England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
Chancery Division

		Royal Courts of Justice Strand London, WC2A 2LL
		29 November 2013

1. MR JUSTICE WARREN: The appellant, the Official Receiver, is the trustee in Bankruptcy of the respondent, Mr Baker. The OR is represented by Mr Parfitt of counsel, Mr Baker has appeared today in person. He is not represented. He has been unable to afford to instruct counsel, although he did, I believe, visit an individual in June or July.
2. The OR appeals from a decision of Deputy District Judge Campbell in the Brighton County Court on 22 February 2013 when he dismissed the OR's application for an income payments order coupled with an IPO under section 310 of the Insolvency Act 1986. The relevant facts can be briefly stated:

A Bankruptcy order was made against Mr Baker on 10 November 2011. The OR became trustee of the bankruptcy estate on 19 December 2011 following the filing of a notice under section 293 of the Act that there would be no meeting of creditors.

3. On 23 January 2012 the OR wrote to Santander bank requesting details of Mr Baker's accounts with the bank. In May he received a reply when Santander confirmed that Mr Baker held four accounts with balances totalling £10,196, which had been credited post bankruptcy. These sums are currently being retained by Santander to the OR's order.
4. It is not clear from the papers which I have read whether these amounts in the account represented earnings from Mr Baker's activities prior to or after (or a mixture of both) the bankruptcy order. Nothing turns on that for present purposes because I shall be making my decision today on the basis that these monies do not fall within either section 306 or 307 of the Act. If when it comes to rehearing, if that is what the result of my judgment is, then Mr Baker will be able to take any points under those sections which he wishes, although I know that he has told me that his recollection is that these monies were all derived from his activities after the bankruptcy order.
5. On 26 September 2012 Mr Baker attended on the OR for interview. He stated that his only source of income was as a professional gambler, although he has told me today that he had also income from a wedding business and other sources of income. He said that the balance in the Santander accounts has accrued through the accumulation of gambling winnings but in the light of what he has told me it may be that they derived also from other activities.
6. On 27 November 2012 the OR wrote to Mr Baker enclosing a suggested income payments agreement under section 310A comprised of a single payment of £9,415, which was the sum in the accounts less £781, which the OR estimated to be the cost of Mr Baker's essential outgoings for one month.
7. Having no response to that letter, on 14 January 2013 the OR made an application for an IPO under section 310 in the amount of £9,415. As I have said the application was heard by the deputy district judge on 22 February and he dismissed the application.
8. I now turn to the legislation and make a few preliminary comments as I set out the relevant provisions. Section 306(1) is concerned with the vesting of the bankrupt's estate in the trustee on his appointment. Property does not vest in anyone on the making of the bankruptcy order itself. This would not catch the money in the Santander account.
9. Section 307 which is headed 'After Acquired Property' provides in subsection (1):

"Subject to this section and section 309 the trustee may by notice in writing claim for the bankrupt's estate any property which has been acquired by or has devolved upon the bankruptcy's commencement to the bankruptcy."

10. And subsection (5) reads:

"References in this section to property do not include the property which as part of bankrupt's income may be the subject of an income payments order for the section 310."

11. So, on its face, it appears to catch all "property" and would thus include income once received paid after the bankruptcy order. While subsection (5) excludes the property described in that subsection, clearly if an IPO is made income received after the date of that order does not fall within subsection (1). The status of income received after the date of the bankruptcy award but before the IPO is a matter which I will come to later.
12. Section 309 provides for the time limit for notices under section 307 and 308. If no notice is served after the period of 42 days or any extended period the relevant property does not vest in the trustee in bankruptcy.
13. The trustee in bankruptcy may well decide not to serve a notice if the relevant property is onerous and such that under the old law he would simply have had to disclaim following its automatic vesting in him.
14. Section 310 is the section which deals with IPOs. Subsection (1) reads that:

"The court may make an order ("an income payments order") claiming for the bankrupt's estate so much income of the bankrupt during the period which the order is in force as may be specified in the order."

