the minor payments in the allegations set out in the Official Receiver's report, a BRO was not sought at the hearing before the district judge by reference to those payments. This much is apparent from counsel's skeleton for the hearing before the district judge. Paragraph 14 identifies all the relevant payments, but at paragraphs 15 to 17 concentration is applied exclusively on the payment by the appellant to his mother. The submissions that are outlined at paragraphs 20 to 21 are advanced exclusively by reference to the payments by the appellant to his mother, and at paragraph 22 under the heading "Conclusion" the following is said:

"The Official Receiver contends that Mr Going's conduct in making the payment to his mother such that she was repaid some £26,000 of her debt, and his accelerating the sale of his property to enable him to do so before being made bankrupt, is such as to warrant a bankruptcy restrictions order being made. The payment was to the detriment of the general body of his creditors, and amounted to a preference of his mother."

Not surprisingly in these circumstances, no part of the district judge's judgment suggests that the order that he made was attributable to the minor payments – see in particular paragraph 73 of the judgment, as set out above. It is true that the district judge did refer to the rent payment in passing at paragraphs 63 to 64 of his judgment, but the only point apparently being made was that the payment would not have been necessary but for the sale of the Property, which in turn feeds into the conclusion arrived at by the district judge at paragraph 73(c) of the judgment relating to what is called by the district judge "the quick sale".

28. As I observed at the outset, this appeal is a review of the district judge's decision. It is not open to me to make an entirely new order by reference to issues that were not argued before the district judge and in respect of which he made no findings, and in respect of which no submissions appear to have been made. In those circumstances, I consider that permission to appeal must be granted and the appeal allowed.

Issues 2 and 3

29. In the circumstances, it is not necessary that I consider issues 2 and 3. However, it is right that I should indicate in very brief terms the conclusions that I would have reached had they been material.
30. In relation to issue 2, I agree that the district judge failed to decide whether the appellant believed he was under an obligation to pay his mother, and I agree also that if the district judge had concluded that the appellant genuinely believed that he was under an obligation to pay his mother, that could impact on whether a BRO was made at all, or, if it was to be made, for how long. This enquiry would involve not merely attempting to ascertain the subjective intentions or beliefs of the appellant, but also would involve an enquiry as to the degree to which it was reasonable in the circumstances for the appellant to have any such belief. This issue was addressed by the Official Receiver's counsel in paragraph 35 of his skeleton submissions for the appeal, but, in my judgment, the point that he makes there really misses the point in issue between the parties. Clearly, if the appellant had no honest belief that he was obliged to pay his mother out of his 40% share, and that he did so only because he wanted to prefer her over his other creditors, then there would be no point that could be made. However, that is not the point which is made on behalf of the appellant. The point which is made is the one I have identified, namely that it was necessary to enquire as to the subjective intentions or beliefs of the appellant and the objective grounds for that belief in order to determine whether a BRO should be made and, if so, for how long.
31. Had the point I am now considering been a determinative one, a question would have arisen as to whether to direct a re-hearing, or whether the issue could have been addressed on the basis of the evidence available, which is set out in the transcript. The difficulty is that whilst the district judge certainly concluded that the appellant was motivated by a desire to defeat the interests of his creditors, the issue I am now considering was not considered at all. The difficulty is, in those circumstances, whether all the relevant evidence was properly before me. There is an additional issue as to whether or not this issue is open at all, given the way in which the case was conducted before the district judge. These are issues I would have had to grapple with had the point been a determinative one. It would be inappropriate for me to express any concluded views on them, given the hypothetical nature of the points in the circumstances.
32. In relation to the issue concerning whether the district judge was entitled to take account of the appellant's conduct relating to the sale of his house, I would have resolved that issue in favour of the appellant as well. There was no mention of the circumstances of the sale in the statement of conduct relied on. Indeed, the sale of the Property took place before the dates identified in the statement of conduct. No allegations were made of any sort concerning the sale at that stage. The allegations made related exclusively to the disposition of the proceeds of sale. The first mention of the relevance of the timing of sale appears to be in the skeleton filed by counsel for the Official Receiver the day before the hearing before the district judge at which the order under appeal was eventually made. In my judgment, if this point was to be relied upon, it ought in fairness to have been clearly identified as a factor relied upon in the statement of conduct set out in the initial report by which these proceedings were initiated; or, alternatively, ought clearly to have been identified either formally by a proposed amendment or additional report, or perhaps in correspondence supplied to the appellant and his advisers, well before the hearing before the district judge.
33. It was submitted on behalf of the Official Receiver, by reference to certain passages of the judgment of Neuberger J (as he then was) in Re Deaduck Limited [2000] 1 BCLC 148 at 159, that the district judge's approach was justified because he was obliged to take into account the circumstances that surrounded the conduct identified in the statement of conduct relied upon. In my judgment, that submission involved a misunderstanding of what Neuberger J was saying. What he said was:

"While I accept, in light both of principle and of Rule 3(3), that it is of the essence that a director is not disqualified under the 1986 Act for a course of conduct which is not the subject matter of a specific charge (and, indeed, which is specifically disavowed as a topic of criticism), it does not appear to me to be illegitimate to take into account that course of conduct as part of the background against which the seriousness of a charge which has been made and established is to be judged. A wrongful action may be explicable, even wholly forgivable, when carried out in one set of circumstances; yet an effectively identical action may, in different circumstances, be open to serious criticism. On that basis, it appears to me to have been quite legitimate for the Registrar to have taken into account the fact that the Payment was made in the context of the Project which was being implemented at the time, and which Mr Baker himself accepted involved risk (albeit not, he thought, for the creditors of the Company)."

I have no doubt at all that it was entirely legitimate for the district judge to take into account all the circumstances that surrounded the payments made by the appellant to his mother. This would have included, as I have already said, matters such as (a) whether the appellant subjectively believed he was under an obligation to pay on the hypothetical assumption that there was, as a matter of law, no obligation to pay his mother in preference to his general creditors, and (b) whether he had such a belief on reasonable grounds. However, the district judge's approach was entirely different. He expressly had regard to the circumstances of the sale as part of the conduct which formed the basis for the making of the BRO – see, in particular, paragraph 72 of the judgment set out above. I accept entirely that it would have been preferable for this point to have been identified as an issue for the district judge at the outset of the hearing, and I also accept that it was not identified in that way by the appellant's then counsel (not, I emphasise, his counsel at the hearing of the appeal). However, balanced against that point has to be the point that the issue I am now concerned with goes to procedural fairness, to which all parties are bound to have regard. The issue was addressed by counsel for the appellant at least to a degree – see the transcript at page 142. That ought to have been sufficient to alert the district judge to consider with some care whether the course he was being invited to embark upon on behalf of the Official Receiver was one that he ought safely to adopt. Had this been the only issue in respect of which the appeal had succeeded, I would have concluded that the question of whether a BRO should have been imposed and, if so, for how long, could be decided by me by reference to the existing material, but leaving out of account the issue concerning the speed of sale, which, in my judgment, ought not to have been taken into account. However, and given the circumstances attending the resolution of the principal issue set out above, it seems to me entirely inappropriate that I should embark upon that exercise at this stage on the hypothetical basis that the clear conclusions I have reached in relation to the principal point are wrong.

Conclusion

34. In those circumstances, and as I have said, the appropriate course is to grant permission to appeal and to allow the appeal.