Yang v The Official Receiver

This is an appeal by Ms Yang (“the appellant”) against the order of HHJ Hodge QC (“the judge”) of 18 November 2013, which dismissed an appeal by the appellant against the order of DJ Khan of 12 November 2012.

At the hearing on 23 March 2017 we dismissed applications made by the appellant in correspondence with the Civil Appeals Office, which had sought an adjournment of the hearing, for reasons given in an ex tempore judgment. In essence those reasons were that:

The medical evidence was extremely unsatisfactory: the initial medical note from a private medical practice provided no explanation as to why the appellant’s condition prevented her from attending; the NHS report merely recorded the appellant’s complaint, without expressing any clinical view; and I was not satisfied that I could rely on the short note from a Chinese medical practitioner again recording the appellant’s complaint. In any event, the symptoms of which the appellant complains would inevitably reoccur upon any adjourned hearing.

This case has already been subject to inordinate delays. This set of applications appeared to be the fifth incidence of the appellant seeking a last-minute adjournment on one basis or another.

The court has had the benefit of written submissions prepared by counsel on behalf of the appellant.

As a consequence of dismissing these applications to adjourn, and because the appellant had not attended the hearing and was no longer represented, we did not receive oral argument on behalf of the appellant at the hearing. However, until very shortly before the hearing the appellant had been represented by counsel (Ms Cheryl Jones) on a direct access basis. Indeed, on 8 March 2017 the court had received an updated skeleton argument from Ms Jones on behalf of the appellant. We therefore proceeded on the basis of those submissions.

Whilst the appellant had written to the Civil Appeals Office on 13 March 2017 to say that she did not accept the skeleton argument, and had by then dis-instructed Ms Jones, she did not identify any specific points with which she disagreed. Further, it is unlikely that the appellant would have been in a position to add to the written submissions, which accorded with the appellant’s position in the hearings below, on issues which are entirely legal in nature. Certainly, there could be no dispute about the documents before the court, which had been filed by the appellant herself (as evidenced by the appellant’s email to the court on 7 February 2017).

The court apologises for the delay in the production of this judgment due to pressure of other work.

The appellant owned four rental properties in Manchester. In 2006-2007 Manchester City Council (“the second respondent”) designated one of these properties as being a House in Multiple Occupation and raised Council Tax bills accordingly, totalling £1102.54. Following non-payment the second respondent obtained liability orders in that sum, dated 5 October and 23 November 2006 (“the liability orders”). These liability orders – and not the unpaid council tax bills – were the debts upon which the creditor’s petition for bankruptcy and the bankruptcy order was subsequently founded.

On 12 May 2009 the second respondent served a statutory demand (“the SD”) in relation to the liability orders at 15 Banff Road by way of substituted service. The evidence of the process server was that:

On 27 April he attempted to effect personal service at 13 Banff Road, which was the appellant’s last known residential address, but was informed by a neighbour that the appellant lived at 15 Banff Road, albeit that the appellant was away until the end of the week. (The appellant did not have any business address.)

On 29 April he sent a letter to 15 Banff Road which explained that he would attempt to effect personal service at 15 Banff Road on 12 May.

On 12 May he attended 15 Banff Road. A different neighbour confirmed that the appellant lived at 15 Banff Road. He therefore inserted the SD through the letterbox before 5pm on this date.

On 2 September 2009 the second respondent issued a creditor’s petition. This was served at 15 Banff Road by way of substituted service. No issues arise in relation to the service of the petition: it is not disputed that it was validly served.

On 30 November 2009 a bankruptcy order was made against the appellant (“the BO”).

On 15 November 2010, the automatic discharge from bankruptcy was suspended on the application of the Official Receiver (the first respondent, who takes no part in the appeal), following the appellant’s non-cooperation. On 16 August 2011 Ms Wright (“the third respondent”) was appointed as trustee in bankruptcy.

The appellant’s evidence was that:

Until 1 January 2009 she had resided at 15 Banff Road, but thereafter she resided at various addresses in Oxford.

