Bramston v Haut

This is an appeal by Mr Timothy Bramston (“the Trustee”), the trustee in bankruptcy of the respondent (“Mr Haut”), against the judgment of Arnold J dated 21 May 2012 and paragraphs 1 and 4 of his consequential order made on the same day whereby he dismissed the Trustee’s application to set aside an order he had made on 3 April 2012 suspending Mr Haut’s discharge from bankruptcy and whereby he ordered the Trustee personally to pay Mr Haut’s costs.

The order of 3 April 2012 was made upon the application of Mr Haut pursuant to ss.279, 303 and 363 of the Insolvency Act 1986 (“the IA 1986”) in order to avoid the release from his bankruptcy debts which would take effect upon his statutory discharge and allow him time to make a proposal to his creditors for a voluntary arrangement (“IVA”).

The judge acceded to that application, concluding that he had jurisdiction to make the order sought under ss.279 and 303 of the IA 1986, suspending Mr Haut’s discharge for a period of six weeks and giving the Trustee liberty to apply to vary or discharge his order.

On 30 April 2012, the Trustee made an application under the liberty to apply provision seeking an order that the order of 3 April 2012 be set aside. In his judgment of 21 May 2012, Arnold J gave his reasons for dismissing that application. In summary, he held that the evidence now before him established that, as at 3 April 2012, Mr Haut had failed or was failing to satisfy his obligations so as to satisfy the jurisdictional threshold imposed by s.279(4) of the IA 1986; that the Trustee had no reason to object to the suspension of Mr Haut’s discharge; and the Trustee was Wednesbury unreasonable in refusing to agree to Mr Haut making an application on his behalf under s.279(3) for such a suspension.

On this appeal, brought with the permission of the judge, the Trustee now contends:

The provisions of Part VIII of the IA 1986 deal with voluntary arrangements as an alternative to bankruptcy and ss.252-256 provide for the imposition of a moratorium on proceedings against an insolvent debtor. They read, so far as material:

“Interim order of court

252.

(1) In the circumstances specified below, the court may in the case of a debtor (being an individual) make an interim order under this section.

(2)

An interim order has the effect that, during the period for which it is in force –

(a)

no bankruptcy petition relating to the debtor may be presented or proceeded with,

…

(b)

no other proceedings, and no execution or other legal process, may be commenced or continued and no distress may be levied against the debtor or his property except with the leave of the court.

Application for interim order

253.

(1) Application to the court for an interim order may be made where the debtor intends to make a proposal under this Part, that is, a proposal to his creditors for a composition in satisfaction of his debts or a scheme or arrangement of his affairs (from here on referred to, in either case, as a “voluntary arrangement”).

(2)

The proposal must provide for some person (“the nominee”) to act in relation to the voluntary arrangement either as trustee or otherwise for the purpose of supervising its implementation and the nominee must be a person who is qualified to act as an insolvency practitioner, or authorised to act as nominee, in relation to the voluntary arrangement.

(3)

Subject as follows, the application may be made –

(a)

if the debtor is an undischarged bankrupt, by the debtor, the trustee of his estate, or the official receiver, and

(b)

in any other case, by the debtor.

(4)

An application shall not be made under subsection (3)(a) unless the debtor has given notice of the proposal to the official receiver and, if there is one, the trustee of his estate.

(5)

An application shall not be made while a bankruptcy petition presented by the debtor is pending, if the court has, under section 273 below, appointed an insolvency practitioner to inquire into the debtor’s affairs and report.

…

Cases in which interim order can be made

255.

(1) The court shall not make an interim order on an application under section 253 unless it is satisfied –

(a)

that the debtor intends to make a proposal under this Part;

(b)

that on the day of the making of the application the debtor was an undischarged bankrupt or was able to petition for his own bankruptcy;

(c)

that no previous application has been made by the debtor for an interim order in the period of 12 months ending with that day; and

(d)

that the nominee under the debtor’s proposal is willing to act in relation to the proposal.

(2)

The court may make an order if it thinks that it would be appropriate to do so for the purpose of facilitating the consideration and implementation of the debtor’s proposal.

(3)

Where the debtor is an undischarged bankrupt, the interim order may contain provision as to the conduct of the bankruptcy, and the administration of the bankrupt’s estate, during the period for which the order is in force.

(4)

Subject as follows, the provision contained in an interim order by virtue of subsection (3) may include provision staying proceedings in the bankruptcy or modifying any provision in this Group of Parts, and any provision of the rules in their application to the debtor’s bankruptcy.

(5)

An interim order shall not, in relation to a bankrupt, make provision relaxing or removing any of the requirements of provisions in this Group of Parts, or of the rules, unless the court is satisfied that the provision is unlikely to result in any significant diminution in, or in the value of, the debtor’s estate for the purposes of the bankruptcy.

(6)

Subject to the following provisions of this Part, an interim order made on an application under section 253 ceases to have effect at the end of the period of 14 days beginning with the day after the making of the order.

The general provisions of the IA 1986 concerning bankruptcy appear in Part IX. Chapter 1 addresses bankruptcy petitions and bankruptcy orders. The duration of a bankruptcy is dealt with in s.279. It reads, so far as material:

“Duration

279.

(1) A bankrupt is discharged from bankruptcy at the end of the period of one year beginning with the date on which the bankruptcy commences.

