Yang v The Official Receiver

For the reasons given by the second respondent in argument, I have no doubt that both the judge and DJ Khan were right to conclude that the SD had been properly served and it would be inappropriate for this court to revisit that issue.

The attempts by the process server to effect service was sufficient to comply with r6.3(2) of the Insolvency Rules, which is mirrored by section 11.1 of the 2000 Practice Direction. The process server had done all that was reasonable to effect personal service but – this not being possible – he then did what would be required to obtain substituted service. There was no doubt but that, even on the appellant’s own evidence, the SD was served at the appellant’s last known residential address, 15 Banff Road where she had resided until January 2009. The SD was served in May 2009. The fact that the appellant had subsequently (in July 2009) informed the second respondent that she no longer resided at that address was irrelevant.

Again, as Ms Sandbach submitted, the fact that the appellant had provided a correspondence address in January 2009 was also irrelevant, since there was no requirement to attempt to serve a SD at an address which was not a residential or business address.

Accordingly I see no reason to interfere with either the judge’s or DJ Khan’s conclusions in relation to the issue of service.

I turn to the question of whether the subsequent setting aside of the liability orders is a ground for rescission or annulment. We were told that this would be the first appellate decision squarely to address the ambit and interaction of the powers to annul and to rescind a bankruptcy, under sections 282(1)(a) and 375(1) IA86, in the situation where the debt upon which the BO was founded had been set aside subsequent to the BO.

I have already identified the two principal authorities, which at first blush adopted conflicting approaches. In Farley, Hoffmann LJ suggested at 640 that the subsequent setting aside of a default judgment was a ground existing at the time of the BO, so as to provide a basis for annulment:

“[I]f it can be demonstrated by evidence subsequent to the bankruptcy order that the debt upon which the petition was founded did not exist, then it would be right to say that there was a ground existing at the time the order was made on which it should not have been made …… That could be true, notwithstanding that, at the time of the order there was a default judgment in existence which had not yet been set aside.”

By contrast, in Cassells, the Chancellor considered at [28] that the setting aside of a tax liability was not a ground existing at the time of the BO, and therefore could only be grounds for rescission, not annulment:

“[An application to annul] could not have succeeded under s 282(1)(a) because there is no doubt that the assessments under section 28(c) of the Taxes Management Act 1970 gave rise to legally enforceable debts. Accordingly, the [bankruptcy] order was rightly made when made”.

There are additional authorities supporting each approach. Hoare v Inland Revenue Commissioners [2002] EWHC 775 (Ch), which preceded Cassells, relied upon and applied Farley. There, Peter Smith J suggested at [8]-[9] that:

“8.

…… [A]ny application to rescind or annul is necessarily retrospective in nature and requires the court, on the case of an annulment, to look at the facts and submissions placed before the court on the annulment application to see whether, had those matters taken place, or those submissions in this case been made at the hearing of the bankruptcy petition and then ask the question whether the bankruptcy order [would] have then been made.

9.

It must necessarily be retrospective, because otherwise if the matter had been presented at the time of the hearing of the petition, then there would be no material ever upon which an application to annul could have been made. All that could be done would be to follow the appeal procedure against the decision which had been made, fully argued.”

However, most recently, in JSC Bank of Moscow v Kekhman [2015] EWHC 396 (Ch), at [67]-[70], Morgan J inclined towards the view that in relation to annulment the court should consider the factual position as it stood at the time the BO was made:

“68

There will necessarily be a period of time between the date of the bankruptcy order and the date of the hearing of the annulment application. As s 282(1)(a) makes clear, the court is required to consider the grounds existing at the earlier, and not the later, point in time. Thus, if the facts change between these two dates, the court must consider the facts as they stood before the change. This does not mean that the court will leave entirely out of account events which occurred between the two dates. For example, events which occur after the bankruptcy order may throw reliable light on ‘the grounds existing at the time the [bankruptcy] order was made’. An example would be where there was a dispute about the value of an asset at that time and, following the bankruptcy order, that asset is sold in the open market in such a way as to provide reliable evidence as to the value of the asset at the date of the bankruptcy order[.] ……

69

What sometimes happens when a court is asked to make a bankruptcy order is that the court has to make an assessment of certain possibilities. It might be said that the bankruptcy order will provide an opportunity for the trustee in bankruptcy to investigate certain matters. It might also be said that a bankruptcy order will carry with it the risk of certain adverse consequences. These matters involve an assessment of future possibilities. The court has to do its best to judge those matters as at the time the order is made. On an annulment application, it will be open to a party to lead evidence as to further facts which existed at the date of the bankruptcy order, even though those further facts were not provided to the court at the date of the order. But is it open to a party to inform the court, perhaps some considerable time later, of what actually happened in relation to the various possibilities and then to submit that because things turned out differently, that the court’s initial assessment was wrong and that the order ‘ought not to have been made’? The chief registrar directed himself that, when matters are uncertain at the date of the order, but the uncertainty was resolved before the date of the hearing of a later annulment application, he should have regard to the later events. He relied on the decision in Watts v Newham London Borough Council [2009] BPIR 718. ……

70

…… The chief registrar did take into account a number of matters which had occurred after the making of the bankruptcy order. He was clearly right to take account of subsequent events in so far as they provided evidence of what the facts were on 5 October 2012. However, I am less convinced that it was appropriate to entertain a submission that because a possibility which was assessed in a particular way on 5 October 2012 turned out differently from the assessment that the bankruptcy order ‘ought not to have been made’. In view of the absence of any challenge to his judgment on this ground, this matter was not argued in any detail before me. …… I have therefore considered whether the approach in the Watts case was correct. In the end, I have decided that it is not necessary for me to rule on that point. If it had been necessary to give such a ruling, then I would have wished to consider whether that approach goes too far and whether a case where the court’s assessment in relation to future events does not prove to be accurate should be dealt with by rescission under section 375, rather than by annulment under section 282. This question of the court’s approach to the assessment of a contingency, and the relevance of later events is a difficult one, and a court asked to consider the meaning of ‘on the grounds existing at the time the order is made’ in section 282 might wish to consider whether it derives benefit from the citation of authorities in other areas of the law such as Bwllfa and Merthyr Dare Steam Collieries v Pontypridd Water Works Co [1903] AC 426 (a case which might have influenced the deputy judge in the Watts case), Stein v Blake [1996] AC 243, 252 and Golden Strait Corpn v Nippon Yusen Kubishika Kaisha (The Golden Victory) [2007] 2 AC 353 or whether such authorities should be distinguished.”

