Donohoe v Ingram

The Respondent is the trustee in bankruptcy of Iain Charles Kirkup, against whom a bankruptcy order was made on 21 March 2000. The Appellant was appointed as Mr Kirkup’s trustee on 7 May 2004. Between 1982 and 1999, the Appellant was in a relationship with Mr Kirkup. There was a brief reconciliation between them in the period 2000/2001 but they eventually separated in July 2001. On 30 October 1996, the Appellant and Mr Kirkup bought a property at 196 Britannia Road in Ipswich of which they were registered as the joint proprietors. They occupied the property as their home, together with their four children now aged 10, 8, 6 and 4 respectively.

On 7 June 2005, the Respondent applied against the Appellant and Mr Kirkup for an order for the sale of the property under section 335A of the Insolvency Act 1986. The application came before District Judge Bazley White on 18 October 2005. Mr Kirkup took no part in the proceedings and has taken no part in the present proceedings. After considering two witness statements made by the Respondent, the Appellant’s witness statement and oral evidence from her, the District Judge ordered that the property be sold with vacant possession and made other consequential orders.

The Appellant now appeals to this court against that order. She applies for the order for sale made by the District Judge to be set aside and substituted by an order for sale, not to take place until 2017, when her youngest child will attain the age of 16. This hearing is a true appeal and not a rehearing of the case before the District Judge. In order to succeed, she must, so far as is material in the present case, satisfy the court that the District Judge’s decision was wrong: paragraph 17.18(3)(a) of the Practice Direction relating to Insolvency Proceedings.

At the outset of the hearing, in the exercise of my discretion under paragraph 17.18(2) of the Practice Direction, I refused the Respondent’s application to rely on a further witness statement made on his behalf on the day of the hearing, for reasons which I gave at the time.

Section 335A was inserted into the Insolvency Act 1986 by the Trusts of Land and Appointment of Trustees Act 1996. The 1996 Act also repealed amongst other provisions section 30 of the Law of Property Act 1925. Section 335A provides:

“ (1) Any application by a trustee of a bankrupt’s estate under section 14 of the Trusts of Land and Appointment of Trustees Act 1996 (powers of court in relation to trusts of land) for an order under that section for the sale of land shall be made to the court having jurisdiction in relation to the bankruptcy.

(2)

On such an application, the court shall make such order as it thinks just and reasonable having regard to-

(a)

the interests of the bankrupt’s creditors;

(b)

where the application is made in respect of land which includes a dwelling house which is or has been the home of the bankrupt or the bankrupt’s spouse or former spouse-

(i)

the conduct of the spouse or former spouse, so far as contributing to the bankruptcy,

(ii)

the needs and financial resources of the spouse or former spouse, and

(iii)

the needs of any children; and

(c)

all the circumstances of the case other than the needs of the bankrupt.

(3)

Where such an application is made after the end of the period of one year beginning with the first vesting under Chapter IV of this Part of the bankrupt’s estate in a trustee, the court shall assume, unless the circumstances of the case are exceptional, that the interests of the bankrupt’s creditors outweigh all other considerations.

…”

The Appellant conceded that because over one year had elapsed between the Respondent’s appointment and the making of his application, under section 335A(3) the court must assume, unless the circumstances of the case are “exceptional”, that the interests of Mr Kirkup’s creditors outweigh all other considerations. The only issue which arises on this appeal is whether the District Judge was correct in deciding that the circumstances were not “exceptional” within the meaning of section 335A(3).

In Claughton v Charalambous [1998] BPIR 558, at 562G-H, Jonathan Parker J (as he then was) commented that what is required of the court in applying section 335A(3) is, in effect, a value judgment. The court must look at all the circumstances and conclude whether or not they are exceptional. That process, he considered, left “very little scope for the interference by an appellate court”.

The leading authority on the meaning of “exceptional” in this context is the Court of Appeal’s decision in In Re Citro [1991] Ch 142, a case which arose under the regime governed by section 30 of the Law of Property Act 1925. At 157B-D, Nourse LJ, after a review of the authorities, said:

“ What then are exceptional circumstances? As the cases show, it is not uncommon for a wife with young children to be faced with eviction in circumstances where the realization of her beneficial interest will not produce enough to buy a comparable house in the same neighbourhood or indeed elsewhere. And, if she has to move elsewhere, there may be problems over schooling and so forth. Such circumstances, while engendering a natural sympathy in all who hear of them, cannot be described as exceptional. They are the melancholy consequences of debt and improvidence with which every civilised society has been familiar.