15. Subsection (3) provides for the extent of the order and, paraphrasing, it can require the payment by the bankrupt of an amount equal to so much of the relevant payment as is claimed by the order or it can require a third party, such as an employer, who might be making a payment to the bankrupt, to pay it instead direct to the trustee.
16. I will read subsections (6):

"An income payments order must specify the period during which it is to have effect; and that period -

(a) may end after the discharge of the bankrupt but -

(b) may not end after the period of three years beginning with the date on which the order is made."

17. Subsection (7) defines what is meant by "income of the bankrupt" for the purposes of section 310. I will not read it into the judgment. There is no issue in the present case that the money that we are dealing with is income within that section. If there is any point to take about that it would be for another occasion.
18. The central issue in this appeal turns on the meaning of subsection (1) and it is whether the trustee can claim any income received after the date of the IPO itself or whether he can also claim income received after the date of the bankruptcy order but before the IPO.
19. As to subsection (7), in the present case the OR contended and the district judge accepted that the winnings of the gambling activities fell within the subsection and as I have said if there is any point to take about that it can be dealt with if this matter is ever to get back before the district judge.
20. Section 333 deals with the duties of the bankrupt. Under subsection (1) there is a general duty to give the trustee information and to do all things that the trustee needs to get on with his job.
21. Subsection (2) provides:

"Where at any time after the commencement of the bankruptcy any property is acquired by or devolves upon the bankrupt or there is an increase of the bankrupt's income, the bankrupt shall, within the prescribed period, give the trustee notice of the property or, as the case may be, of the increase."

And the rules provide that the period there is 21 days.

22. Subsection (4) provides:

"If the bankrupt, without reasonable excuse, fails to comply with any obligation imposed by this section, he is guilty of contempt of court and liable to be punished accordingly (in addition to any other punishment to which he may be subject)."

23. In relation to subsection (2) there is no provision similar to section 307(5) but the reference to property, which is "acquired by or devolves upon", and to "an increase in income" appear to me to reflect precisely the division between property within section 307 and income within section 310.
24. The decision of the district judge was simple in its reasoning. In summary he said this:

1) First, the period during which the order is in force, referred to in section 310(1), means the period after an income payment order is made by the court.

2) Secondly, the only income that can be claimed under an income payments order is income received by the bankrupt after the making of the order.

3) Thirdly, a court therefore has no jurisdiction to make an income payments order which has the effect of claiming for the bankrupt's estate any income of the bankrupt which accrued prior to the making of the income payment's order.

4) And fourthly, as the income in this case accrued prior to the date on which an order might have been made the court had no jurisdiction to make an order in respect of that income.

So the application was dismissed.