(2)

If before the end of that period the official receiver files with the court a notice stating that investigation of the conduct and affairs of the bankrupt under section 289 is unnecessary or concluded, the bankrupt is discharged when the notice is filed.

(3)

On the application of the official receiver or the trustee of a bankrupt's estate, the court may order that the period specified in subsection (1) shall cease to run until—

(a)

the end of a specified period, or

(b)

the fulfilment of a specified condition.

(4)

The court may make an order under subsection (3) only if satisfied that the bankrupt has failed or is failing to comply with an obligation under this Part.”

Chapter III deals with trustees in bankruptcy and the general control of a trustee by the court is addressed in s.303 which says in material part:

“General control of trustee by the court

303.(1) If a bankrupt or any of his creditors or any other person is dissatisfied by any act, omission or decision of a trustee of the bankrupt's estate, he may apply to the court; and on such an application the court may confirm, reverse or modify any act or decision of the trustee, may give him directions or may make such other order as it thinks fit.”

On 4 April 2011, Mr Haut was made bankrupt on a petition by Her Majesty’s Revenue and Customs. On 11 August 2011, the Trustee was appointed at a meeting of Mr Haut’s creditors. At the time of the Trustee’s appointment, Mr Haut had an outstanding proposal for an IVA (“the First Proposal”) for which a meeting of creditors was scheduled on 6 September 2011.

On 31 August 2011, the Trustee brought an application under s.363 of the IA 1986 supported by a witness statement of the same date to prevent Mr Haut proceeding with the First Proposal on the basis that he had failed to cooperate with the Trustee, had concealed his assets and had obscured the true state of his financial affairs. Mr Haut did not oppose the application and, on 2 September 2011, Deputy Registrar Barnett made the order sought by the Trustee.

The Trustee says that from September 2011 to March 2012 he continued to investigate Mr Haut’s affairs and to administer his estate but remained of the view throughout that period that Mr Haut was failing to cooperate and that his affairs required further investigation. On 15 February 2012, Mr Haut was publicly examined. Two members of the Trustee’s staff attended that examination and they later advised the Trustee that Mr Haut’s evidence concerning his overseas investments was very confused. At the request of the Trustee, the examination was adjourned to 28 March 2012, but on 7 March 2012 the Trustee wrote to the court asking that the examination be concluded and indicating that a more appropriate course would be for a private examination to be held should it be necessary.

In the meantime, from December 2011 to March 2012, the Trustee had extensive discussions with Rabbi Joseph Teitelbaum who claims to be a creditor of Mr Haut and a representative of six other creditors with claims amounting to a total of £3,103,428. The matters the subject of these discussions have included the potential purchase by Rabbi Teitelbaum and the creditors he represents of the Trustee’s interest in a particular property and a settlement figure necessary to discharge all the costs and expenses of the bankruptcy.

The Trustee claims that as a result of all his activities he has incurred costs and expenses in excess of £100,000. The Trustee’s basis for advancing a claim in this amount is, however, the subject of serious dispute. Rabbi Teitelbaum maintains that the Trustee has made no, or no significant, realisations for the estate. Moreover, he says the Trustee has not identified any assets capable of realisation in the short term. More fundamentally, he says the Trustee has falsely claimed that two formal meetings of creditors took place on 15 November 2011 and 13 December 2011 and that at the second of these meetings the creditors present voted in favour of a resolution that the Trustee be remunerated on the basis of time properly spent by him and his staff in dealing with the bankruptcy. The truth, says Rabbi Teitelbaum, is that no formal meeting of creditors ever occurred and the Trustee does not have the benefit of any resolution from the creditors concerning his terms of remuneration.

All of these matters led Mr Ephraim Solomon, one of the creditors represented by Rabbi Teitelbaum, to write to the Trustee by letter of 22 March 2012 requesting him to summon a meeting of creditors to consider his removal as Mr Haut’s trustee. The issue of the Trustee’s removal has not been resolved in the light of the events to which I will shortly come. Nevertheless, it causes the Trustee concern because he believes there are substantial creditors in the bankruptcy who are not represented by Rabbi Teitelbaum and that their interests could well be prejudiced unless the affairs of Mr Haut are fully investigated.

That brings me to the events which led to the applications before Arnold J. On Wednesday 28 March 2012, after close of business and only shortly before the anniversary of the date on which Mr Haut was made bankrupt, Mr Haut’s solicitor sent to the Trustee another draft IVA proposal (“the Second Proposal”) under cover of an email which invited the Trustee’s comments and stated that Mr Haut intended to issue it on Friday 30 March 2012. The email continued that Mr Haut appreciated that it might not be possible for the Trustee to give the proposal any detailed consideration within the permitted time frame, in which case he could do so in advance of or at the creditors’ meeting. I must return to the details of the Second Proposal later in this judgment.

The following day, 29 March 2012, the Trustee replied indicating that he had a number of concerns, the main ones being that the proposal was not substantially different from the First Proposal and that full details of Mr Haut’s assets and liabilities had still not been provided.

The Trustee also explained that no adequate provision had been made for the payment of his fees or the fees and costs of the bankruptcy estate, and pointed out that Mr Haut would need to make an application for suspension of his discharge from bankruptcy because it would not be possible for the creditors to agree the Second Proposal thereafter.

