Bagnall v Official Receiver

LADY JUSTICE ARDEN: The Insolvency Act provides that, except in certain cases, bankrupts will be automatically discharged from their bankruptcy at the expiration of three years from the commencement of the bankruptcy (see Section 279 of the Insolvency Act 1986). However where a bankrupt has not co-operated with his trustee the court may defer the relevant date. This power is conferred by Section 279 (3) which provides as follows:

The question which arises on this appeal is whether the court has power to make an interim order suspending the bankrupt's automatic discharge until the substantive hearing of an application under Section 279. Such an order was made in the present case. Evans-Lombe J held that the court had power to make such order by virtue of Insolvency Rule 7.4 (6). This deals with urgent interim applications and is in the following terms:

Where an application is made under Section 279 the Official Receiver must file with his application a report setting out the reasons why it appears to him that an order suspending the automatic discharge should be made. This is provided for by the Insolvency Rules (see Insolvency Rule 6.215 (2). The court is to give notice of the hearing of the application to the trustee and the bankrupt as well as the Official Receiver (see Insolvency Rule 6.215 (3). The length of this notice is governed by Insolvency Rule 7.4 (5), which I have set out above. Paragraphs (4) and (5) of Insolvency Rule 6.215 deal with service of the report of the official receiver and the procedure to be adopted where the bankrupt disputes the report:

The appellant, Mr Bagnall QC, was declared bankrupt on 6 August 1999 on the petition of D J Freeman, Solicitors. Before the bankruptcy order was made there had been a proposal for a voluntary arrangement which failed and also proceedings for a freezing order. In the latter proceedings Mr Bagnall disclosed greater assets than had been disclosed to his trustee in the course of his bankruptcy. The trustee considered that Mr Bagnall was obstructing her realisation of some of his assets.

The third anniversary of the bankruptcy would have fallen on 6 August 2002. Therefore under Section 279 Mr Bagnall was due to be discharged from his bankruptcy on that date. However on 12 July 2002 the trustee in bankruptcy wrote to the official receiver asking the official receiver to make an application under Section 279 (3). The official receiver prepared a report which was simply in these terms:

On 23 July 2002 the official receiver issued the necessary application. If 21 days' notice was required to elapse before the third anniversary of the bankruptcy order, 21 days' notice of the hearing could not be given. Furthermore it is common ground that unless the discharge of bankruptcy was suspended on or before that date the bankruptcy would come to an end and could not subsequently be revived by an order under Section 279 (3).

Accordingly on 2 August 2002 the official receiver applied, without notice, to Deputy District Judge Radcliffe, sitting in the Eastbourne County Court. Deputy District Judge Radcliffe made an order suspending the bankruptcy until the substantive application could be heard. It is clear that the deputy district judge wished to maintain the status quo until that date. Mr Bagnall was not represented at the hearing. He was not served with the application or the official receiver's report, nor was he informed that there would be an application until after the order was made.

The date for the substantive hearing of the application was originally fixed for 11 September 2002, but then it was adjourned successively to later dates. By letter dated 7 August 2002 the official receiver asked the deputy district judge to consider a letter written by the solicitors for Mr Bagnall in which they disputed the grounds of the application. The official receiver had anticipated that the application would be opposed and, indeed, knew that those representing Mr Bagnall would take the point that there was no communication between the trustee and Mr Bagnall between December 2000 and May 2002. The deputy district judge confirmed his order; he did not give any reasons for doing so. The deputy district judge dealt with the matter on paper; there was no hearing.

On 24 October 2002 Mr Bagnall applied to strike out the official receiver's application. On 30 January 2003 District Judge Robinson dismissed the application. It was against that order that Mr Bagnall appealed to the judge. The judge's order against which this appeal is brought refers to a further order of 7 March 2003, which we have not seen but are told is not material for the disposition of this appeal. Judgment on the official receiver's substantive application under Section 279 was ultimately given on 16 May 2003, that is nearly 10 months after the application was issued and 9 months after the third anniversary of the bankruptcy order. The district judge suspended the discharge on the grounds that Mr Bagnall had failed to co-operate with the trustee. There was no appeal from this order. Mr Bagnall obtained his discharge on 21 September 2003, some four months later.

