Nationwide Building Society v Wright & Anor

This is an appeal from an order made on 24 September 2008 by His Honour Judge Charles Harris QC, sitting in the Northampton County Court, in proceedings brought by the trustee in bankruptcy of Mr Jonathan Wright under section 3(5) of the Charging Orders Act 1979.

The section is in these terms, so far as material:

That issue arises from the terms of sections 346(1) and (5)(b) of the Insolvency Act 1986:

For the purposes of this section – . . .

Mr Wright (“the bankrupt”) was adjudicated bankrupt on 12 July 2006 on a petition which had been presented some two months earlier, on 17 May 2006, by the supervisor of an individual voluntary arrangement in respect of which he was said to be in default. The estate which vested in the trustee in bankruptcy on appointment included the bankrupt’s share in property known as 15 Cedrus Court, Northampton: a property of which the bankrupt and his wife were registered as proprietors.

At the date when the bankruptcy order was made the bankrupt’s share in 15 Cedrus Court was subject to a charging order in favour of the appellant, Nationwide Building Society. That charging order had been made to secure a judgment, in the sum of some £10,000, obtained by the Building Society on 7 April 2006 in respect of a credit card debt. An interim charging order had been made on 5 May 2006: that order was made final on 26 June 2006.

It can be seen that the interim charging order was made before the presentation of the bankruptcy petition. Although the final order was made after the presentation of the petition, it is common ground that the Building Society did not then know that the bankruptcy petition was pending. Further, although the petition was presented in the Northampton County Court, it is common ground that the District Judge who made the charging order – and who was subsequently to make the bankruptcy order - did not know that at the time. It has not been suggested that, under the practice then prevailing in that court, he should have known of it.

An application to discharge both the interim charging order of 5 May 2006 and the final charging order of 26 June 2006 was made by the trustee in bankruptcy by notice dated 6 November 2007. It came before Deputy District Judge Jolly on 16 May 2008. He made the order sought. He held, correctly in my view: (i) that the final order would not have been made if the District Judge had known, at the time, that there was a pending bankruptcy petition; (ii) that, in the circumstances that the District Judge did not know of the pending bankruptcy petition, the final charging order was properly made; and (iii) that the existence of the pending bankruptcy petition, and the bankruptcy order subsequently made on that petition, were not, of themselves, sufficient to establish a right to have the charging orders set aside. It was a matter of discretion whether or not to accede to the application. He concluded:

The Building Society appealed to the County Court Judge. He dismissed the appeal for the reasons set out in the judgment which he delivered on 24 September 2008. After consideration of the authorities cited to him, he concluded that section 3(5) of the 1979 Act gave the court a discretion “to discharge or vary when it considers after proper consideration of the circumstances that it is correct to do so”. That was not to be done lightly “because that would destroy the advantages of a charging order which is a useful remedy which the law provides”. He went on, at paragraph 11 of his judgment, to say this:

The Deputy District Judge had made no reference in his judgment to the provisions of section 346 of the Insolvency Act 1986. The Building Society’s grounds of appeal to the County Court Judge included the following:

If this effect was intended by the legislature it would have been expected to have said so explicitly and it does not.

The language of Section [346](1) is not without explicit provision apt to limit the breadth of section 3(5).

Section 3(5) has not been revoked or modified.

I agree with Judge Behrens in the IDC case [IDC v Marrons [2001] BPIR 600] that the provisions of Section [346](1) are , , , ‘Dealing with the creditor’s rights to retain the proceeds of a [in that case] Garnishee Order. They do not deal with the court’s powers to set aside an order’.

There is no authority binding me to a contrary conclusion.”

The Building Society appealed to this Court with permission granted by Lord Justice Jacob on 14 January 2009. He was satisfied that the case involved an important point of principle. The trustee in bankruptcy has taken the view that, in the interest of saving costs to the bankrupt’s estate, he should not oppose the appeal; but, helpfully, the skeleton arguments filed on his behalf at the hearings below were put before the Court. We had the benefit of full argument by counsel on behalf of the appellant. At the conclusion of the hearing, we indicated that we would allow the appeal; set aside the whole of the order of 16 May 2008; set aside the order for costs made on 24 September 2008; but make no order for costs in this Court or below. Our reasons would be put in writing.

The point of principle on which the guidance of this Court is required is whether there can be discerned, in the provisions of section 346(1) of the Insolvency Act 1986, a clear legislative policy that, absent special circumstances, the interest of a judgment creditor who has obtained the benefit of a final charging order before the commencement of the debtor’s bankruptcy, should prevail over the interests of the unsecured creditors in having pari passu distribution of the bankrupt’s estate. If so, then it can properly be said that the courts below erred in failing to recognise, or give weight to, that principle.