On the morning of Friday 30 March 2012, Mr Haut’s solicitors sent to the Trustee a further email stating that they had been instructed to apply for an order suspending Mr Haut’s discharge from bankruptcy for a period of six weeks to allow the creditors time to consider the Second Proposal and asking for confirmation that the Trustee had no objection to such an order being made. They also said that, given the urgency, they intended to apply to court that day. Shortly afterwards, the draft application and a supporting statement of Mr Rushworth, a partner in the firm of solicitors instructed by Mr Haut, were sent to the Trustee. These revealed Mr Haut proposed to make his application under ss.279 and 303 of the IA 1986.

Late in the evening of 30 March 2012, the Trustee replied stating that he did not believe that ss.279 and 303 of the IA 1986 provided any proper basis for an application by Mr Haut; that the evidence in support of the application failed properly to set out the history of the matter and, in particular, the First Proposal and the successful application made by the Trustee to have it withdrawn on the basis of Mr Haut’s failure to give full and frank disclosure of his affairs; and that in all the circumstance he was unable to provide confirmation that he had no objection to the order sought. He concluded by saying that he considered the proposed application flawed and without merit and requested that he be given notice of when and where it would be made.

On Monday 2 April 2012, Mr Haut’s solicitors proposed a slight change of course in the light of the Trustee’s response, and invited the Trustee to make an application or, alternatively, to agree to Mr Haut making an application on his behalf. As a yet further alternative, Mr Haut invited the Trustee to accept that s.363 of the IA 1986 provided a jurisdictional basis for the order sought.

Once again, the Trustee declined to agree to any of Mr Haut’s suggestions. By email of 2 April 2012 he explained that it was not his intention to make an application for the suspension of Mr Haut’s discharge at such a late stage. He continued that this possibility had been discussed with the official receiver at the time of the last court hearing and it had been agreed that no such application would be made. Moreover, the Trustee could see no proper basis for an application under s.303 or s.363 of the IA 1986. He again asked that he be given notice of the time and place of any application.

The application was issued on 3 April 2012 and made to Arnold J in the interim applications court on that day supported by the statement of Mr Rushworth to which I have referred. In that statement Mr Rushworth explained that Mr Haut wished to place before his creditors a proposal for an IVA; that it could only be proposed prior to the automatic discharge of his bankruptcy; that he sought an order for suspension for six weeks which would hopefully allow sufficient time for agreement to be reached with the Trustee and the creditors; and that Mr Haut had previously proposed an IVA (that is to say, the First Proposal) which had been withdrawn pursuant to an order of the court upon the application of the Trustee. Mr Rushworth also exhibited to his statement a copy of the Second Proposal and the various emails and other correspondence which I have summarised.

The circumstances surrounding that application are related by the judge at [14]-[21] of his judgment of 21 May 2012. As he explains, the Trustee was not given notice of the time and place of the application and so did not attend. Rabbi Teitelbaum was informed of the hearing at the last moment, attended the latter part of it and addressed the judge, with his permission. Further, the judge was taken through the emails and other correspondence exhibited to Mr Rushworth’s statement and also to an email sent by Rabbi Teitelbaum to the Trustee earlier that day stating that he and the majority of Mr Haut’s creditors supported the application. The judge was not, however, taken to ss.252-256 in Part VIII of the IA 1986.

The judge did not give a fully reasoned judgment but stated that he was satisfied that it was an appropriate case in which to exercise the court’s discretion under s.303(1) of the IA 1986. As he later explained in his judgment of 21 May 2012, it appeared to him that the court had jurisdiction under that section because the Trustee had decided not to make an application under s.279(3) and both Rabbi Teitelbaum and Mr Haut were dissatisfied with that decision. By contrast, he was not satisfied that the court had jurisdiction under s.363(1). On this appeal, Mr Haut has not suggested the judge fell into error in this latter respect and I need say no more about it.

The judge made an order in the terms requested by Mr Haut, suspending his discharge from bankruptcy until 15 May 2012. The Trustee was given liberty to apply to set aside or vary the order on giving not less than two clear days notice. I would note that this was, effectively, the final relief sought. It gave Mr Haut the six weeks he needed to secure the agreement of the creditors to the Second Proposal whereupon he could apply for an annulment of his bankruptcy order under s.261(2) of the IA 1986.

The Trustee was not made aware of Arnold J’s order until 4 April 2012 and it seems that on that same day Rabbi Teitelbaum attended at the Trustee’s offices to discuss the Second Proposal and the Trustee’s fees.

On 5 April 2012, the Trustee sent to Rabbi Teitelbaum a long email concerning the Second Proposal and detailing 11 matters that needed attention. He also explained that the Trustees fees and expenses now amounted to slightly in excess of £109,000 including VAT.

On 10 April 2012, the proposed nominee, Mr Harold Sorsky, gave notice to creditors of a meeting to be held on 1 May 2012 to approve the Second Proposal.

On 25 April 2012, Mr Haut’s solicitors replied to the Trustee’s email of 5 April 2012 seeking to address the 11 matters it raised. As for the costs and expenses of the Trustee, they explained that there were no assets available to discharge them; that the Trustee would therefore need to rely upon the provisions in the Insolvency Rules; and there was no basis upon which the Trustee could insist on their settlement on approval of the IVA.