Nourse LJ then continued, at 157D-158B, to consider the Court of Appeal’s decision in In Re Holliday [1981] Ch 405 – also a case under the regime of section 30 of the Law of Property Act 1925 - in which, in his words, such circumstances “helped the wife’s voice to prevail, and then only, as I believe, because of one special feature of that case”:

“ One of the reasons given for the decision by Sir David Cairns was that it was highly unlikely that postponement of payment of the debts would cause any great hardship to any of the creditors, a matter of which Buckley LJ no doubt took account as well. Although the arithmetic was not fully spelled out in the judgments, the net value of the husband’s half share of the beneficial interest in the matrimonial home was about £13,250, against which had to be set debts of about £6,500 or £7,500 as the sum required to obtain a full discharge. Statutory interest at 4 per cent on £6,500 for five years would have amounted to no more than £1,300 which, when added to the £7,500, would make a total of less than £9,000, well covered by the £13,250. Admittedly, it was detrimental to the creditors to be kept out of a commercial rate of interest and the use of the money during a further period of five years. But if the principal was safe, one can understand that the detriment was not treated as being decisive, even in inflationary times. It must indeed be exceptional for creditors in a bankruptcy to receive 100p in the £ plus statutory interest in full and the passage of years before they do so does not make it less exceptional. On the other hand, without that special feature, I cannot myself see how the circumstances in In Re Holliday could fairly have been treated as exceptional. I am confirmed in that view by the belief that it was shared by Balcombe LJ who in Harman v Glencross [1986] Fam 81, 95, said that the decision in In Re Holliday was very much against the run of recent authorities. I would not myself have regarded it as an exceptional circumstance that the husband had presented his own petition, even ‘as a tactical move’. That was not something of the creditors’ choosing and could not fairly have been held against them. I do not say that in other cases there might not be other exceptional circumstances. They must be identified if and when they arise.”

The Appellant’s circumstances taken into account by the District Judge are summarized in paragraphs 5, 6 and 10 of his judgment. I do not repeat them here. Before me, it was accepted by the Appellant that these were no other circumstances relied upon pertaining to her position which the District Judge had failed to take into account. The Appellant emphasized, however, her inability to be re-housed in the short term and the loss of the family support network upon which she depends.

The Appellant advanced two broad submissions. In the first place, it was submitted that the District Judge misconstrued the statement of Nourse LJ at page 157 and failed to have regard to the passage at 157F-G to the effect that if the repayment to the creditors of the principal sum owed was safe “one can understand that the detriment was not treated as being decisive, even in inflationary times”. She went on to submit that although there were certain inevitable factual differences, the present case was materially indistinguishable from In Re Holliday and that the District Judge was wrong not to have decided that the fact that the creditors were likely to be paid in full with interest, even if the order for sale was postponed for a number of years to allow the children to remain in the property until they were older, amounted to exceptional circumstances.

I reject the Appellant’s submission that that the District Judge misconstrued the statement of Nourse LJ at page 157 and failed to have regard to the passage at 157F-G to the effect that if the repayment to the creditors of the principal sum owed was safe “one can understand that the detriment was not treated as being decisive, even in inflationary times”. The District Judge quoted the passage from Nourse LJ’s judgment set out in paragraph 8 above (except for the last sentence) in paragraph 8 of his judgment. There is nothing in his judgment to indicate that he in some way misunderstood that passage or the ratio in In Re Citro. Paragraph 13 of his judgment in particular indicates the contrary. It is correct that the District Judge did not quote the passage at 157F-G which is within the passage quoted in paragraph 9 above. There can, however, be no doubt that he had that passage in mind too. This is apparent from the reference in the latter part of paragraph 8 of his judgment to Nourse’s reference to In Re Holliday and also from paragraphs 9 and 13 of his judgment.

I also reject the Appellant’s submission that the District Judge’s decision that there were no exceptional circumstances was flawed because he wrongly proceeded, in paragraph 4 of his judgment, on the basis that the sum claimed by the Respondent was about £39,000 when in fact it was some £29,000. Mr Nicholls, who appeared on behalf of the Respondent at the hearing before the District Judge as well as in this court, accepted that this was an error and said that he had pointed it out to the District Judge at the conclusion of his judgment but that it had not affected the District Judge’s conclusion. The Appellant accepted that the error was not decisive but submitted that it added to the force of her further submission, to which I shall turn next, based upon In Re Holliday. I agree with the Respondent that this error is immaterial. The District Judge concluded that even with debts amounting to about £39,000, and barring accidents, there appeared to be a good chance that the creditors would be paid in full: paragraphs 4 and 13.

