Sands (as trustee in bankruptcy) v Layne & Anor

This is an insolvency case. In a nutshell the issue is whether the Insolvency Act 1986 (“IA 86”), section 375(1) (set out in the appendix to this judgment) enables a court to review, rescind or vary an order which was previously made by that court in exercise of its jurisdiction to hear an appeal from a lower court. The order sought to be reviewed is an order for the discharge of an earlier bankruptcy order made against the second respondent, Mr Carlos Layne (“Mr Layne”), on terms agreed with the creditor (the second respondent (“Wycombe”)) which had made him bankrupt. I will call this “the Subject Order”.

Section 375 is a relatively unusual statutory provision because it enables a court to review an order that it previously made, and it may do so irrespective of whether there is or has been an appeal. The section goes back at least to the Bankruptcy Act 1869. It enables a court to rehear a case, for example, if new evidence has come to light and to review, rescind or vary its earlier order. The application in this case sought rescission of the court’s earlier order. What I say below about rescission of an order under section 375(1) will also apply to the review and variation of an order under that section.

It was common ground before the judge that the courts have interpreted the power as applying only where there has been a change in the circumstances or there is fresh evidence (see, for example, Re a Debtor (no 1) [1993] 1 WLR 314).

The question that falls to be determined on this appeal has only arisen recently because, until the IA 1986, insolvency appeals from the county court went to the Divisional Court. They now go to a single High Court judge. So the High Court now has an appellate jurisdiction as well as a first instance jurisdiction in insolvency matters of its own.

I shall explain the facts and the judge’s judgment briefly and then the arguments. Finally, I will set out my conclusions.

In 2011, Mr Layne owed Wycombe some £57,361.09 for rent, business rates and council tax. He did not pay and so Wycombe applied for, and obtained, a bankruptcy order against Mr Layne. The order was made on 7 July 2011 by District Judge Perusko in the Aylesbury County Court. No other creditors were present or represented.

Mr Layne made an offer of security and payment by instalments but the creditor rejected the offer. On 30 August 2011 (some weeks out of time) Mr Layne applied for permission to appeal to the High Court in London on the basis that he had made a reasonable offer of security and payment.

On 22 September 2011, the first trustee was appointed.

On 9 March 2012, Peter Smith J ordered that the permission application should be heard with the appeal to follow if permission was given.

In about April 2012, the appellant (“the Trustee”) became the trustee in bankruptcy in place of the first trustee.

The permission application and appeal were due to be heard on 29 June 2012 before Mr David Donaldson QC, sitting as a deputy Judge of the High Court of Justice, Chancery Division. In the event, the High Court did not hear either the permission application or an appeal as Mr Layne and Wycombe came to an agreement compromising the appeal before the hearing began. The judge was instead asked to, and did, make the Subject Order with the consent of Mr Layne and Wycombe on 29 June 2012.

The Subject Order discharged the bankruptcy order and ordered Mr Layne to pay the amount he owed to Wycombe by agreed instalments. The amount was charged on Mr Layne’s home. Mr Layne has performed his obligations under the Subject Order.

The first trustee was informed of the progress of the permission application, including the hearing date for 29 June 2012 but Mr Layne and Wycombe did not tell the Trustee that the parties proposed to ask the court to approve the Subject Order. There have been several changes of trustee. The appellant is the current trustee.

The Trustee considered that the Subject Order ought not to have been made because there were other creditors of Mr Layne who stood to be prejudiced by it. On 25 June 2013, the Trustee made an application to the Aylesbury County Court to rescind the Subject Order. It is not necessary for the purposes of this summary of events to explain why the Trustee did not make an application until this date.

On 7 November 2013 District Judge Rand ruled that the Aylesbury County Court had no jurisdiction to rescind the Subject Order and transferred the application to the High Court.

That matter came before Mr Donaldson QC again. He heard that application on 23 October 2013, and he refused it for the reasons summarised in the next section of this judgment.

At the date of his application, the Trustee had fees of some £6,000 outstanding and there were other debts owed in the bankruptcy.

If the Subject Order had not been made, or if it is now rescinded, the Trustee’s fees and expenses will be paid out of the assets which under the Subject Order were charged to the creditor. In that event, all Mr Layne’s creditors, not just Wycombe, will share in Mr Layne’s assets on an equal footing.