On 30 April 2012, the Trustee’s newly appointed solicitors sent to Mr Sorsky for his immediate attention a long letter requesting that the Second Proposal be withdrawn immediately. Various grounds were put forward. First, the order of 3 April 2012 should never have been made and the Trustee was about to issue an application to have it discharged. Second, there were fundamental defects in the Second Proposal which had resulted in the creditors being misled and to proceed would place Mr Sorsky in breach of his duty as nominee. Third, the Second Proposal made no commercial sense and was seriously prejudicial to the interests of creditors who had no personal connection with Mr Haut. Fourth, there were serious doubts about the claims advanced by the creditors represented by Rabbi Teitelbaum. Finally, the Trustee had various outstanding enquiries and needed to carry out further investigations in the bankruptcy.

On the same day, 30 April 2012, the Trustee issued the application to have the order of 3 April set aside. It was returnable on 10 May and by that date supported by a second witness statement of the Trustee dated 4 May 2012. In summary, the Trustee explained that he owed duties to all the creditors, not just those represented by Rabbi Teitelbaum and that he had grave concerns at the tactics adopted by Mr Haut and Rabbi Teitelbaum in relation to both the First and Second Proposals. Whilst Rabbi Teitelbaum claimed to represent the majority of creditors, the Trustee considered the evidence in support of the claims of those creditors was, in many cases, totally inadequate for the claims to be regarded as genuine and there were significant other creditors with claims of over £1 million whose interests needed to be taken into account. The Trustee also explained that the Second Proposal appeared to be designed to thwart his efforts to carry out a thorough investigation into Mr Haut’s affairs.

The Trustee’s application was also supported by a witness statement of another creditor, Mr Melvyn Becker, dated 8 May 2012 who stated that he intended to vote against the Second Proposal and did not accept the claims of the creditors Rabbi Teitelbaum claimed to represent.

Meanwhile, on 1 May 2012, the meeting of the creditors took place at the offices of Mr Sorsky. Due to the Trustee’s concerns which had been notified to Mr Sorsky, the meeting was adjourned to 10 May 2012, the return date of the Trustee’s application to have Arnold J’s order of 3 April 2012 set aside.

Further, on 4 May 2012, Mr Solomon issued an application seeking an order that the Trustee be removed or alternatively an order that the Trustee call a meeting of Mr Haut’s creditors for the purpose of considering his removal as trustee. That application was supported by a witness statement of Rabbi Teitelbaum dated 9 May 2012. In that statement Rabbi Teitelbaum claimed to represent 54% of Mr Haut’s creditors. He asserted that the Trustee has misled the creditors both as to his appointment and as to the passing of a resolution in relation to his fees; that the Trustee has incurred fees of in excess of £100,000 despite making minimal realisations for the estate; that the Trustee was wrongly attempting to block the Second Proposal; and that the Trustee had refused or failed to call a meeting of the creditors for the purpose of considering his removal, as requested by Mr Solomon.

All of this evidence was before Arnold J on 10 May 2012 when he came to consider the Trustee’s application to have his order of 3 April 2012 set aside although, as he noted, Mr Solomon’s application to remove the Trustee was not before him and the Trustee had not had an opportunity to respond to Rabbi Teitelbaum’s witness statement of 9 May 2012. The judge was faced with a further difficulty. The application came on for hearing only shortly before the creditors’ meeting to consider the Second Proposal. He indicated it would have been preferable for him to give a decision prior to the commencement of the meeting but that it seemed to him that the parties’ arguments required proper consideration and accordingly he reserved judgment. He recognised that in the meantime the creditors might well approve the Second Proposal but observed that if the Trustee’s application were to succeed, then his order of 3 April 2012 would be set aside with the result that Mr Haut would have been discharged from bankruptcy at midnight on 3 April 2012. There was no dispute that the effect of that would have been to invalidate the IVA if it had been approved.

In considering whether to set aside his order of 3 April 2012, the judge focused on two questions: first, whether, on that day, the court had jurisdiction to make an order under s.279 suspending Mr Haut’s discharge from bankruptcy; and second, whether the Trustee’s refusal to apply for a suspension of Mr Haut’s discharge was Wednesbury unreasonable such that it was appropriate for the court to intervene and make an order to that effect under s.303(1).

In addressing these questions, the judge was fully conscious that the case was highly unusual in that it was the bankrupt, Mr Haut, who wished to secure a suspension of his discharge, and that suspension was opposed by the Trustee. Moreover, at least by the time of the hearing before the judge on 10 May 2012, Mr Haut was contending that he had fully complied with all his obligations and had made full disclosure of all matters required of him whereas the Trustee was contending that Mr Haut was in continuing default.

The judge began by considering whether the court had jurisdiction to make an order under s.279. He referred (at [36]) to the decision of this court in Bagnall v Official Receiver [2004] EWCA Civ 1925, [2004] 1 WLR 2832 which he thought established that s.279(3) must be given a purposive interpretation which takes account of the fact that automatic discharge cannot be reversed after the expiry of the relevant period.

Then (at [38]-[39]) the judge thought another relevant consideration was the attitude of the bankrupt and that where the bankrupt wants his discharge to be suspended, it must follow that that the court will be more easily satisfied that it is appropriate to make an order suspending discharge than if the bankrupt opposes it. That will be particularly so, the judge continued, if a substantial body of creditors supports the suspension.