In the period between the date on which he would have been automatically discharged from his bankruptcy and the date when he was actually discharged there was considerable litigation between the trustee and Mr Bagnall, and Mr Bagnall continued to be subject to all the limitations which, by law, are imposed on a bankrupt person. If the four-month suspension had been ordered in August 2002 Mr Bagnall would have been discharged from bankruptcy in December 2002 and not September 2003.

On this appeal Mr Bagnall submits that the judge had no power to make an interim order under Section 279, and that the application did not comply with Insolvency Rule 6.215. Accordingly, on Mr Bagnall's submission, both the application and the order were nullities. Mr Bagnall submits that the power to make an interim order is not conferred by Insolvency Rule 7.4 (6). The procedure for applications under Section 279 (3) is set out exclusively in Insolvency Rule 6.215. That rule is mandatory. The period of 21 days could not be shortened. The deputy district judge made the order so as to maintain the status quo, not because of any urgency. The district judge was not in fact referred to the decision of Mr Michael Burton QC in Re Jacobs [1999] 1 WLR 619 and did not satisfy himself as to the grounds for suspending the discharge. Re Jacobs was wrongly decided: the judge made no reference to Insolvency Rule 6.215. Alternatively, Re Jacobs is distinguishable because in that case the bankrupt was in fact served with the report of the official receiver. The district judge's reference to the status quo was inapt because the status quo was about to change. In the circumstances, as he (Mr Bagnall) was not given notice of the application on 2 August 2002, there was a violation of Article 6 of the European Convention on Human Rights ("the Convention") for which he would be entitled to damages.

Mr Ritchie, for the official receiver, submits that Insolvency Rule 6.215 is facilitative and not restrictive. It would be offensive to common sense if the court could not make an interim order while the decision under Section 279 was pending. The acts of non-compliance relied on by the official receiver might only have been discovered on the eve of the expiry of the three-year period.

Mr Ritchie relies on the decision of Mr Michael Burton QC in Re Jacobs. He submits that the application on 2 August 2003 was under Insolvency Rule 7.4 (6). The existence of Insolvency Rule 6.215 (4) does not mean that the court has no power to make an order in any other circumstance.

Finally Article 6 of the Convention does not apply to an interim application which is not of itself determinative. Conclusions

I deal first with the judge's judgment and explain the reasons for his conclusion. The judge held that there was no authority on the operation of Insolvency Rule 7.4 (6) and, in particular, on what constitutes urgency within that Rule. He held that whether a particular order is to be treated as urgent within Insolvency Rule 7.4 (6) is a matter for the court in deciding whether or not to make the order. An application was properly to be regarded as urgent where, if the order was not made, the situation of one of the relevant parties or both of them would irretrievably alter. The court would then go on to consider whether in fact to make the order on the balance of convenience.

The judge then referred to the decision in Re Jacobs. He held that it was authority for the proposition that the court considering an application under Section 279 (3) could make an interim order suspending the bankrupt's automatic discharge pending a full hearing on the official receiver's application for such suspension. He noted, however, that in that case there had been full compliance with Insolvency Rule 6.215, that the bankrupt was present and able to argue against the making of the bank interim order at the hearing. In Re Jacobs the court did not consider Insolvency Rules 7.4 (6) or 7.5 (1).