25. He rejected, also, the proposition that the court could make an order with retrospective effect, treating the order as coming into effect on the date of the bankruptcy order rather than on the date of the IPO itself, so that it could be said that it was in force from the date of the bankruptcy order.
26. Mr Parfitt submits that the deputy district judge's conclusion is wrong. He does not submit that the court can make a retrospective order in the way I have just mentioned. Instead he makes three submissions which can be subsumed under the single head of construction, although there are separate points in them, as it were, in descending order.
27. Before considering those submissions I wish to say a little about the policy behind section 310 and to consider the authorities to which Mr Parfitt has referred in his skeleton argument and in his oral submissions.
28. Under the old law, the Bankruptcy Act 1914, the provisions for enabling a trustee to get hold of the income of the bankrupt were deficient. The Cork Committee, in its recommendations, said, effectively, that more emphasis should be placed, in future, on the payments of debts out of surplus income of a bankrupt and consideration should be given to his ability to pay early in the administration of his affairs. And it is fair to say that section 310 reflects the conclusions of the report.
29. The first case I wish to refer to is Pike v Cork Gully [1997] BPIR 723. In that case sums of money had been paid by Mr Pike into his account with the Abbey National Building Society. His trustees seised that sum in line with section 307. Mr Pike appealed asserting that the sums represented earnings for work done and materials supplied after the date of the bankruptcy order. As to that Lord Justice Millett said at page 724(e) that had that been so the trustee would have not been entitled to it, although he could have gone to the County Court and applied for an income payments order which had not been done. Mr Pike's appeal was therefore dismissed on the basis that he had not provided to the courts below with any evidence to demonstrate that the money did, indeed, represent earnings. However, Lord Justice Millett did review some correspondence with the Court of Appeal, which suggested that Mr Pike's version might be correct, but as to that Lord Justice Millett considered that Mr Pike could provide the further evidence to the trustee and ask him to consider it and to refund the money if he was satisfied that Mr Pike's version was correct. If the trustee refused to do so, Mr Pike would be able to go back to the district judge under section 375(2) to ask him to review his previous order.
30. Although the point on which the district judge in the present case relied was decided in favour of Mr Baker, it is a point which was not argued before Lord Justice Millett, a judge I might add hugely experienced in insolvency matters, who did not perceive any difficulty in an IPO being made in relation to income already in hand.
31. Next comes Kilvert v Flackett, a decision of Mr Peter Scott QC reported in [1998] DPIR 721. After the date of his bankruptcy Mr Flackett, a dentist and member of the NHS pension scheme, became entitled to benefits under that scheme including a tax free lump sum of over £50,000.
32. Mr Flackett admitted that his reasonable living expenses were met sufficiently out of his income as a dentist such that the annuity under the scheme should be paid to his trustee in the period until his discharge from bankruptcy and secondly, that the lump sum was income within the meaning of section 310(7).
33. The district judge made an order directing that only £10,000 of the lump sum should be made subject to an IPO. On appeal, Mr Scott allowed the appeal, directed that the whole of the lump sum should be paid to the trustee.
34. It is not necessary to go into the detail of the appeal; the only point to take away is that both the district judge and Mr Scott proceeded on the basis that an IPO could be made in relation to the lump sum notwithstanding that it had been received by Mr Flackett before the application for the IPO had been made.
35. Although there is nothing to indicate that the issue now before me was raised, Mr Scott had this to say:

"The court's discretion must be exercised by reference to the general purpose of the legislation, which is to vest in the trustee all property belonging to the bankrupt at the commencement of the bankruptcy (Insolvency Act section 306) and indeed after acquired property in limited circumstances (section 307) and to provide the payments in the nature of income received between the bankruptcy and the discharge should also benefit the estate unless there are reasons to the contrary."

36. That description of the purpose was, at least, consistent with the Cork Report recommendation which I have already referred to.
37. I come then to the decision of Mr Justice Evans-Lombe in Supperstone v Lloyds Names Associations' Working Party reported in [1999] DPIR 832.
38. This case concerned certain payments received by Mr Stockwell for work that he had carried out for certain action groups in relation to claims by Lloyd's members against Lloyd's. These payments were received after the date of Mr Stockwell's bankruptcy but even to the extent that they represented payment in respect of the provision of pre-bankruptcy services they were a non-contractual entitlement. In other words all payments were strictly ex gratia honoraria in recognition of the enormous amount of work which Mr Stockwell had carried out.
39. Mr Justice Evans-Lombe held that the payments were income even if they were one-off. Accordingly, not only were they excluded from section 307 but, also, they still constituted income "from time-to-time" under section 310.
40. In fact an IPO could not be made in that case because Mr Stockwell had already been discharged. There was no consideration of the issue now before me. However, Mr Justice Evans-Lombe, another experienced insolvency judge like Lord Justice Millett, did not advert to any argument that section 310 was not, in principle, applicable because the income in question was received before an IPO had been made.
41. The final case referred to in this context is Raithatha v Williamson [2012] EWHC 909, [2012] 1 WLR 3559, a decision of Mr Bernard Livesey QC sitting as a deputy judge of this division.
42. The bankrupt, Mr Williamson, had an entitlement under a pension scheme to elect to take a pension either in the form of a lump sum or periodical payments. His trustee applied for an IPO by reference to the unexercised right of election. This was resisted on the basis that the entitlement to receive payments under the pension scheme did not amount to income for the purposes of section 310. Mr Livesey held that the payment which Mr Williamson was entitled to receive, but had not yet elected to receive, constituted a payment in the nature of income to which he was entitled under section 310(7). He went on to make an order.
43. At paragraph 18 of his judgment Mr Livesey QC said this:

"The position now is that, where the bankrupt has, prior to the bankruptcy order, given notice to the pension fund of his election to take up his rights under the pension scheme, the operation of s.310 will present no problem. In the light of any lump sum or periodical payment paid or to be paid pursuant to that election, the sums remain the property of the bankrupt save to the extent that the trustee has applied for and obtained an order pursuant to s. 310. On such an application, before making an IPO, the court will evaluate what is fair and just between the competing interests of in particular the bankrupt and his creditors and make an order which is appropriate in all the circumstances of the case"

44. Clearly here Mr Livesey is referring to payments received after the bankruptcy order. Payments received before that order will no longer be rights under the pension scheme and so would vest, when the trustee is appointed, under section 306. And nor did he address the issue now before me, but he clearly saw the provisions working in the way which Mr Parfitt now submits they do work. This is entirely consistent with what Mr Livesey said in the next paragraph of his judgment, paragraph 19:

"While dealing with the order which a court can make in these circumstances, the court's power is set out in subsection (3) of section 310, subject, of course, to the limitation in subsection (6)(b). It was suggested in argument that the court could make an order which was expressed in terms of only (a) or (b) and not both. To my mind the power to make an order under (a) is designed to cater to situations where a payment has already been made to the bankrupt prior to the making of the IPO, that under (b) where payment has not yet been made."

45. I should not be taken in citing that passage to be accepting that the two paragraphs interact in precisely the way in which Mr Livesey has identified. It may be that a particular payment of income not yet made could nonetheless pass through the hands of the bankrupt, although, I accept that the more usual and better course will be for the person making the payment to be required to make it direct to the trustee.
46. I turn now to Mr Parfitt's submissions. At the outset I must say that in agreement with him I can see no policy reason at all why income received after the bankruptcy order but before the making of an IPO should not be capable of being made subject to such an order. If that is what the legislation requires, so be it. I think that might be thought to be a surprising result. This is because the conclusion of the deputy district judge really would leave a possible and possibly serious lacuna in the provisions. The bankrupt in some circumstances might quite properly be able to arrange that some income received in this twilight period, which could be a substantial amount when it is remembered that one-off payments can be income within section 307(5), could not be made the subject of an IPO and nor would they fall within section 307, as I will explain in a moment.
47. Mr Parfitt submits in his skeleton argument, effectively, as follows:

a) Income may come in the form of irregular one-off lump sums. I agree.

b) Income cannot be brought into the bankruptcy estate under section 307. I agree, but I will discuss that further in a moment.

c) Thirdly, a bankrupt does not have to tell his trustee in bankruptcy about the increase in income until 21 days after the income has increased. In relation to that see section 333(2).

d) Fourthly, there is no sanction on a bankrupt who does not comply with the notification requirement other than proceedings for contempt and, in particular, no financial sanction.

e) Fifthly, at least 28 days must elapse between an application for an income payments order being made and the hearing of such an application, see Insolvency Rule 6.1892.