That brought the judge to what appeared to him to be the key consideration, namely Mr Haut’s reason for seeking suspension of his discharge for what the judge described as a short period and the Trustee’s reason for opposing that suspension. The judge summarised the position in this way at [40]:

“… Mr Haut’s reason for seeking suspension was straightforward: he wanted to enter into an IVA in accordance with the Second Proposal. He could not do that once he had been discharged from bankruptcy. As for the Trustee, counsel for the Trustee expressly confirmed what appeared to be the case from the Trustee’s second witness statement and her skeleton argument, namely that the Trustee’s reason for opposing suspension was, and his objective in making the present application is, to prevent Mr Haut from proceeding with the Second Proposal. Indeed, as the Trustee has stated in paragraph 82 of his second witness statement, if the present application is unsuccessful and the Second Proposal is approved by the creditors’ meeting, he intends to make an application pursuant to section 282 of the 1986 Act to revoke that decision.”

The judge concluded that the jurisdictional threshold imposed by s.279(4) was satisfied. He reasoned (at [41]):

“…. the Trustee’s evidence shows that it was as at 3 April 2012, and remains, the Trustee’s position that Mr Haut is in default of his obligations under the 1986 Act. Indeed, the Trustee’s witness statements, and counsel for the Trustee’s skeleton argument on the present application, contain a number of specific allegations that Mr Haut has failed to provide information which he is obliged to provide. Given that (i) the Trustee contends that Mr Haut is in default of his obligations, (ii) Mr Haut accepts that the Trustee has reasonable grounds for that contention, (iii) Mr Haut positively wants an application for suspension to be made and (iv) Mr Haut is supported by the creditors represented by Rabbi Teitelbaum, I consider that it is sufficiently proved that as at 3 April 2012 Mr Haut had failed or was failing to comply with his obligations to satisfy the jurisdictional threshold imposed by section 279(4).”

Turning to the second question, whether the refusal of the Trustee to make an application under s.279 was Wednesbury unreasonable, the judge considered (at [42]) the strictness of the test must depend upon the nature of the dispute and the relevant circumstances.

The judge noted the Trustee’s position that it was not in the interests of the creditors to apply for a suspension and his concerns about the Second Proposal. He then reasoned (at [44]) that these arguments demonstrated that the Trustee had no basis for objecting to the suspension; indeed, to the contrary, the judge thought he had a good reason to support such a suspension. Given that the Trustee’s real objection was to the Second Proposal, the correct course was for him to apply to the court under s.363 requiring the Second Proposal to be withdrawn, as he had done in the case of the First Proposal.

The judge expressed his overall conclusion in this way at [46]:

“Accordingly, in the rather unusual circumstances of this case, I consider that the Trustee was Wednesbury unreasonable in refusing to agree to Mr Haut making a section 279(3) application on his behalf. In short, this was unreasonable because the Trustee exercised his discretion as to whether to make an application under section 279(3) not for the proper purpose of exercising control over the bankrupt’s compliance with his obligations, which would have required him to support the application, but for the collateral and improper purpose of blocking the Second Proposal, which was properly to be achieved by an application under section 363. If the Second Proposal is approved, it will remain open to the Trustee to apply for it to be revoked, as he has threatened to do.”

The Trustee contends the judge fell into error in the five respects summarised at [5] above. The first two concern the jurisdiction to make the order and I will take them together.

The Trustee submits that in approaching the matter as he did the judge lost sight of the legislative purpose of s.279(3) of the IA 1986 and ought to have concluded that in all the circumstances of this case it did not confer a power to suspend Mr Haut’s discharge.

In my judgment the purpose of a suspension under s.279(3) is plainly connected to a failure by a bankrupt to comply with his obligations under Part IX. The subsection contemplates an application being made by the trustee or the official receiver, not by the bankrupt. Rule 6.215 of the Insolvency Rules 1986 (“the IR”) makes clear that the official receiver or trustee must file evidence setting out the reasons why it appears to him the order should be made; the court must fix a venue for the hearing and give notice of it to the official receiver, the trustee and the bankrupt; and the official receiver’s report and the trustee’s evidence must be served on the bankrupt at least 21 days before the date fixed for the hearing. Further, and importantly, s.279(4) expressly provides the court may not make an order unless it is satisfied that the bankrupt has failed or is failing to comply with an obligation under Part IX.

This issue was considered by the Chancellor in Shierson and Birch v Rastogi (a bankrupt) [2007] EWHC 1266 (Ch), [2007] BPIR 891 in the more conventional context of an application by trustees to suspend the discharge of a bankrupt on the basis that he had failed to comply with his obligations. In allowing an appeal against a refusal by the registrar to make the order sought, the Chancellor summarised the consequences of discharge at [7]:

“A discharge from bankruptcy has various consequences. It releases the bankrupt from the debts prescribed in s 281 of the IA 1986. It removes the disqualification imposed by s 11 of the Company Directors Disqualification Act 1986 from being concerned in the promotion, formation and management of a company without the leave of the court. Acts or omissions of the bankrupt occurring after discharge cannot constitute a bankruptcy offence under Chapter VI, see s 350(3) of the IA 1986. Accordingly a bankrupt may, after his discharge, obtain credit or engage in business, see s 360 of the IA 1986. But discharge from bankruptcy does not affect the continuing obligations of a bankrupt to assist the official receiver or the trustee in bankruptcy with the provision of information and the recovery of assets. Those are the obligations on which the trustees rely in this application.”