The judge’s reasoning may be summarised briefly as follows. The High Court had power to rescind an order in the circumstances set out in section 375(1) of the 1986 Act, but section 375 (1), provides that an order must be made “by it”. Here the order had been made on appeal, albeit by the High Court. The judge followed, with diffidence, a passage from the judgment of Briggs J (as he then was) in Appleyard v Wewelwa [2012] EWHC 3302 (Ch), [2013] 1 W.L.R. 752 holding that the language of section 375(1) only contemplated rescission by a court at first instance of its orders made at first instance. Therefore a court could not under that section rescind an order made in the course of an appeal from an order of a lower court.

The judge further held that, even if he had jurisdiction to make an order, the application would fail because the court could dismiss an application (which would be by way of petition) for a bankruptcy order where there was a reasonable offer of security. That was so even if the debtor had other creditors. The judge considered it arguable that under section 271(3) of the 1986 Act the court had a discretion to dismiss an application for a bankruptcy order if there was a reasonable offer of security to the creditor applying for the order. Any other creditor who was prejudiced by the exercise of this discretion in favour of dismissal could make another application later which, if successful, might lead to a bankruptcy order. In the bankruptcy, the court could make a further order setting aside the security given earlier as a preference under sections 340 and 341 of the IA 86. In fact, the judge held that there was no detailed evidence that any other creditor would have been prejudiced.

Furthermore, in the judge’s judgment, the Trustee could not show that he had standing to apply for a rescission order. To show standing, he had to show that he was entitled to be a party to the application for the Subject Order. He was not so entitled because no trustee had been appointed at the time when the bankruptcy order was made.

In any event, the application would fail because the Trustee should have brought the application more quickly.

The Trustee appeals from the order of the judge.

As I see it, there are five issues, which I will address in turn.

To which courts and to which orders does section 375(1) apply?

Mr James Couser, for the Trustee, submits that the judge was wrong on this point and that section 375(1) permits a court to review an order made by a court of the same level, whether sitting on appeal or at first instance. Mr Couser submits that the judge was wrong to consider himself in any sense bound to follow Appleyard as the holding of Briggs J was only an obiter dictum, which the judge was not bound to follow. The judge should have come to the same conclusion as Mr Kevin Prosser QC, sitting as a deputy judge of the High Court of Justice, Chancery Division, in National Asset Loan Management Ltd v Cahillane [2015] EWHC 62 (Ch), [2016] 1 WLR 45 that a High Court judge sitting at first instance could exercise the Court’s powers under section 375(1) in relation to an order previously made by the High Court on appeal. Mr Couser points out that, if this is not the position, an application has to be dismissed and made again in another court, causing extra costs and delay.

Mr Paul French, for Wycombe, seeks to uphold the decision of the judge. He submits that Briggs J was correct to say that section 375(1) applies only to the review at first instance of orders made at first instance.

I conclude that Mr Couser is correct on this issue for the reasons given below.

The question whether section 375(1) is limited to first instance courts reviewing first instance decisions is one of statutory interpretation of section 375(1). Counsel have relied on two cases in which the point before us has been considered. I shall start by explaining those cases but neither of them is binding on us nor do they agree about the answer to the question.

The first of the two cases is Appleyard, in which, as in this case, the trustee in bankruptcy did not know that the bankruptcy order under which he was appointed had been set aside by an order (“the rescission order”) on a later application. The trustee had incurred costs and expenses as trustee after the date on which it was set aside, and the purpose of the application heard by Briggs J was to release the trustee and to determine who should pay the costs which the trustee had incurred. The bankrupt had appealed against the making of the bankruptcy order to the High Court and it was not clear whether the rescission order had been made after appeal or on some other basis. Counsel submitted to Briggs J that he could review the rescission order under section 375(1), but Briggs J rejected that argument, holding that:

In my judgment section 375(1) contemplates review, at first instance, of the exercise of jurisdiction at first instance. It would be surprising if it contemplated review, at first instance, of the exercise of appellate jurisdiction, since on its language, it would then permit a bankruptcy registrar (for example) to review the decision of a High Court judge on appeal. (at [16])

Briggs J did not exercise any jurisdiction to review the order of the High Court under section 375(1) as he was satisfied that he could deal with the application under the inherent jurisdiction to deal with the expenses of the trustee and his release as a necessary consequence of that order. I therefore agree with Mr Couser that Briggs J’s holding was obiter.