In January 2009 she had provided the second respondent with what she described as a “correspondence address”. This was the address of a friend, and there was no suggestion that the appellant herself ever resided there. The appellant suggested that this correspondence address was used by the second respondent, albeit in an unrelated context.

On 30 July 2009 she had informed the second respondent that she no longer resided at 15 Banff Road.

She became aware of the SD and creditor’s petition only in November 2011.

The appellant has made three applications to annul the BO:

An application of 17 November 2011, which was dismissed on 8 February 2012. DJ Smith considered that even if the appellant could set aside the liability orders, this did not afford grounds to annul the BO.

An application of 23 May 2012, which was dismissed on 25 May 2012. HHJ Waksman QC refused this application because he held that there was no arguable ground on which to annul the BO and because the application was an abuse of process.

An application of 28 May 2012 that sought annulment or, alternatively, rescission. This application gives rise to the present appeal.

Before the third application was heard, on 6 August 2012 the Valuation Tribunal found that the second respondent should never have designated the appellant’s rental property as a House in Multiple Occupation. Thus it was ordered that the second respondent should remove the appellant from liability from 16 March 2006 to 16 May 2007. Since the appellant had by this time paid the liability orders, the second respondent gave her credit for that sum.

I interpose that, strictly, the liability orders do not appear to have been set aside as they had by then been discharged by the appellant. However, the effect was the same and it was not suggested that the position would have been any different if the liability orders had remained outstanding and had been set aside. It is therefore convenient to refer to the liability orders as having been “set aside”, in the sense that subsequently to the BO it was decided that the liability orders should not have been made in the first place.

The third application was heard by DJ Khan, who by his order on 12 November 2012:

rescinded the BO on the ground that, whilst the liability orders were extant at the time of the BO, they had been set aside;

refused to annul the BO on that ground; and

ordered that (a) the remuneration and expenses of the trustee in bankruptcy, including litigation costs, and (b) the second respondent’s costs were to be paid out of the appellant’s estate. (I refer to these the decisions regarding the costs of litigation and the bankruptcy, collectively, as “the costs decisions”).

By his order on 18 November 2013, the judge dismissed an appeal by the appellant against the order of DJ Khan.

By their order on 22 April 2015, Patten and Briggs LJJ gave permission to appeal against the judge’s order of 18 November 2013.

The appeal turns on the construction of certain statutory provisions relating to service of the SD and the court’s powers to rescind and annul a BO. In order to summarise the decisions below and the parties’ submissions on the appeal, it is convenient to set out this material. For the avoidance of doubt, in the period between the hearing of this matter and the handing down of judgment, the Insolvency Rules 1986 were replaced by the Insolvency Rules 2016 (operative from 6 April 2017). Such replacement was not retrospective, and accordingly the Insolvency Rules 1986 continue to govern the position for the purposes of this appeal.

Insolvency Rules 1986 (“Insolvency Rules”), r6.3(2) provides:

Insolvency Rules, r7.51A(1) provides that Part 6 of the CPR (except r6.30 to 6.51 but including any related practice direction) shall:

Practice Note (Bankruptcy: Substituted Service) (No4/86) [1987] 1 WLR 82 (“the 1986 Practice Note”) provides, at section 4:

Practice direction on insolvency proceedings [2000] BCC 927 (“the 2000 Practice Direction”) provides at section 11:

Section 282(1) of the Insolvency Act 1986 (“IA86”) provides the power to annul a BO:

Section 375(1) IA86 provides the power to rescind a BO:

Emphasis was also placed by the second respondent on regs 34(6) and 49(1) of The Council Tax (Administration and Enforcement) Regulations 1992 (“CTR”), which set out the circumstances in which a liability order will be made and its effect:

Reg 49(1) CTR thereby deems liability orders to fulfil the requirement in section 267(1) IA86 that “[a] creditor’s petition must be in respect of one or more debts owed by the debtor”. Accordingly, the local authority may serve a statutory demand, issue a creditor’s petition and ultimately obtain a BO in relation to the liability orders (as opposed to the unpaid council tax itself).