A little later, at [9], the Chancellor explained the concern of the trustees in seeking a suspension of discharge was to secure compliance by the bankrupt with his obligations under s.333:

“Section 333 of the IA 1986 provides that the bankrupt:

‘shall …give to the trustee such information as to his affairs … as the trustee may for the purposes of carrying out his functions under any of this Group of Parts reasonably require’.

Failure to perform that duty before discharge may result in the commission of the offences prescribed by ss 353-356 of the IA 1986. The concern of the trustees on this application is that the obligation of the bankrupt under this section may continue to be backed by criminal sanctions and its performance encouraged by a wish to be relieved of the disabilities to which I have referred in para [7] above.”

Having concluded that there had been and still were substantial failures by the bankrupt to comply with his obligations under Part IX, the Chancellor explained the nature and purpose of the power conferred by s.279 in these terms at [65]:

“It is clear from the terms of s.279 of the IA 1986 that postponement of discharge is linked to a failure to comply with the obligations imposed on a bankrupt by Part IX. But is the purpose of the power to postpone a discharge to provide an incentive to full compliance? Or is it that the disabilities arising from being an undischarged bankrupt should, in the public interest, continue until there has been full compliance? I doubt whether, on the facts of this case, it is necessary to reach a final conclusion on those questions. But in my view the purpose of the power is the latter, even though its effect may be to achieve the former. Were it otherwise I would have expected Parliament to have made discharge conditional on full compliance.”

A purpose of the power conferred by s.279 is therefore to extend the period of the bankruptcy and to ensure that the bankrupt continues to suffer the disabilities arising from his undischarged bankruptcy until he complies with his obligations. I accept the submission advanced by the Trustee that in this sense the power is intended to be penal in character and used for purposes connected with the functions of the official receiver and the trustee and to allow the trustee to get in, realise and distribute the bankrupt’s estate in accordance with the provisions of Chapter IV.

Applying these principles in the context of the present appeal, it is clear that the order made by the judge on 3 April 2012 was not linked to the failure by Mr Haut to comply with his obligations; nor was it made to ensure that Mr Haut continued to suffer from the disabilities of being an undischarged bankrupt until he had fully complied with those obligations. Nor is it suggested that it was made for any other purpose that might be within s.279(3). Instead it was made to give Mr Haut time to put before the creditors in his bankruptcy an IVA proposal and thereafter secure the annulment of his bankruptcy order. That, it seems to me, was impermissible and outside the scope of the jurisdiction conferred by s.279(3).

I also believe that Mr Haut faced a further important jurisdictional hurdle in that s.279(4) requires the court to be satisfied that the bankrupt has failed or is failing to comply with his obligations. As I have mentioned, the judge referred (at [36]) to the decision in Bagnall in which this court held that an interim order could in principle be made suspending discharge pending a full hearing where the court was satisfied that there were reasonable grounds for concluding that such an order would be made after the substantive hearing on the material then before the court. In those circumstances the interim order would, in effect, hold the ring pending the full hearing.

It seems to me, however, that the decision in Bagnall is of no assistance to Mr Haut in this case for the following reasons. First, the application on 3 April 2012 was made by Mr Haut without notice to the Trustee and supported only by the witness statement of Mr Rushworth. I have summarised the contents of that statement and the emails and other correspondence to which it referred. But in my judgment none of those materials provided a basis for concluding that Mr Haut had failed or was failing to comply with any of his obligations; indeed his position was that he had complied with all of the Trustee’s demands. Nor did those materials provide a reasonable basis for supposing that the court would reach such a conclusion after a further substantive hearing on the material then before the court.

Second, the order made on 3 April was, in effect, a final order because, although it gave the Trustee liberty to apply, it suspended Mr Haut’s automatic discharge not for a period of a few days to enable the matter to be brought back before the court and fully argued, but for a period of six weeks which, it was hoped, would be sufficient to secure the approval of the creditors to the Second Proposal.

Third, when the matter came back before the court on 10 May 2012 upon the application by the Trustee to have the order of 3 April 2012 set aside, the court had the benefit of the further evidence from the Trustee and from Rabbi Teitelbaum to which I have referred. From this it was indeed apparent that the Trustee was contending that Mr Haut was in default. But Mr Haut was still contending the opposite. The judge was therefore faced with a conflict of evidence which he had to resolve in order to satisfy himself that Mr Haut had failed or was failing to comply with his obligations. But that he did not do. Instead, as appears from [46] of his judgment set forth at [44] above, he approached the matter by identifying the rival positions and then taking into account the fact that Mr Haut wanted his discharge suspended and was supported in that regard by the creditors represented by Rabbi Teitelbaum. In so doing, the judge wrongly conflated the separate and distinct issues of jurisdiction and discretion and wrongly failed adequately to address the former.

I believe the proper gateway for Mr Haut to have made an application for the suspension of his bankruptcy lay in the provisions of ss.252-256 of the IA 1986. Section 252 confers jurisdiction upon the court to make an order which has the effect that, during the period for which it is in force, no bankruptcy petition relating to the debtor may be proceeded with. The orders which the court may make include (by s.255(4)) a provision staying proceedings in the bankruptcy or modifying any provision in the Second Group of Parts (dealing with the insolvency of individuals and bankruptcy) and any provision of the rules in their application to the debtor’s bankruptcy. In my judgment such a modification could therefore include a modification of s.278(b) which provides that the bankruptcy of an individual against whom a bankruptcy order has been made continues until the individual is discharged under the provisions of Chapter I which follow, including s.279. Thus I believe that in an appropriate case the court can make an order under s.252 suspending the automatic discharge of the bankrupt for a specified period.