Mr Kevin Prosser QC came to the conclusion that the holding of Briggs J was obiter in Cahillane at [36] to [43]. He “did not see why” section 375(1) did not permit the High Court sitting as a first instance court to review an order made by the High Court sitting as an appellate court. He considered (without any detailed consideration of the issue of statutory interpretation) that he should not follow Appleyard.

So since neither of these cases is determinative, I can turn to the statutory provisions afresh. In my judgment, the true interpretation is to be found by examining (1) the function of section 375(1) in the context of other related provisions of the IA 86, and (2) the language used in section 375(1).

The related provisions deal with first instance jurisdiction, the power to review, rescind or vary an existing order and certain appeals.

First instance jurisdiction is dealt with in section 373(1). This establishes the level of court to deal with bankruptcy matters. Both the High Court and the county court “have jurisdiction”, but these courts do not have universal jurisdiction. They have jurisdiction only in relation to proceedings allocated to the insolvency jurisdiction of that court (section 373(3)).

Appeals are dealt with in section 375(2). Appeals from the county court and from a registrar of the High Court go to a High Court judge, and from him to this Court. But no provision is made here for appeals from decisions of a High Court judge sitting at first instance, so this is not a comprehensive statement of the appeal jurisdiction.

Section 375(1) deals with the power to review, rescind or vary prior orders. This is not given by reference to the levels of court by name but to “Every court having jurisdiction for the purposes of the Parts in this Group”. The arrangement of sections shows that the “Parts in this Group” are all the Parts of the IA 86 dealing with the insolvency of an individual (“the individual insolvency Parts”).

Section 375(1) limits the power of review to an order made by the court “in exercise of that jurisdiction”. Those words exclude a court with insolvency jurisdiction exercising a review power over orders made by virtue of some other jurisdiction (for example in relation to housing claims), or in relation to insolvency proceedings allocated to some other district.

It is apparent that section 375 deals both (in sub-section (1)) with the power to review, rescind or vary, and (in sub-section (2)) with the appellate jurisdiction.

The language is critical and at first sight it seems to assist Wycombe and Mr Layne. The marginal note to section 375 uses the words “Appeals etc,. from courts exercising insolvency jurisdiction” and section 375(1) confers power on courts “having jurisdiction” for the purposes of the individual insolvency Parts. At first sight, the word “jurisdiction” appears on each occasion to be a reference back to section 373(1) which states:

373(1) The High Courts and the county courts have jurisdiction throughout England and Wales for the purposes of [the individual insolvency Parts].

That is what Briggs J may have had in mind. However, I do not consider that those words are conclusive for the following reasons. First, although section 373 provides that the High Court and county courts have insolvency jurisdiction, it is apparent that they are not the only courts having or exercising that jurisdiction with respect to that matter. The High Court, when acting as an appeal court, and this Court will also have or exercise that jurisdiction.

Moreover, section 375(1) opens with the words “every court having jurisdiction for the purpose of the [individual insolvency Parts]”. The word “every” emphasises the point that I have just made that it is not just the High Court and the county courts to which proceedings have been allocated which have the power conferred by section 375(1). Furthermore, if Parliament had intended to achieve the result that only such courts were included, it would have used the word “court” alone. That is because the expression “court” is specially defined in section 385(1) to mean:

in relation to any matter, the court to which, in accordance with section 373 in Part X and the rules, proceedings with respect to the matter are allocated or transferred.

That definition would exclude an appellate court.

In these circumstances I would interpret the words “Every court” in section 375(1) as including the High Court, whether it is sitting at first instance or on appeal. I do not consider that this produces a wider result than Parliament could have intended since a practical limitation to ensure respect for the hierarchy of courts is found in the words “order made by it”. It is not open to the High Court to review an order made by the county court or vice-versa. This appears to have been the position before the Insolvency Act 1986 (see Re Hughes (1887) 4 Mor 73) but those responsible for recommending insolvency law reform may wish to consider whether a restriction on orders made by different courts serves any useful purpose for the future.

