Papanicola v Humphreys & Ors

The Appellant is the Trustee in Bankruptcy of Samuel Sing Kee Mak. I shall refer to him throughout as the Trustee. Mr Mak owned and operated a restaurant known as the Ugly Duckling. He was made bankrupt on 11 September 2002. He continued to run the Ugly Duckling until September 2003 when it was sold. The net proceeds of sale were received by the Trustee as part of Mr Mak’s estate. On 17 February 2003, after he was made bankrupt but before the sale of the restaurant business, Mr Mak entered into a contract with Readygame Ltd (Readygame) under which the latter provided a PDQ facility for use in the Ugly Duckling business. In other words, it provided facilities through which Mr Mak could accept credit card payments made by customers of the business. Readygame is the third respondent but it is not represented before me on this appeal. It is in liquidation. The first respondent, Mr Benjamin Toby Humphreys, and the second respondent, Mr Craig Dunne, operated Readygame. It offered professional assistance to individuals and companies facing insolvency. Only Mr Humphreys is represented before me on this appeal.

On 16 June 2004, Registrar Rawson held that the sum of £50,361.83 received by Readygame between the week ending 1 March 2003 and the week ending 13 September 2003 was held upon trust for the Bankrupt Estate of Mr Mak and ought not to be mixed with other funds of Readygame. He also ordered Mr Humphrey and Mr Dunne to attend for examination on 20 July 2004. I will refer to this as the Second June Order.

On 24 November 2004, the Registrar ordered that the Second June Order be rescinded and, in its place, he declared that:

“all sums generated by credit card receipts from the bankrupt’s business between the week ending 1 March 2003 and the week ending 13 September 2003 (subject to any proper deduction by Ready Game Ltd under the contract dated 17 February 2003) are prior bankruptcy income of the Bankrupt.”

The effect of this (which I will refer to as the November Order) was not only to reverse the declaration the Registrar had made on 16 June 2004 but also to rescind the order for the examination of Mr Dunne and Mr Humphrey. It is from the November Order that this appeal is brought. Before me the Trustee is represented by Mr Christopher Parker. Mr Humphreys is represented by Mr Jamie Riley.

There is one other order to which it is necessary to refer at this stage. On 30 January 2004 District Judge Blomfield gave judgment against Readygame and in favour of the Trustee in the sum of £50,000 together with costs. This was money received by Readygame through processing credit card payments made to the Ugly Duckling. It is not in dispute that it is, in substance, the same money as is covered by the November Order. On 19 April 2004 Readygame applied to set Judge Blomfield’s order aside. That application, which was signed by Mr Humphreys as director, included the following two paragraphs:

“Judge Sykes Frixou acting on behalf of the Claimant (i.e. the Trustee’s solicitors) contacted us with regard to the credit card processing machine claiming all monies that we had received to date. We stated that they were not entitled to the money as it was Mr Mak’s income and under the Insolvency Act 1986, the Trustee in Bankruptcy can only apply to the Bankrupt for an Income Payments Order. As such, we have refused to make a payment to the Trustee in Bankruptcy and we have deducted our fees from the monies held as detailed in our Contract of Engagement.

The Claimant maintains he is entitled to the money by describing the funds received by us as property. We have clearly demonstrated that the funds received are income and not property. As such the Claimant has no right to bring this action against us and we are not indebted to the Claiment.”

Notwithstanding that submission, the application to set aside Judge Blomfield’s order was dismissed by Deputy Registrar Brettle on 8 June 2004 (the First June Order).

Mr Parker advances four grounds in support of the Trustee’s appeal:

S 375(1) provides:

“ 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.”

Mr Parker argues that it was only open to the Registrar to rescind his own earlier order in exceptional circumstances and here, far from there being exceptional circumstances supporting rescission, the circumstances pointed the other way.

Mr Riley argues that Mr Parker is wrong both on the law and the facts. As to the former he says that s 375(1) creates a very wide jurisdiction to rescind and that the discretion is at large. There are some cases where the party seeking rescission needs to demonstrate exceptional circumstances, but this is not one of them. As to the latter, he argues that, even if he is wrong on the law, there are circumstances here which qualify as exceptional.