The legislation does, however, incorporate important limitations to this jurisdiction and safeguards in relation to its exercise. Section 253 provides that an application for such an order may be made by the debtor where he intends to make a proposal for an IVA but it requires (by s.253(2)) the debtor to provide for a suitable nominee to act in relation to the IVA and makes clear (by s.253(4)) that an application shall not be made unless the debtor has given notice of the IVA to the official receiver and, if there is one, to his trustee.

Moreover, s.255(1) requires the court to be satisfied that the debtor intends to make a proposal; that no previous application has been made by the debtor for an interim order in the preceding 12 months; and that the nominee is willing to act. By s.255(2) the court may make an order if satisfied that it would be appropriate to do so for the purpose of facilitating the consideration and implementation of the debtor’s proposal. At the outset the court must be satisfied that the proposal is serious and viable: Hook v Jewson Ltd [1997] BPIR 100 at 105, per Sir Richard Scott V-C. The court will consider this issue at a hearing at which the trustee and the official receiver may attend (IR 5.9(1)) and at which, if an interim order is made, the court will fix a venue for consideration of the nominee’s report (IR 5.9(3)). Moreover, by s.255(5), the court may not make an order in relation to a bankrupt which relaxes or removes any of the provisions of the Second Group of Parts, or of the rules, unless it is satisfied that the provision is unlikely to result in any significant diminution in, or the value of, the debtor’s estate for the purpose of the bankruptcy. Subject to the provisions to which I next refer, an interim order ceases to have effect after 14 days.

Importantly, by s.256(1), the nominee must, before the interim order ceases to have effect, submit a report to the court stating, inter alia, whether, in his opinion, the proposal has a reasonable prospect of being approved and implemented; whether, in his opinion, a meeting of the debtor’s creditors should be summoned to consider it; and if, in his opinion, a meeting should be summoned, when and where he proposes the meeting should be held. For the purposes of enabling the nominee to prepare his report, the debtor must submit to him the terms of the proposal and a statement of his affairs. The importance of the nominee’s report is, I think, evident from the statutory framework. Further, as Lindsay J explained in Greystoke v Hamilton Smith [1997] BPIR 24 at 28, the nominee should normally take all reasonable steps to satisfy himself of the following matters: first, that the debtor’s true position as to assets and liabilities does not appear to him in any material respect to differ substantially from that which it is represented to the creditors to be; second, that it appears to him that the debtor’s proposal as put to the creditors’ meeting has a real prospect of being implemented in the way that it is represented it will be (recognising that a measure of modification is possible under s.258, so the question must be approached broadly); and third, that the information that he has provides a basis such that no already manifest yet unavoidable prospective unfairness in relation to those functions is present.

If the nominee fails to submit a report, the court may give him more time to do so or direct that he be replaced and extend the interim order in the meantime. If the court is satisfied on receiving the nominee’s report that a meeting of the creditors should be summoned to consider the proposal, the court must direct that the period for which the interim order has effect shall be extended for the purpose of enabling the proposal to be considered by the creditors. At the hearing by the court to consider the nominee’s report, the official receiver and the trustee may again be present (IR 5.13(1)).

In the present case it was open to Mr Haut to make an application for an interim order under s.252 of the IA 1986 because, although he had made an IVA proposal within the preceding 12 months (the First Proposal), it was made by the non-interim order procedure of s.256A of the IA 1986. As I have explained, an application by Mr Haut for an interim order would, however, have required him to give notice both to the official receiver and the Trustee, which he did not do. It would also have required consideration by the court of the Second Proposal at a hearing which the Trustee and the official receiver would have been entitled to attend; and, if the court made an interim order, it would have required the nominee to file a report for consideration by the court.

Now it is true to say that the nominee did in fact submit a report purportedly in compliance with s.256. But the report failed to comply with the provisions of either s.256A or s.256(1) in that it merely stated that “the debtor is further satisfied that the Individual Voluntary Arrangement has a reasonable prospect of being approved and implemented” (emphasis added). It contained no statement of the nominee’s opinion, the importance of which I have explained and which would have required the nominee to take the various steps elaborated by Lindsay J in Greystoke.

In the particular circumstances of this case I therefore believe that if Mr Haut had made an application for an interim order under s.253, it would inevitably have foundered.

In my judgment it follows from all of the foregoing that the judge fell into error in concluding that the court had jurisdiction under s.279(3) to make an order suspending Mr Haut’s discharge from bankruptcy for a period of six weeks in order to give him time to place the Second Proposal before his creditors.

In the light of my finding as to jurisdiction I can deal with this ground of appeal relatively shortly but first I must draw together some aspects of the background. It will be recalled that after the hearing of the public examination on 15 February 2012 the Trustee wrote to the court asking that the examination be concluded and expressing the view that a more appropriate course would be for there to be a private examination if necessary. In this regard the Trustee made clear in his second witness statement dated 4 May 2012 that he considered that a number of serious issues still required detailed investigation.

Then, very late in the day, Mr Haut proposed the Trustee should apply for a suspension of his discharge for the purpose of allowing him to present the Second Proposal to his creditors. The Trustee declined. As he explained in his email of 2 April 2012, he did not intend to apply for a suspension of Mr Haut’s discharge; he had discussed this possibility with the official receiver; and he could see no proper basis for such an application.