Section 346(1) of the 1986 Act was first enacted as section 179 of the Insolvency Act 1985. It is the statutory successor to section 40(1) of the Bankruptcy Act 1914 (which was repealed by the 1985 Act). Section 40(1) of the 1914 Act was in these terms:

Section 40(1) of the 1914 Act must be read in conjunction with section 37(1) of that Act:

A short summary of the relevant provisions in the pre-1986 law may be of assistance. A debtor committed an “act of bankruptcy” in circumstances set out in section 1(1) of the 1914 Act. The commission of an act of bankruptcy, might lead to the making of a bankruptcy order under section 18(1) of the 1914 Act. But there were at least four intervening steps: (i) within three months following the commission of an act of bankruptcy, a creditor might present a bankruptcy petition (section 4(1) of the Act); (ii) on a bankruptcy petition being presented, the court could make a receiving order (section 3 of the Act); (iii) that would lead to a meeting of creditors (section 13(1) of the Act) and to the submission of a statement of affairs (section 14); and (iv) following the submission of the statement of affairs there would usually be a public examination of the debtor (section 15). The effect was that the commencement of the bankruptcy (under section 37(1) of the Act) – and the relevant date for the purposes of section 40(1) of the Act – could be expected to have occurred some weeks, if not months, before the bankruptcy order was made.

That was the position when the power to make charging orders for the purpose of enforcing judgments or orders of the High Court or any county court for the payment of money was conferred by section 35(1) of the Administration of Justice Act 1956; and that remained the position when that section was repealed by – and replaced by section 1(1) of – the Charging Orders Act 1979.

The position changed when the provisions relating to individual insolvency - formerly in the 1914 Act – were replaced by those first enacted as Part III of the Insolvency Act 1985 and brought into force by the Insolvency Act 1986. Section 278 of the 1986 Act provides, in terms, that “the bankruptcy of an individual against whom a bankruptcy order has been made – (a) commences with the day on which the order is made”. Section 306(1) provides for the vesting in the trustee in bankruptcy, immediately on his appointment, of “the bankrupt’s estate”. The “bankrupt’s estate” is defined as “all property belonging to or vested in the bankrupt at the commencement of the bankruptcy”: section 283(1) of the 1986 Act. Save to the extent permitted by section 284 of that Act (restrictions on dispositions of property in the period between the presentation of the bankruptcy petition and the vesting of the bankrupt’s estate in the trustee), there is no relation back under the 1986 Act – as there was under the 1914 Act – to a date before the making of the bankruptcy order. And section 284 does not affect the rights of persons who received property from the bankrupt before the commencement of the bankruptcy in good faith, for value and without notice that the petition had been presented: section 284(4) of the 1986 Act. There is, of course, power to restrain execution after the presentation of the petition (section 285(1) of the 1986 Act) - and there are powers to set aside transactions at an undervalue or by way of preference (sections 339 and 340 of the Act) – but those powers do not detract from the clear principle that a person who deals with the bankrupt (in good faith and without notice of the presentation of a bankruptcy petition) before the making of the bankruptcy order is entitled to retain property so acquired.

The principle that property acquired from a debtor (in good faith and without notice of the presentation of a bankruptcy petition) is entitled to retain that property against the trustee in bankruptcy represents a change not only to the position in respect of individual insolvency before the 1986 Act but also a departure from the position, both before and after the 1986 Act, in relation to corporate insolvency. In a case where a company is wound up by the court (save where there has been an earlier resolution for voluntary winding up) the winding up is deemed to commence at the time of the presentation of the petition for winding up: section 129(2) of the 1986 Act, and, formerly, section 229(2) of the Companies Act 1948. Section 127 of the 1986 Act (and, formerly, section 227 of the 1948 Act) avoids any disposition of the company’s property made after the commencement of the winding up – that is to say, after the presentation of the petition - unless the court otherwise orders. There is no saving for persons who acquired property from the company between the date of the presentation of the petition and the making of the winding up order in good faith and without notice of the petition. Section 128(1) of the 1986 Act (and, formerly, section 228(1) of the 1948 Act) avoids any execution against the estate of a company after the commencement of the winding up. Section 183(1) of the 1986 Act (and, formerly, section 325(1) of the 1948 Act) is in terms which are indistinguishable from those of section 346(1); but there is, of course, the important difference that, in the former, the “commencement of the winding up” means the date of the presentation of the petition and, in the latter, the “commencement of the bankruptcy” means the date of the bankruptcy order. There can be no doubt, as it seems to me, first, that the legislature intended to alter the position in bankruptcy in respect of charging orders from that which had preceded the 1986 Act; and, second, that the legislature intended that, under the 1986 Act, the position in bankruptcy in respect of charging orders should differ from the position in corporate insolvency.