Mr Parker relies on the decision in Fitch v Official Receiver [1996] 1 WLR 242. In view of Mr Riley’s arguments, that authority deserves close analysis. The relevant facts of Fitch are that bankruptcy orders were made against Mr and Mrs Fitch on petitions presented by a creditor, the Co-Operative Bank Plc. An appeal by Mr Fitch was dismissed. Three months later the debtors applied under the provisions of s 375(1) for rescission of the bankruptcy orders. On this application they were supported by the bank and many of the larger creditors. No creditor opposed. On the material before the court, it appeared that the creditors had come to believe that there was a serious risk that the bankruptcy orders, particularly that against Mr Fitch, would prejudice the recovery of a substantial asset for the estate. The matter came on before Chadwick J. He refused the application.

On appeal the respondent Official Receiver felt unable to support either of the two grounds upon which Chadwick J. had based his judgment. Nevertheless he argued that the appeal should be dismissed. He said that the jurisdiction to rescind a bankruptcy order is an exceptional one and that authority under the former Bankruptcy Acts indicated that it was a jurisdiction which should be exercised only where the circumstances are closely analogous to a scheme of arrangement. In re A Debtor (No 12 of 1970) [1971] 1 WLR 1212 was relied upon in support of the latter proposition.

Millett LJ, giving the judgment of the court, analysed the statutory provisions and the caselaw including the Court of Appeal decision in In re Izod [1898] 1 QB 241 which had been distinguished in In re A Debtor (No 12 of 1970). As he pointed out, the jurisdiction under s 375 replaced sections in identical terms in earlier Bankruptcy Acts, including s 104 of the Bankruptcy Act 1883, and that it is:

“ … unique to insolvency, (having recently been extended from bankruptcy to company winding up), in that it allows the court to review and rescind or vary an order made by a court of co-ordinate jurisdiction. It applies to any order made in the exercise of the bankruptcy jurisdiction. It is available to rescind a bankruptcy order as it was formerly available to rescind a receiving order. The court's power to review and if thought fit rescind a bankruptcy order is, in theory at least, virtually unlimited.” (p 246)

He then referred to In re Izod and commented:

“None of the members of the court doubted the existence of the jurisdiction or that section 104 of the Bankruptcy Act 1883 gave the bankruptcy court an absolute discretion to rescind or vary any of its orders. By a majority the court held that a receiving order may properly be rescinded where the debtor has afterwards come to a private arrangement with his creditors, but emphasised that the court will act only with great caution and under special circumstances which make it clear that the arrangement is for the benefit of the creditors and where the debtor has not been guilty of any misconduct in connection with his insolvency.” (p 247 – 8)

He then referred to In re A Debtor (No 12 of 1970) and cited the following passage from the judgment of Russell LJ upon which the respondent relied:

“In our judgment the exceptional circumstances that justify the exercise of the power under section 108(1) to rescind a receiving order and set aside the bankruptcy must be such as are closely analogous to the expressly recognised circumstances which enable a bankruptcy to be halted or annulled.”

In refusing to treat this as laying down the general rule, Millett LJ said:

“The statutory discretion is in terms unlimited. The effect of a rule of law to the effect alleged would be to distort the nature of the inquiry upon which the court ought to embark. That inquiry is whether the circumstances justify the rescission of the bankruptcy order, not whether they are sufficiently close to an informal scheme of arrangement.”

He then went on to consider the facts of the case before him. His approach was explained in one short passage:

“While, therefore, the discretion is still to be exercised with caution and only in exceptional circumstances, we do not accept that those circumstances are limited in the manner alleged. It remains to consider whether the circumstances of the present case are exceptional and if so whether they justify the rescission of the bankruptcy order. In our opinion they are and do.” (p 249)

Mr Riley points out that this case was only concerned with applications to rescind bankruptcy orders. He argues that it is understandable that such orders could only be varied or rescinded in exceptional circumstances. The reason for this is that under all other statutory jurisdictions which can be used to set aside a bankruptcy order, namely an annulment or appeal, the Court is limited to considering the matters originally before the court when the bankruptcy order was made. He suggests that In re A Debtor (32/SD/1991) [1993] 1 WLR 314 supports his argument.