48. The last of those two factors only go to emphasise the lacuna reflected in the first three factors. On one view, income only increases when the relevant additional income comes into payment. On that view any actual payment received before an IPO is made is not within the scope of section 310.
49. On another view, income might be said to increase when a person becomes contractually entitled to receive it immediately or in the future, but even in these circumstances it may well be that the actual payment ought to have been received within the 21-day period, and thus before the trustee has had an opportunity to apply for an IPO.
50. In either case the bankrupt is entitled to retain the increase.
51. That leads me into the question, which I have already mentioned, which is whether this income would, in fact, be outside the scope of section 307(5). The argument that it is outside that scope is this: section 307(5) excludes property from section 307(1) only if, as a part of the bankrupt's income, it may be the subject of an IPO.
52. On the construction of section 310, adopted by the deputy district judge, an IPO cannot be made in respect of income which has already been received. Therefore, the argument would run, at the time of its receipt the income is not excluded from the meaning of the property in section 307 because it is not income which may then be the subject of an IPO.
53. I have raised that argument, I have asked Mr Parfitt about it, because it is the only argument which I can think of which might help Mr Baker in this context, but I do not consider that there is anything in it. In my judgment the purpose of section 307(5) is to identify the type of property which is excluded from the meaning of that word, as used in section 307, which, absent the subsection, would fall within it. If an item of property falls within the definition found in section 310(7), it is excluded from section 307 whether or not an order can, in the events which happen, be made.
54. As I said, Mr Parfitt does not submit that section 310(1) permits the court to make a retrospective order in the sense that ordering the IPO itself is to be treated as coming into force on the date on which the bankruptcy order was made. In my view, he is right not to make that submission.
55. Instead, he submits, to use his words, that the phrase "during the period for which the order is in force" refers to when the order claiming the income can take effect and not when the income had to be received by the bankrupt and by that I understand the submission to be that the phrase in effect qualifies "making an order claiming" rather than "the income to the bankrupt".
56. Although the first limb of his submissions is that the natural reading of the subsection is in the sense that I have just indicated, he accepted in oral argument that the more natural meaning, at least looking at this provision in isolation, is that adopted by the district judge. I think he is right to acknowledge that difficulty facing him. But, of course, that is only one possible construction of section 310 read in isolation. It is not, however, to be read in isolation; it must be read with other provisions of the Insolvency Act 1986 including, in particular, subsection (3) of section 310 as well as section 307 and section 333. Thus section 301(3) deals with how the claim under section 310(1) is to be given effect to. It makes perfectly good sense in the context of, and indeed lends support to, the construction for which Mr Parfitt contends. It enables, through the route of paragraph (a), the trustee to recover, on that construction, an amount equal to the sums already received, even if the actual income has been spent.
57. Further, a construction which eliminates the lacuna which I have identified is to be preferred other things being equal to one which does not do so. The impact of section 307 therefore supports the construction for which Mr Parfitt contends. As to section 333(2), the underlying purpose of the notice requirement must surely be to enable the trustee to give the further notice under section 307 or to seek a further IPO or variation of an existing IPO. An actual payment of an increased income might be received before the trustee had had the opportunity to make an application. I can think of no rational explanation of why an increase in regular income should fall to be left out of account until a revised IPO is made or why a one-off income payment should fall to be left out of account altogether.
58. Further, section 333(4) provides the only remedy, if that is the right word, for a failure of a bankrupt to comply with his notice obligations and that is an exercise of the contempt jurisdiction. There is no power to put matters right in the sense of backdating an IPO or any other way of making the bankrupt disgorge that which could otherwise have been made the subject of an IPO. To that extent, a clear policy objective would be thwarted. I do not need to rehearse the well-known law relating to the purposive approach to statutory interpretation articulated by the House of Lords in Inland Revenue Commissioners v McGuckian [1997] 1 WLR 1991 on which Mr Parfitt relies, nor, indeed, from any other tax and other cases which have followed it. Nor do I need to refer to the general rules of construction which are now very well known and which one can derive from cases such as ICS and Rainy Sky. Effectively the courts must have regard to the purpose of the particular statutory provision in hand and give effect to it even if it requires some modest distortion of the language of the statute. But in a case such as the present where distortion is not necessary, I have no doubt that the correct construction of section 310 is to allow an income payments order to be made in respect of any income arising after the date of the bankruptcy order.
59. On that basis, in my judgment, the decision of the deputy district judge was incorrect and therefore I allow the appeal.