That principle, as it seems to me, underlies both the restriction in section 346(1) of the 1986 Act and the limitation to that restriction. A creditor who has issued execution against the land of a person who is adjudged bankrupt is not entitled, as against the trustee in bankruptcy, to retain the benefit of that execution unless the execution was completed before the commencement of the bankruptcy; that is to say, unless the execution was completed before the bankruptcy order was made. That is not to say that a creditor who has completed execution before the commencement of the bankruptcy will, in all circumstances, be entitled to retain the benefit of that execution. In the absence of an express limitation to that effect, the legislature is not to be taken to have intended to impose a restriction on the general power to discharge or vary a charging order conferred by section 3(5) of the 1979 Act. But it is, in my view, clear that the legislature did intend that a creditor who had completed execution before the bankruptcy order was made was not to be deprived of his security by reason of the bankruptcy order alone. Some additional feature was needed before it could be appropriate to exercise the general power under section 3(5) of the 1979 Act.

Further, section 346(5)(b) of the 1986 Act supplements the provision formerly in section 40(2) of the 1914 Act by the addition, after the words “an execution against land is completed by seizure, [or, in the case of an equitable interest], by the appointment of a receiver”, of the words “or by the making of a charging order [under section 1 of the Charging Orders Act 1979]”. Those additional words, as it seems to me, put beyond doubt the legislative intention that a judgment creditor who has obtained a final charging order before the making of a bankruptcy order is not to be deprived of the benefit of his security by reason of the bankruptcy alone.

It follows, in my view, that the courts below were in error in failing to recognise, and give weight to, the legislative policy underlying section 346(1) of the 1986 Act. This Court was entitled to substitute its own view as to the order to be made on the application under section 3(5) of the 1979 Act.

We were referred to observations made, both in this Court and in the House of Lords, in Roberts Petroleum Ltd v Bernard Kenny Ltd, [1982] 1 WLR 301 (CA) and [1983] AC 192 (HL). The issue, in that case, was whether a charging order nisi should have been made absolute in circumstances where, between the date of the order nisi and the order absolute, the debtor company had commenced winding up (in that resolutions for voluntary winding up had been passed). The House of Lords, reversing the Court of Appeal, held that a final order should not have been made. Lord Brightman posed the question in these terms ([1983] AC 192, 208):

The issue which was determined by the House of Lords in the Roberts case does not arise in the present case. At the date when the charging order in the present case was made final (26 June 2006) the statutory scheme for the distribution of the debtor’s assets was not in existence (notwithstanding the presentation of the bankruptcy petition on 17 May 2006); and it did not come into existence with effect from 17 May 2006 (or any other date before 26 June 2006) by relation back on the making of the bankruptcy order on 12 July 2006. Nevertheless, it is necessary to have regard to a further passage in the speech of Lord Brightman. After setting out the provisions of section 325 of the Companies Act 1948, as amended by section 36(4) of the Administration of Justice Act 1956 – provisions now found in sections 183(1) and 346(1) of the 1986 Act – Lord Brightman said this (ibid, 212G-213E):

It is important to appreciate that Lord Brightman did not suggest that, if an order absolute had been made before the commencement of the winding up, the liquidator would, under the terms of section 325 of the Companies Act 1948, be able to deny the execution creditor the benefit of the execution. Indeed, it is reasonably clear that he took the contrary view: that, if the order absolute had been made before the commencement of the winding up, the liquidator would have been unable to deny the execution creditor the benefit of the execution. And, as he observed (ibid, 212H), if that were the position “it would be odd if the court seized of the action took the view that it would be wrong to make an order absolute in [those] circumstances”. The reason why that was not the position on the facts in the Roberts case was that, as at the date of the commencement of the winding up, the order absolute had not been made. The execution had not been completed. The argument advanced on behalf of the execution creditor failed because it was wrong to construe the phrase “completion of the execution ” in section 325 of the 1948 Act as including the making of an order nisi or the interim appointment of a receiver. Properly understood, as it seems to me, Lord Brightman’s observations in the Roberts case provide support for the view that, absent special circumstances, it would be wrong to refuse an order absolute in circumstances where, if the order were made, the execution creditor would be able to rely on it against a liquidator in a winding up: that is to say, if the order were made at a time when the winding up had not commenced.