In the latter case a debtor had applied and failed to have a statutory demand set aside. He then applied under s 375 for a review of that decision. He was now in a better position to challenge the statutory demand because he had new evidence from another accountant to the effect that the petitioning creditor’s charges, which were the subject of the statutory demand, were grossly excessive. It appears that at first instance the judge came to the conclusion that the whole matter had been fully canvassed at the first hearing, that there was no reason why the new evidence could not have been made available then and, for that reason, it could not be relied on an application under s 375. The debtor’s only course was to appeal the original order.

On appeal Millett J. explained that the rule in Ladd v Marshall did not apply to s 375 although the fact that evidence might and should have been obtained at the time of the original hearing was a factor to be taken into account in exercising the discretion under the section. Millett J. then considered the question “whether exceptional circumstances must be shown before the court’s jurisdiction under s 375 can be invoked” (p 319). The respondent relied on In re A Debtor (No 12 of 1970). The judge distinguished that case as follows:

“In my judgment, the decision in In re A Debtor [1971] 1 W.L.R. 1212 has no bearing on the present case, which raises the question: what grounds should exist to invoke the jurisdiction to rescind or vary an order dismissing an application to set aside a statutory demand. In my judgment, what is needed is evidence to show either that there was no debt or that for some other reason the statutory demand ought to have been set aside. The statutory demand ought to have been set aside either where the debt is proved to have been paid or to be no longer owing, or never to have arisen or where the debt is bona fide disputed on substantial grounds. It follows that in the rare case where the court would entertain an application to rescind an order dismissing an application to set aside a statutory demand any fresh evidence must be cogent evidence that the debt is bona fide disputed. Where credible - it obviously need not be incontrovertible - it must be such that if unanswered it would undoubtedly lead to the setting aside of the statutory demand if made at the appropriate time.”

Mr Riley says that this demonstrates that exceptional circumstances are not needed and is consistent with his argument that the high hurdle imposed by Fitch is restricted to cases where the rescission of a bankruptcy order is in issue. In a case like the present one, the wide scope of s 375 allows the court to assess the matter afresh.

I do not accept these submissions. First, the fact that the court has a wide jurisdiction does not throw light on how the jurisdiction should be exercised. In Fitch the Court of Appeal noted that the power bestowed on the court by s 375 was “in theory at least, virtually unlimited”, that the “statutory discretion is in terms unlimited” and that it created an “absolute discretion” to rescind or vary any of its orders. Nevertheless the court said that the discretion could only be exercised in exceptional circumstances.

Second, there is nothing in the wording of s 375 which suggests that it should be applied in a significantly different way in different cases. The authorities do not support that approach either. Even if Millett J.’s decision in In re A Debtor (32/SD/1991) can be construed as suggesting a lower threshold where what is being sought is the rescission of a refusal to set aside a statutory demand, that view does not appear to have commended itself to the Court of Appeal in Fitch. Millett J’s judgment was cited to the Court in Fitch yet it held that s 375 applied to “any order made in the exercise of the bankruptcy jurisdiction” and that it could be applied “to rescind or vary any of its orders” without distinguishing in any way between them.

Third, I do not accept that In re A Debtor (32/SD/1991) supports Mr Riley’s argument. On the contrary, Millett J. said:

“As a matter of discretion, I have no doubt that the jurisdiction ought to be rarely exercised, since the effect of doing so would be to allow what would amount to a renewed application to set aside a statutory demand after the period limited for making the application.” (p 318)

It seems to me that a number of propositions can be formulated in relation to s 375. Some of them are derived from the passages cited above:

The second and fourth of these propositions merit some expansion. Inherent in s 375 is the concept that something has changed so that it is appropriate for the court to reconsider its own earlier order. If there is no change in circumstances, the only way to challenge the order is by appeal. The court is not to review its order simply on the basis that the applicant wants to present essentially the same facts and the same arguments but more forcefully or attractively. This is apparent from the following passage in Fitch:

“[A]n appellate court can quash a bankruptcy order only if it is satisfied that, on the evidence which was before the court which made the order or on new evidence which is admitted in accordance with the rule in Ladd v. Marshall [1954] 1 W.L.R. 1489, the order should not have been made. An application under section 375(1) is essentially different. It must be based on a change in circumstances since the order was made or, more rarely, on the discovery of further evidence which could not be adduced on appeal.” (p 246)

The same requirement that there should be something new appears to be inherent in Millett J’s judgment in In re A Debtor (32/SD/1991):

“Where an application is made to the original tribunal to review, rescind or vary an order of its own, however, the question is not whether the original order ought to have been made upon the material then before it but whether that order ought to remain in force in the light either of changed circumstances or in the light of fresh evidence, whether or not such evidence might have been obtained at the time of the original hearing. The matter is one of discretion, and where the evidence might and should have been obtained at the original hearing that will be a factor for the court to take into account; but the rationale of the rule in Ladd v. Marshall, that there should be an end to litigation and that a litigant is not to be deprived of the fruits of a judgment except on substantial grounds, has no bearing in the bankruptcy jurisdiction. The very existence of section 375 is inconsistent with such a rationale.” (p 318-9)

This passage supports the sixth proposition set out in paragraph 25 above.

I now turn to consider the factors in this case. In addition to the facts mentioned already, there are a number of additional matters to which reference should be made. The main issue between the Trustee on the one hand and Readygame, Mr Humphreys and Mr Dunne on the other, is and has always been whether or not the money received by Readygame belong to the Trustee or whether it was income earned by Mr Mak after the bankruptcy order. If it was the latter it would not vest in the Trustee as property within the estate. To secure any part of it, the Trustee would need to obtain an Income Payment Order. The respondents’ argument is summarised succinctly in Readygame’s application cited at paragraph 5 above. The Trustee’s position is that, after the bankruptcy order was made, Mr Mak was allowed to manage the Ugly Duckling restaurant business for and on behalf of the Trustee. This involved using the various assets of the business including the lease, furniture, kitchen equipment, cutlery, crockery, glassware, menu cards, stock and goodwill to generate income from what was now the Trustee’s business. On 16 June 2003, the Trustee obtained retrospective sanction to appoint Mr Mak to carry on his business as the Ugly Duckling from the date of the bankruptcy order up to the sale of the business in September 2003. He was employed to manage the business. The receipts were never Mr Mak’s income.

Mr Mak has not disputed the Trustee’s view. He has not asserted that the money held by Readygame was his income. Furthermore the question of who was entitled to the money held by Readygame has now been resolved, as between those primarily concerned, namely Readygame and the Trustee, as a result of the First June Order which Readygame did not seek to appeal or to rescind under s 375. Mr Riley accepts that the latter order is inconsistent with the order now made by the Registrar. The Registrar did not address how this inconsistency could be resolved.

In addition to these points, it is necessary to have regard to how the application to rescind arose. As I have said, Mr Humphreys’ arguments have remained the same throughout. So has the evidence. Thus this is not a case where the applicant can rely on a change of circumstances or new material. Instead he relies upon the fact that he did not attend before the Registrar at the hearing on 16 June so that the decision then was not made at a “full hearing”. However it is clear that Mr Humphreys made a conscious decision not to attend that hearing. He wrote to the court on 15 June telling it that he would not attend. He has since explained that decision in his second witness statement in which he said that “there seemed to be little point in spending further time and expense in dealing with this matter”, when he had “already provided significant detail” regarding his involvement with Mr Mak. It was not until some four or five weeks later that Mr Humphreys launched his application to rescind.