The judge then referred to a passage in the judgment of Robert Walker J in Hardy v Focus Insurance Co Ltd [1997] BPIR 77. At page 81 Robert Walker J observed:

The judge then referred to a passage from the judgment of Hoffmann J in Re First Express Ltd [1991] BCC 782:

The judge then held that Insolvency Rule 7.4 (6) conferred power on the court to make an interim order suspending a bankrupt's automatic discharge without notice and before the provisions of Insolvency Rule 6.215 had been complied with in a case where the court could properly regard the making of such an order as urgent and had concluded that - on the balance of convenience between the official receiver representing the creditors' interests and the bankrupt - it was appropriate that such an order be made. The judge did not therefore apply the test set out by Mr Michael Burton QC, namely of ascertaining whether the application was made on grounds which, if unchallenged, would justify a final order of suspension under Section 279 (3). Applying the test which he laid down, the judge held that it had been satisfied on 2 August 2002, subject to Article 6 of the Convention. The district judge was entitled to conclude that it was appropriate for him to make an interim order since -

The judge noted that considerable further delay occurred before judgment was given in May 2003, but he held that -

The judge held that there was no violation of Article 6 since it was established by authority that interlocutory orders of the court, pending a full hearing at which the rights of the complainant are to be determined finally, do not result in a violation of Article 6 even if the application is made ex parte.

Finally the judge dealt with a separate argument based on the construction of the two orders of April and August 2002. We are not concerned with that argument.

I turn to my conclusions. Insolvency Rule 7.4 (6) enables the court to deal with urgent applications by hearing the application immediately or by shortening the period for service. In my judgment, with respect to the judge, it does not fully answer the question of jurisdiction here since that power must be one which is not excluded by - in this case - Section 279 (3) or Insolvency Rule 6.215. Rule 7.4 (6) does not deal with the orders which the court may make on any application in respect of which paragraph (a) or (b) of that sub-rule has been invoked. That matter must be a question of construction of a substantive section and, in addition, in this case Insolvency Rule 6.215.

I take, first, Insolvency Rule 6.215 which has been at the forefront of Mr Bagnall's argument. In my judgment, this Rule doesnot stand alone. It must be read in the context of the Insolvency Rules as a whole, including Insolvency Rule 7.4. There is nothingin Insolvency Rule 6.215 to exclude the operation of Insolvency Rule 7.4. Accordingly, the powers conferred on the court by sub-rule (6) of Insolvency rule 7.4 to deal with urgent applications must apply to applications under Insolvency Rule 6.215. These powers include the power to shorten the period for service of the application (Insolvency rule 7.4 (6) (b)). Insolvency Rule 6.215 is therefore not mandatory in all circumstances. On the other hand, it is a clear expression that the underlying policy of the Insolvency Rules that wherever possible on an application under Section 279 the bankrupt should be served and moreover wherever possible he should be given an adequate opportunity to consider, and if appropriate respond to, the points made in the official receiver's report.

That therefore leaves Section 279 (3). On first reading Section 279 (3) does not authorise the making of interim orders. This is because it only applies "if the court is satisfied that a bankrupt has failed or is failing to comply with any of his obligations under this Part". Obviously, after a substantive hearing the court must be so satisfied, on the balance of probabilities. This was the conclusion of His Honour Judge Rich QC in another case noted in Muir Hunter on Personal Insolvency, namely Official Receiver v Milburn, unreported, 6 July 1999. It would be odd, however, if the court could not make an order at any interim stage provided of course that the application was filed within the three-year period, otherwise Parliament's intention could be rendered futile if the bankrupt concealed his activities until the last moment or managed to gain an adjournment. I am not suggesting that in this case Mr Bagnall concealed his activities until the very last moment, but taking that possibility as an example.

There could also be other circumstances in which the evident purpose of Section 279 could be frustrated by the absence of a power to make an interim order. Suppose the Official Receiver issued and served his application well within the time required but the court declined to make a suspension order; suppose further that the Official Receiver wishes to appeal that order but before the appeal can be heard the three-year period expires. If the appeal is ultimately successful the Official Receiver would be deprived of the fruits of his success if no interim order can be made. I also bear in mind that Section 279 (3) does not entail any change in the status of the bankrupt but rather the continuation of a pre-existing status and the postponing of the discharge date. In all those circumstances I consider that Section 279 (3) must be read as enabling the court in an appropriate case to make an order at a point in time before the substantive hearing of the application. The word "satisfied" means, as I see it, "proved sufficiently" and there must, in the particular circumstances, be an iterative process between the proposed order and the degree of satisfaction required. Accordingly where only an interim order is proposed the degree of satisfaction required is that sufficient to justify the court in granting that interim order.