For completeness I should mention three decisions in the High Court to which we were taken. In Banque Nationale de Paris plc v Montman Ltd and others [2000] 1 BCLC 576 the charging order absolute was made on 1 February 1996; a winding up petition was presented on 22 May 1996; and an order for the winding up of the debtor company was made on 10 July 1996. In those circumstance it follows, in my view, that Miss Hazel Williamson QC was correct when, sitting as a Deputy Judge of the High Court on an application made by an unsecured creditor under section 3(5) of the 1979 Act (which failed on the grounds of lack of standing), she observed (at 581e-f) that:

Industrial Diseases Compensation Limited v Marrons [2001] BPIR 600 provides an example of circumstances in which it was held to be wrong to make an order absolute in the period between the presentation of a bankruptcy petition and the making of the bankruptcy order. The Inland Revenue presented a bankruptcy petition against the debtor on 3 July 1998; on 5 August 1998 and, again, on 2 September 1998, the claimant (IDC), with knowledge of the petition, applied for and obtained garnishee orders nisi in respect of monies which would become payable to the debtor on a contingency; on 3 December 2008 those orders were made absolute; a bankruptcy order was made on 12 January 1999. On the application of the trustee in bankruptcy His Honour Judge Behrens, sitting as a Judge of the High Court, set aside the garnishee orders on the grounds that they should not have been made. He accepted that the District Judge was aware of the pending bankruptcy petition at the time when he made the orders nisi; and there was no doubt that the County Court Judge was so aware at the time when he made those orders absolute. After referring to the Roberts case and to observations of Lord Justice Buckley in D Wilson (Birmingham) Ltd v Metropolitan Property Developments Ltd [1975] 2 All ER 814 Judge Behrens said this ([2001] BPIR 600, C-D):

It is important to have in mind that, in both the Wilson case and the IDC case, the question was whether a court should make a garnishee order absolute in circumstances where it knew of pending insolvency proceedings. The distinction between the two cases (as Judge Behrens recognised) was that, in the former, the winding up had commenced on the presentation of the winding up petition whereas, in the latter, the bankruptcy had not commenced on the presentation of the bankruptcy petition. The judge did not find that distinction material; and given that the court knew of the bankruptcy petition at the time when the garnishee orders were made, I think he was right to take that view. He was right to hold that, in those circumstances, the orders should not have been made absolute on 3 December 1998: the appropriate course, at that time, would have been to adjourn the application for the orders to be made absolute until after the hearing of the bankruptcy petition.

Although the sequence of events in the present case is indistinguishable from that in the IDC case, there is an important difference on the facts. In the IDC case the garnishee orders should not have been made absolute at the time when they were made, because the court then knew of the pending bankruptcy petition: as I have said, the right course was to await the outcome of that petition. In the present case, the court did not know of the pending bankruptcy petition at the time when the charging order was made absolute. It is impossible to say that the charging order absolute should not have been made at the time when it was made. There are no grounds for an appeal against the charging order made in the present case: the question is whether the order which was correctly at the time should now be set aside by reason of the subsequent bankruptcy order.

C&W Berry Ltd v Armstrong-Moakes (deceased) and another [2007] EWHC 2101 (QB), [2007] BPIR 1199, provides an example of circumstances in which a charging order absolute, properly made at the time that it was made, was later discharged on an application under section 3(5) of the 1979 Act. The charging order absolute had been made on 22 July 1992. At that date, as Mr Justice David Clarke observed (ibid, [8] at 1201), the judgment creditor did not know that a bankruptcy petition had been presented against the debtor. He observed that “It may well be that had the deputy district judge in July 1992 received evidence as to the position of other creditors, particularly the petitioning creditor Acorn Minimix, he would not have made the order absolute”; but, plainly, he accepted that the district judge was not aware of the petition at the time. In that respect, the position is the same as that in the present case; and Mr Justice David Clarke’s decision to reject the submission that charging order should be set aside on the grounds that there was a bankruptcy petition pending against the debtor at the time it was made is direct authority in support of the appellant’s contentions in the present case. In the event he upheld the decision of the judge below to set aside the charging order on the ground that the judgment creditor had acted in such a way – including proving in the bankruptcy without relying on its security – that it should no longer be permitted to rely on that order. He said this (ibid, [29] at 1204-5):

As I have said, I am satisfied that the legislative intention which underlies section 346(1) of the 1986 Act is that a judgment creditor who has obtained a final charging order before the making of a bankruptcy order is not to be deprived of the benefit of his security by reason of the bankruptcy alone. I find nothing in the authorities which compels a different view: indeed, there is support for that view in two of the decisions in the High Court – the IDC case and the Berry case – and it is consistent with the approach of the House of Lords in the Roberts case. There is nothing in the facts of the present case which justifies a departure from that principle. I think the courts below were wrong to discharge the charging orders which had been made in this case.

For the reasons which I have now set out in this judgment, I held that the appeal should be allowed and the order of 16 May 2008 be set aside.

I agree.

I also agree.