Mr Riley says that there are exceptional circumstances here. First he says that the absence of a full hearing is a major factor in his client’s favour. For that he relies on a passage in Re R S & M Engineering Co Ltd [1999] 2 BCLC 485. That case concerned the scope of r 7.47(1) of the Insolvency Rules 1986 which is in identical words to s. 375(1). The passage relied on by Mr Riley includes the following extract from the judgment of Chadwick LJ:

“As Hoffmann J pointed out in Re Calmex Ltd [1989] BCLC 299 at 301, [1989] 1 All ER 485 at 486, the power is expressed in completely general terms. But, although I would hold that, as a matter of jurisdiction, the power to review conferred by r 7.47(1) is unfettered, it is, of course, a power which is to be exercised judicially. It would, in my view, be inappropriate - save in the most exceptional circumstances - for a judge to exercise that power in order to substitute his own decision for that of another judge of co-ordinate jurisdiction reached on the same material after a full consideration of the arguments. The power to review is not to be used in order to hear an appeal against a judge of coordinate jurisdiction. The exercise of the power should be confined, as a matter of discretion, to cases in which there has been some change in circumstances (which may, perhaps, include the consideration of material which was not previously before the court) since the original order was made - see the observations of Millett J in Re a debtor (No 32/SD/91) [1993] 2 All ER 991 at 995, [1993] 1 WLR 314 at 318-319.”

Mr Riley relies on the reference to a “full consideration of the arguments”. He argues that if there was no inter partes hearing, there could not have been a full consideration of the arguments. Presentation of the arguments at a “full hearing” would constitute new material. Second he says that the exercise of the court’s discretion is not affected by non-attendance. Third he says that if the Registrar considers that his original decision was wrong, that itself amounts to an exceptional circumstance.

I do not accept any of these submissions. As far as I can see there was a full hearing on 16 June. Mr Humphreys’ decision not to attend does not alter that fact. I also cannot accept Mr Riley’s third argument which amounts to little more than saying that if you can persuade the court it was wrong the first time round, that automatically triggers the operation of s 375. It seems to me that the need to demonstrate exceptional circumstances means demonstrating to the court, at the very least, some substantial new material or argument which justifies the court in changing its mind. It is not met by pressing the same facts and same arguments more forcefully or effectively. Indeed the passage from Re R S & M Engineering Co Ltd reinforces the point since it emphasises the need to demonstrate a change in circumstances.

In this case Mr Riley has not suggested that there is anything new to put before the court, only the same materials but better presented. For reasons set out above, I do not think that is enough to trigger the application of s 375. Therefore it was not open to the Registrar to rescind the Second June Order. Not only were there no exceptional circumstances, there were no relevant circumstances.

Furthermore, even if Mr Riley were correct that the jurisdiction under s 375 can be invoked whenever the court thinks that its earlier decision was wrong, it would still need to determine whether, in all the circumstances, it was appropriate to exercise its discretion in favour of rescission or variation. There are special circumstances here which point strongly against the exercise of the discretion in Mr Humphreys’ favour. All of his arguments relate back to the fact that he did not attend court on 16 June. Had he done so there would have been a “full hearing” and the Registrar would have realised his error and would not have made the order he did.

The power to vary or rescind under s 375 can be exercised whether or not the applicant attended or was represented at the hearing where the original order was made. However where he did not attend and that is said to have contributed significantly to the alleged error in the original order, it is incumbent on the applicant to explain why he did not attend and what steps he took to bring the matter back speedily to court. Were it otherwise, a party intent on delay could decline to attend a hearing and then simply apply for rescission later and at his leisure. Although s 375 is a statutory code relating to insolvency proceedings, it seems to me that when a party seeks the review or rescission of an order made in his absence, the philosophy underlying CPR r. 39.3(3) to (5) applies. The applicant must explain why he was absent from the earlier hearing and he must apply for rescission promptly, meaning with reasonable celerity. If there is a delay between the original order and the application under s 375, he should explain, if it be the case, that he has acted with reasonable speed. He has done none of these things here.

For these reasons, I have come to the conclusion that there was no basis upon which the Registrar could have exercised the jurisdiction under the section in Mr Humphreys’ favour.

In the circumstances it is not necessary to consider Mr Parker’s other arguments. I should just add that, on any basis, it appears that the November Order went too far. As Mr Parker points out, the effect of the order was to release Mr Humphreys and Mr Dunne from attending to be examined. There was no material put forward to justify that. Mr Riley does not argue to the contrary.

In the result, I will allow this appeal.