In this case the judge expressed the position as being that there was a strong prima facie case for the grant of an order under Section 279 (3). In my judgment the court has power to make an interim order under this section and in doing it must be satisfied that there are reasonable grounds for concluding that such an order would be made after the substantive hearing on the material then placed before the court. The approach of Mr Michael Burton QC in Re Jacobs was a little different. He held that the court had to be satisfied that the grounds would, if unchallenged, have enabled the court to make an order under Section 279 (3). If the judge was there suggesting that, in making an interim order, the bankrupt's case, if known, should be disregarded, I would disagree. The judge cannot decide all the matters in dispute until the substantive hearing, but he must be satisfied, as I have said, that there are reasonable grounds for concluding that an order would be made on the substantive hearing on the material then placed before the court. I would expect the judge to lean on the side of the official receiver because of the consequences of refusing an interim order where the third anniversary of the bankruptcy order is about to occur. The automatic discharge cannot be reversed after the three-year period has expired. Thus no later decision under Section 279 (3) could revive the bankruptcy.

Applying the above tests to the facts of this case, I notice that the district judge was motivated by a desire to hold the ring until the application could be heard. He does not appear expressly to have considered the weight of the application but he had before him the report of the official receiver including the concluding paragraph which I have read. Bearing in mind that in due course a suspension order was made and that there had been no appeal from that order, the right inference to draw must be that he was satisfied that there were reasonable grounds for concluding that the application was likely to succeed.

I would like to conclude my judgment by making some observations as to the procedure. The policy behind Insolvency Rule 6.215 is that wherever possible the bankrupt should be given notice of the application and wherever possible he should be given an adequate opportunity to consider the points in the trustee's report. That policy, as I see it, is reflected in the official receiver's practice set out by Muir Hunter on Personal Insolvency at paragraph 3-528 where the text states:

Mr Ritchie was constrained to admit that it would have been better in this case if the official receiver had given Mr Bagnall notice of the application on 2 August and applied for the period of 21 days required by Rule 6.215 to be shortened if necessary. I entirely agree. That course would have been altogether fairer to the bankrupt. In a case where 21 days' notice cannot be given the bankrupt should at least be told as soon as the decision to launch the application under Section 279 is made. The making of a suspension order will have serious consequences for him. Moreover it is not an economical use of the court's resources to leave it to the bankrupt to make his own application to discharge an order made on the application of the official receiver without notice. Nor would I expect the official receiver, as an officer of the court, to take this course. His presence has been deliberately interposed by Parliament into Section 279 to ensure that there is a proper filter between the trustee and the court.

There are two further points. Trustees who leave it to the very last moment run the risk that the court will not exercise its discretion to make the suspension order. It is a judicial discretion. As the judge said, the interests of the creditors whom the official receiver represents have to be balanced with those of the bankrupt. Circumstances may arise where a trustee has been so dilatory that the consequences to the bankrupt are so unfair that the court might take the view that it was not appropriate to exercise its powers under Section 279 (3) despite the bankrupt's past or current failure to co-operate.

Robert Walker J made a further point which I should like to underscore. In his judgment in Hardy v Focus Insurance he held at page 81:

Finally the orders made by the court on 2 April 2003 were not dispositive of any civil right. For the purpose of Article 6 of the Convention, Mr Bagnall had not lost his right to oppose a suspension of his discharge for bankruptcy and indeed he could have applied to set aside the without notice order made by Deputy District Judge Radcliffe if he had wished to do so. Accordingly the making of the application without notice did not violate the right of access to court guaranteed by Article 6 of the Convention. For all those reasons I would dismiss this appeal.

LORD JUSTICE LATHAM: I agree. The consequence is that we give permission to appeal and dismiss the appeal.