(Notwithstanding those remarks by Morgan J, none of the parties suggested that any other authorities outside the insolvency context assisted in construing the specific wording in section 282 IA86.)

Whilst it does not directly relate to the construction of section 282 IA86, the general ambit of the power to rescind might be thought to inform the scope of the power to annul - in particular, if it were thought that these powers should dovetail rather than overlap. The salient point is that it is “well established” that section 375 IA86 requires “new material and/or a material change of circumstances”: Crammer v West Bromwich Building Society [2012] EWCA Civ 517 at [7]-[8]. However, a change in circumstances in this sense will include where facts which did exist at the time a BO was made have subsequently come to light: Papanicola v Humphreys [2005] EWHC 335 (Ch).

Finally, in considering the interaction between the powers to rescind and to annul a bankruptcy, it is also appropriate to understand why the difference might matter to the bankrupt. In essence, rescission terminates the bankruptcy whereas annulment treats the BO as having never been made. There are a variety of reasons why this might be significant: see Muir Hunter on Personal Insolvency (“Muir Hunter”) at 3-600 to 3-6003 and 3-2614 (references as at 29 March 2017). Two reasons might be thought to be of general significance. First, the Insolvency Rules require the bankruptcy details to be removed from the Individual Insolvency Register in the event of annulment, but not rescission. Thus a credit agency may not become aware of the making of a rescission order, which would have implications in relation to the ex-bankrupt’s credit rating. Second, certain contractual terms may be triggered when a BO has been made but rescinded, whereas the terms will not be triggered if the BO has been annulled (this was, for example, the case in Hoare).

In my judgment, the only sensible interpretation of section 282(1)(a) IA86 is that contended for by the second respondent: namely that reg 49(1) CTR deems the liability orders to constitute a legally enforceable debt, regardless of the underlying factual position relating to the relevant property, unless and until the liability order is set aside under the specific statutory procedure laid down for doing so. Dictates of certainty and expediency require that a bankruptcy court should not go behind the liability orders, except in the event of fraud or some miscarriage of justice. As the date that the BO was made, the liability orders remained in place and had not been set aside; the effect of reg 49(1) CTR was therefore statutorily to deem them as constituting a legally enforceable debt from the time they were made until the time they were set aside. The fact that the liability orders were subsequently set aside was not a ground “existing at the time the [BO] was made”, as required by section 282(1)(a) IA86. It was only later, in August 2012, when the liability orders were in fact set aside, that the debt ceased to exist. Thus, even if all the underlying facts in relation to the property had been known at the time that the BO was made, the court would nonetheless have been entitled to make a bankruptcy order. (Of course, whether it would have done so, as opposed to adjourning the petition to enable the appellant to have obtained an order setting aside the liability orders, is irrelevant.)

The logic of the Chancellor in Cassells, and of Morgan J in JSC Bank of Moscow v Kekhman, appears to me to be compelling and to be preferred to that of Peter Smith J in Hoare v Inland Revenue Commissioners. Nor do I consider that this court is bound by the obiter suggestion of Hoffmann LJ in Farley, which was, in any event, dealing with the position in relation to a default judgment, as opposed to a debt imposed by a specific statutory provision. The fact is that the words “at the time the order was made” in section 282(a) must have some significance and if read as widely as Hoffmann LJ’s dictum might seem to suggest, such words would seem to have no significance at all.

The contrast in section 282 between subparagraphs (a) and (b) is perhaps of some relevance. The latter envisages something happening i.e. the payment of debts, since the making of the order. The fact that the order was properly made because the debts could not properly have been paid at the time is irrelevant.  By contrast, the language in (a) is different. It envisages that if all material facts existing at the time the order was made had been known to the court, the order would not have been made.  In this case, as I have said, it would have been made.

 My conclusion is supported by various authorities: see Muir Hunter at 3-310.1 (references as at 29 March 2017). The finality of liability orders is a point also made in Dennis Rye Ltd v Bolsover District Council [2009] EWCA Civ 372, where Mummery LJ said at [5]:

“[L]iability orders are orders of the court like ordinary civil judgments. If a winding-up petition is based on such orders the court will seldom look into them, or go behind them, in the absence of fraud, or in the absence of jurisdiction in the court that made the orders, or ‘some other truly compelling circumstance’.”

In the circumstances, the question of discretion does not arise since the power to annul under section 282(1)(a) was not engaged.

In my judgment, irrespective of this court’s conclusion in relation to issues (i) and (ii), there is no basis for setting aside the costs decisions in the courts below which were, as pointed out by counsel for the respondents, not in any way consequential upon the decision to rescind but not to annul the BO. It is clear from the judgments that the question of costs would have been approached in the same way even if the BO had been annulled. There is, accordingly, no basis for challenging the rationale of DJ Khan and the judge for the costs decisions, which were based on other factors such as the appellant’s conduct. I would not give permission to appeal in respect of this issue.

Accordingly, I would dismiss this appeal.

I agree.