Counsel referred us to the power of the court to annul a bankruptcy order under section 282(1) of the IA 86. There is nothing to stop a county court exercising this power even if the bankruptcy order was made by this Court on an appeal. But that is a different provision. The exceptional jurisdiction in section 375(1) has been deliberately confined to review, rescission or variation of orders “made by” courts in the same level of the hierarchy of courts.

Accordingly in my judgment, the judge was wrong to hold that he had no power to review, rescind or vary an order which he had previously made on appeal. I would allow this appeal on this issue.

Did Mr Layne have standing to pursue an appeal against his bankruptcy order?

Mr Couser submits that the judge was wrong to entertain any application by Mr Layne on the appeal from the bankruptcy order. Once the bankruptcy order was made, the right of appeal formed part of the estate in bankruptcy which vested in the trustee in bankruptcy under section 306 of the IA 86. The trustee was an officer of the court who could be expected to act fairly in pursuing that right.

I do not agree. Normally, any cause of action which may lead to the recovery of money or other assets which form part of the estate in bankruptcy will form a part of the estate held on statutory trusts following the making of the bankruptcy order (Heath v Tang [1993] 1 WLR 1421). However the right to appeal against a bankruptcy order itself is of a different order as common sense and fairness dictate that the right of appeal against the bankruptcy order should remain with the bankrupt whose status has been fundamentally changed. Moreover, if Mr Couser were right on this point, the Trustee who decided to appeal against the bankruptcy order would be challenging the very order under which he acquired title to the bankrupt’s assets. The courts as a matter of practice permit a bankrupt to appeal against the bankruptcy order: see Re Baron [1943] Ch 177. (The parties cited Wordsworth v Dixon [1997] BPIR 337, but this does not concern an appeal against the bankruptcy order itself). In the same way, where the court has made an order for the winding up of a company, the company acting by its directors are allowed to appeal against the winding up order even though the powers of the directors have come to an end : see Re Diamond Fuel Co (1879) 13 Ch.D. 400.

Joinder of the Trustee to the application to make the Subject Order

Mr Couser submits that the Trustee should in any event have been joined as a party to the application for the making of the Subject Order to ensure that provision was made for payment of the outstanding liabilities of Mr Layne and the expenses of the bankruptcy. The judge was wrong to hold that the court did not have to consider the position of other unpaid creditors if a bankruptcy order was set aside on appeal.

Mr French contends that there was no need to join the Trustee to the application to make the Subject Order. There is no provision in the Rules or the Act for the trustee in bankruptcy to appear or be joined and there was nothing for him to do.

Mr French suggests that the trustee in bankruptcy in Sekhon v Edginton [2015] 1 WLR 4435 may have made submissions to this Court without being joined, but the transcript shows that there was a second respondent, and that appears to have been the trustee.

I consider that the trustee ought to have been joined so that provision could be made for his costs and expenses out of the assets held by him as trustee. There is also the risk that the trustee may not hear that the order has been made setting the bankruptcy order aside so that he continues to incur costs for no purpose. I would therefore allow the appeal on this issue and remit the case to the High Court to determine how the Trustee’s proper costs and expenses should be paid. I deal with the question whether the Trustee could argue that the Subject Order should not be made because Mr Layne had other unpaid debts under the next issue.

Was the judge right to hold that the court could set aside a bankruptcy order even if the debtor had other outstanding debts?

The Trustee’s concern in this case is that Wycombe and Mr Layne came to an agreement which had the effect of putting an end to the bankruptcy and giving Wycombe security for the amounts owed to it, even if other creditors were unpaid.

In my judgment, a creditor who applies for a bankruptcy order is in control of the proceedings even though the order when made will constitute a collective remedy for the payment of all the debtor’s provable debts. It follows that the court may allow him to withdraw the application, though if there is another creditor who wishes to pursue the bankruptcy order, the court may substitute his name as applicant in his place under Insolvency Rule 6.30. The court is not bound to refuse to allow him simply because the debtor is insolvent.