Further, by reg 57(1) CTR, a debtor who wishes to challenge a liability order that has been made must appeal to the Valuation Tribunal.

The judge’s reasoning was set out in his judgment of 1 October 2013. Subject to one point, the judge essentially upheld the judgment of DJ Khan below.

The judge held that the appropriate remedy, where the liability orders had been set aside after the BO was made, was rescission. It appears that both DJ Khan and the judge took the view that, in the context of liability orders, annulment was confined to where the BO should not have been made based on the factual and legal position which existed at that time, which did not include where the liability orders had been subsequently set aside because of later events.

The judge therefore agreed with DJ Khan that, because of reg 49(1) CTR, liability orders were akin to tax liabilities, and were not to be equated with default judgments:

In HM Revenue and Customs v Cassells [2008] EWHC 3180 (Ch) it was suggested that it would not be possible to annul a bankruptcy on the ground that a tax liability had been subsequently set aside.

This position regarding liability orders and other tax liabilities was thus different from the position in relation to default judgments, set out in RBS v Farley [1996] BPIR 638. In that case a BO was annulled on the ground that a default judgment had subsequently been set aside.

Finally, the judge considered that DJ Khan had not erred in his approach when concluding that the SD had been properly served. The judge held that:

DJ Khan had correctly applied the test set out in r6.3(2) of the Insolvency Rules, which is supplemented by the 2000 Practice Direction. At the time of service of the SD, 15 Banff Road was the last known residential address of the appellant.

The assessment of the evidence in determining whether proper service had been effected was a matter for the trial judge. The court would not lightly interfere with DJ Khan’s conclusion on this point.

In my judgment there are three issues which require determination:

Was the SD properly served?

Should the BO be annulled pursuant to s282(1)(a), rather than rescinded, on the ground that the liability orders had been subsequently set aside or, if the appellant succeeds on issue (i), on the ground that the SD was never properly served?

If the appellant succeeds on issue (ii), should the Court of Appeal interfere with the costs decisions?

The arguments advanced in the written submissions by counsel then acting on behalf of the appellant, Miss Cheryl Jones, may be summarised as follows.

As to issue (i): the judge applied the wrong test in determining whether the SD was properly served, and erred in concluding that DJ Khan had not erred:

In upholding the reasoning of DJ Khan, the judge erroneously applied the CPR Part 6 test and asked whether the second respondent had taken sufficient steps to bring the SD to the appellant’s attention. The correct test is whether the second respondent had done “all that is reasonable” to serve the SD.

The second respondent was required to send a copy of the SD to “all known addresses”, which would include any known correspondence addresses, in addition to any residential or business addresses. (I interpose that this appears to be premised on the applicability of the 1986 Practice Note, which refers to “all known addresses”, whereas the 2000 Practice Direction refers only to all “residential or business addresses”.)

As to issue (ii):

If the appellant succeeds on issue (i), the BO should be annulled because the conditions for a creditor’s petition were not met: Johnson v Tandridge District Council [2007] EWHC 3325 (Ch) at [32].

Alternatively, the BO should be annulled on the ground that the liability orders had been subsequently set aside:

The judge erred in distinguishing a liability order from a default judgment. Farley was directly analogous and should be applied.

The discretion to annul should have been exercised in this case, by analogy with Mustafa.

As to issue (iii): if the appellant succeeds on issues (i) and/or issue (ii), the costs decisions below should be revisited as a consequential matter in order to reflect the outcome of the substantive issues.

The arguments developed by the second respondent, Manchester City Counsel, in written submissions and by Ms Carly Sandbach in oral submissions, in relation to the above issues may be summarised as follows.

As to issue (i): the judge was right to conclude that the SD had been properly served:

Both the judge and DJ Khan correctly identified and applied the relevant legislation. The correct test was contained in r6.3(2) of the Insolvency Rules, although it was permissible to have regard to Part 6 of the CPR.