The court is properly reluctant to interfere with the day to day administration by a trustee of the bankruptcy estate because, as Harman J explained in Re a debtor; ex parte the debtor v Dodwell (the trustee) [1949] Ch 236 at 241, administration would be impossible if the trustee had to answer at every step to the bankrupt for the exercise of his powers and discretions in the management of and realisation of the property. So also in Re Edennote Ltd [1996] 2 BCLC 389 this court explained (at 394) that, fraud and bad faith apart, the court will only interfere with the act of a liquidator if he has done something so utterly unreasonable and absurd that no reasonable man would have done it. Nourse LJ, with whom Millett LJ agreed, questioned whether it was helpful to introduce a Wednesbury test, observing:

“I sympathise with Mr Rayner James’s submissions to the extent that it is unnecessary, rather it may be confusing, to introduce into the court’s control of the acts and decisions of liquidators the language of its control of administrative action. In the latter case the court is usually concerned with supervision of public servants performing statutory functions; in the former with the supervision of persons who must, in most of what they do, act as prudent businessmen. In general there seems to be something unrealistic in judging the propriety of acts and decisions of a businessman by asking whether he took into account something he ought not to have taken into account or failed to take into account something he ought to have taken into account.

That said it is certainly possible for a liquidator to do something so utterly unreasonable and absurd that no reasonable man would have done it, simply by selling an asset of the company without taking into account the possibility that a third party might well have made a better offer than he to whom it was sold.”

In my judgment these observations remain apposite today and I believe the test which must in general be satisfied was correctly described by Registrar Baister in these terms in Osborne v Cole [1999] BPIR 251 at 255:

“It follows that it can only be right for the court to interfere with the decision the official receiver has taken if it can be shown he has acted in bad faith or so perversely that no trustee properly advised or properly instructing himself could so have acted, alternatively if he has acted fraudulently or in a manner so unreasonable and absurd that no reasonable person would have acted in that way.”

In this case Arnold J considered the Trustee was Wednesbury unreasonable in refusing to make the application under s.279. His reasoning is summarised at [42]-[44] above. In short, he considered the Trustee had no good reason for objecting to the suspension and that he exercised his discretion not to make the application for the collateral and improper purpose of blocking the Second Proposal.

In reaching these conclusions I believe Arnold J fell into error in each of the following respects. First, he adopted the Wednesbury unreasonableness test and stated (at [42]) that this was a flexible standard that could be moulded to the exigencies of the case when, in the circumstances of this case, he ought to have asked himself whether the Trustee had acted perversely.

Second, it seems to me to be wholly impossible to say that the Trustee acted perversely in refusing to allow Mr Haut to make an application on his behalf under s.279(3) for the purpose of putting the Second Proposal before his creditors when that subsection provides no jurisdictional basis for such an application.

Third, and more generally, the functions of the Trustee are to get in, realise and distribute the bankrupt’s estate in accordance with the provisions of Chapter IV of Part IX and to exercise his discretion in carrying out those activities and in administering the estate. As guardian of the interests of the creditors, a trustee is required to be given notice of an application for an interim order under s.253; may object to and may challenge the decision of a creditors’ meeting to approve an IVA under s.262(1) and (2); and may apply for an order under s.363 requiring a proposal for an IVA to be withdrawn. But I do not understand it to be one of the duties of a trustee that he must respond affirmatively to a bankrupt’s request that he co-operate in the promotion of a proposal for an IVA. Furthermore, in the circumstances of this case, the Trustee believed that Mr Haut was in continuing default of his obligations and that the Second Proposal was defective, prejudicial to the interests of the creditors who had no personal connection to Mr Haut and appeared to be designed to thwart his efforts to carry out a proper investigation into Mr Haut’s affairs. Yet the order Mr Haut invited the Trustee to seek was intended to give Mr Haut an opportunity to put the Second Proposal before his creditors and thereafter secure the annulment of his bankruptcy with all the consequences the Trustee was anxious to avoid.

In all these circumstances I accept the Trustee’s submission that this is far from a case where he has acted perversely or as no other reasonable trustee would have acted.

The Trustee submits that the order of 3 April 2012 was flawed in any event because it should have directed the Trustee under s.303(1) to make an immediate application to suspend Mr Haut’s discharge and only then could there have been an order suspending discharge under s.279(3).

As this court explained in Heath v Tang [1993] 1 WLR 1421 at 1423-1424, the jurisdiction conferred by s.303(1) protects a bankrupt from injustice which might otherwise be caused by his inability to bring proceedings outside the bankruptcy jurisdiction and, in an appropriate case, permits a bankrupt to apply for an order that the trustee must make an application or bring a claim or allow the bankrupt to conduct proceedings in the name of the trustee. In the present case, for the reasons I have given, I do not believe Mr Haut was in a position to invoke that jurisdiction. But if he had been, I am doubtful that the rather formalistic objection raised by the Trustee would have provided a sound basis for allowing the appeal.

In the light of my findings, I do not believe the order for costs made by the judge can stand. He had no proper basis for ordering the Trustee to pay Mr Haut’s costs.

For the reasons I have given, I would allow the appeal. In my judgment Arnold J ought to have set aside his earlier order of 3 April 2012 and he ought not to have ordered the Trustee to pay Mr Haut’s costs.

I agree.

I also agree.