Likewise, as the judge thought arguable, section 271 of the IA 86 permits the court to dismiss a bankruptcy application (which would be by way of petition) where the creditor refuses a reasonable offer of security even if the debtor is insolvent and unable to pay his debts in full. It provides:

Accordingly, I do not consider that the Trustee would have succeeded if he had opposed the application for the court to make the Subject Order on the ground that other creditors would be prejudiced. His only claim would have been that the order should make proper provision for his costs and expenses.

Trustee’s delay

Mr French submits that the Trustee was told of the compromise within a week of it having been made. The Trustee never engaged with Wycombe and in the meantime Mr Layne has paid the instalments and thereby reduced the amount to less than £750, the minimum required to launch a fresh bankruptcy petition.

Mr Layne appeared in person. I can summarise his position. Mr Layne submits that it would be unfair to him if this Court set aside the Subject Order. He was in regular contact with one of the employees of the Trustee, Harriet Barnes. He assumed that everything had been properly dealt with it.

In the light of my answer to the last issue, this issue does not need to be decided, and the concerns expressed by Mr Layne do not arise.

For the reasons given above I would allow this appeal in part and remit it to the High Court to determine how the costs and expenses of the Trustee should be paid. I would dismiss the remainder of the appeal.

Every court having jurisdiction for the purposes of the Parts in this Group may review, rescind or vary any order made by it in the exercise of that jurisdiction.

An appeal from a decision made in the exercise of jurisdiction for the purposes of those Parts by the county court or by a registrar in bankruptcy of the High Court lies to a single judge of the High Court; and an appeal from a decision of that judge on such an appeal lies. . . to the Court of Appeal.

The county court is not, in the exercise of its jurisdiction for the purposes of those Parts, to be subject to be restrained by the order of any other court, and no appeal lies from its decision in the exercise of that jurisdiction except as provided by this section.

I have read both judgments in draft, and agree with both of them.

I too consider that this appeal should be allowed and that the matter should be remitted to the High Court to deal with the issue of the Trustee’s costs and expenses. I wish, however, to add a few words on ground 1.

It seems to me that the result for which the Trustee contends on the first ground follows from the plain wording of section 375(1) of the Act. I see no reason why the section should be thought not to confer on the court a power to review its orders made in the exercise of any part of its jurisdiction, whether at first instance or on appeal. The process of bankruptcy administration is an evolving one. Circumstances change and events arise after the making of orders, even on appeal, that may not have been foreseen when the original orders were made. Convenience seems to me to dictate that the court should have wide power to review its own orders, at whatever stage in the bankruptcy they may have been made.

I see nothing shocking in a High Court Registrar in Bankruptcy having jurisdiction to review, rescind or vary an order made in the High Court, even if that order was originally made by the High Court judge. However, depending on the circumstances, it may be thought convenient or politic for an application to review (etc.) an order of a High Court judge to be listed before the same or another High Court judge. In general terms, I favour the view of section 375 that commended itself to Mr Prosser QC (sitting as a deputy Judge of the High Court) in Cahillane’s case (supra).

I agree with Arden LJ that Mr Layne had standing to pursue his appeal, notwithstanding the vesting of his property generally in the Trustee under section 306 of the Act. As Re Baron (supra) illustrates, the debtor retained his right to appeal against his adjudication, even though the effect of it was to vest his estate in his trustee under section 18 of the 1914 Act. It was the individual creditors who were disabled from participation in the appeal in that case.

It is to be noted, however, that under the 1914 Act creditors had their opportunity to consider whether or not to adjudge the debtor bankrupt at the creditors’ meeting and adjudication did not follow until the creditors had made up their collective mind on that point. Today, the making of a bankruptcy order vests the debtor’s property in the trustee without more and a question may arise hereafter (not disputed in the case of Wycombe DC before us) as to whether a creditor’s locus standi on a debtor’s appeal is ruled out. Further, the subtleties of the former distinction between the effect a receiving order and of an adjudication under the 1914 Act must not be forgotten when considering the older cases in cases such as this.

I also agree that in the present case, the Trustee would not have succeeded if he had opposed the application on the basis of potential prejudice to other creditors. However, I would not wish to say, in deciding on this appeal, that that would be the inevitable result in every such case. Clearly, however, as Arden LJ states, the Trustee ought to have been joined as a party to the application for the Subject Order.