The 1986 Practice Note was superseded by the 2000 Practice Direction from April 1999; the earlier note therefore has no application.

What had been done by the process server 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.

Even on the appellant’s own evidence, the SD was served at the appellant’s last known residential address:

The appellant accepted that she had resided at 15 Banff Road 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.

The correspondence address provided by the appellant in January 2009 was also irrelevant. There is no requirement to attempt to serve a SD at an address which is not a residential or business address.

An appeal court should not lightly interfere with the judge’s conclusions, which itself had deferred to the assessment of the evidence by DJ Khan.

As to issue (ii): first, neither the alleged improper service of the SD nor the fact that the liability orders had been set aside are grounds which engage s282(1)(a) IA86:

Even if the appellant succeeds on issue (i):

Improper service of the SD would not render the bankruptcy a nullity. Non-compliance with the requirements to serve a SD does not necessarily undermine the bankruptcy procedure: Bush v Bank Mandiri (Europe) Ltd [2011] BPIR 19. There is authority suggesting that the appropriate order would be to rescind the BO: Housiaux and another v HM Customs and Excise [2003] EWCA CIV 257 at [25].

Even on the hypothesis that the SD had not been validly served, it does not follow that the BO “ought not to have been made”. For example, the court might have granted the BO in any event, since the creditor’s petition had been validly served.

The fact that the liability orders had been set aside was not a ground “existing at the time the [BO] was made”, as required by section 282(1)(a) IA86:

The effect of reg 49(1) CTR was statutorily to deem the liability orders as constituting a legally enforceable debt from the time the liability orders were made until the time they were set aside. Whilst the liability orders had been set aside in August 2012, at which point the debt ceased to exist, until that time the debt did exist. Therefore, even taking into account what had happened subsequently, at the time the BO was made the liability orders were a debt. (This could be contrasted with the position in relation to a default judgment, which if set aside was considered to have never existed at all.)

The present case was analogous to Cassells. Farley should be distinguished:

default judgments were procedural whereas liability orders required the council to present evidence to demonstrate a right, so there was no need for the bankruptcy court to go behind liability orders;

Farley did not consider section 375(1) IA86, and hence did not consider its potential interaction with section 282(1)(a); and

the comment in Farley was obiter and made in the course of an ex tempore judgment.

The subsequent setting aside of the liability orders was an exceptional circumstance arising after the making of the BO. This constituted a ground for rescission, but not annulment.

Second, even if the appellant can identify a ground on which s282(1)(a) was engaged, the appellant has failed to explain how the judge (upholding DJ Khan) erred in the exercise of the discretion not to annul but to rescind.

Third, there was a technical argument concerning the scope of the appeal. The appellant has no permission to appeal the order of DJ Smith of 8 February 2012 (made in response to the appellant’s first application), which decided that there no ground on which to annul the BO. The consequence was that there was a subsisting order precluding annulment of the BO, which was not open to challenge on appeal.

As to issue (iii): the costs decisions should not be disturbed in any event:

The appellant did not have permission to appeal the costs decisions.

The costs decisions were not consequential upon the decision to rescind but not to annul the BO. The question of costs would have been approached in the same way even if the BO had been annulled. Therefore, even if the appellant succeeded on issues (i) or (ii), this would not undermine the rationale for the costs decisions, which were based on other factors such as the appellant’s conduct.

The third respondent was neutral on issues (i)-(ii) and was concerned only to ensure that it was not adversely affected by any appeal in relation to the costs decisions, within issue (iii). Accordingly, the focus of written submissions and oral submissions by Ms Troy was the argument identified at paragraph 42.ii) above: even if the BO should be annulled, this would not undermine the reasons for the order that the remuneration and expenses of the trustee in bankruptcy, including litigation costs, should be borne by the appellant.

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:

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:

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:

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:

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]:

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.