Was the District Judge nonetheless wrong to have decided that the circumstances were not exceptional? According to the Appellant, the decisive consideration why Nourse LJ in In Re Citro regarded the circumstances in In Re Holliday as exceptional was that it was highly unlikely that the postponement of payment of the debts would cause any great hardship to any of the creditors because they would receive payment of the principal in full. Additionally, the creditors were all commercial in nature rather than individuals or small businesses who would or might suffer great hardship by the debts to them remaining outstanding. The Appellant referred to passages in the judgment of Buckley LJ and Sir David Cairns in In Re Holliday at pages 423G-424E and 425D-G respectively. She submitted that the same situation prevailed in the present case.

For his part, the Respondent submitted that the special feature discerned by Nourse LJ in In Re Citro which made the circumstances in In Re Holliday exceptional, namely that the creditors would be repaid in full with statutory interest even with a delay in the sale of the property, was not present on the facts of this case. He submitted that, on the arithmetic in this case, it was impossible for the District Judge to have concluded that the creditors were going to be repaid in full with statutory interest, having regard to a delay in the sale of the property until 2017, statutory interest at 8% per annum and continuing costs in the meantime, and taking into account the fees payable to the DTI. He submitted that taking all those elements together, the total debts would be very close to his half-interest in the property.

The Respondent submitted that the fact that creditors are likely to be paid in full with interest is not of itself an exceptional circumstance and was only regarded to be so in In Re Holliday because of a collection of factors which are absent from the present case, namely that (1) the rate of interest then was 4% compared with 8% now; (2) the postponement was only for five years not 11 years; (3) the total period during which the creditors were deprived of their money was nine years compared with 17 years; (4) the creditors were paid in full with interest after that time, which was not the case here; and (5) the margin by which the original equity exceeded the debts, costs and expenses was substantial compared with the present case, in which the margin would gradually reduce and eventually be wiped out. In short, the Respondent submitted that the present case came nowhere near the situation in In Re Holliday where, at the end of the period of postponement, it was possible for the creditors to be paid in full with interest and for there to remain one-third of the trustee’s equity untouched before any increase in the value of the property was contemplated.

The Respondent further submitted that the test applied under section 30 of the Law of Property Act 1925 was different from the test under section 335A and that In Re Holliday should therefore be approached with a degree of caution. He drew attention to the observations of Mr Nicholas Strauss QC, sitting as a Deputy Judge of this court, in Barca v Mears [2005] BPIR 15, 22, in paragraph 28 of his judgment that while the categories of exceptional case are not circumscribed by the previous case-law, the only cases subsequent to In Re Citro in which orders for possession and sale have been withheld for substantial periods are cases in which either the bankrupt or his or her spouse was terminally or very seriously ill; and that this was unsurprising since the majority judgments in In Re Citro indicated that only circumstances which were inherently unusual qualified as exceptional circumstances.

In my judgment, it cannot properly be said that the District Judge was wrong to have concluded that the circumstances were not exceptional. On the facts of the present case, he took into account the consideration that the creditors were likely to be paid in full but nevertheless decided that, taken together with all the other circumstances, they were not exceptional. In Re Holliday, which I accept needs to be approached with a degree of caution, did not require him to reach the contrary conclusion. I do not accept that, on the arithmetic in this case, it would have been impossible, without the trustee’s half-interest in the property being exceeded, for the District Judge to have concluded that the creditors were going to be repaid in full with statutory interest, having regard to a delay in the sale of the property until 2017, statutory interest at 8% per annum and continuing costs in the meantime, and taking into account the fees payable to the DTI. However, I do regard the position in the present case as less clear-cut than in In Re Holliday, in particular given the considerable length of the delay. It is, however, unnecessary to express a concluded view on that aspect.

The Appellant’s second broad submission was that the “narrow” construction of section 335A was not consonant with the right to respect for family and private life recognized in Article 8 of the European Convention on Human Rights, which required that section 335A should be interpreted in a manner which afforded greater weight to the needs of the bankrupt’s partner and children. In this regard, she relied upon Barca v Mears. In that case, the court upheld the lower court’s decision that there were no exceptional circumstances but questioned whether the approach in In Re Citro was consistent with Article 8. The court tentatively suggested in particular that a shift of emphasis might be required so that, in the general run of cases, the creditors’ interests would prevail but leaving it open to the court to conclude that exceptional circumstances would not be limited to those cases where the consequences were unusual in the sense of going beyond the usual consequences of bankruptcy. It was, however, unnecessary for the court to determine the point because, even applying that approach, on the facts there were still not exceptional circumstances.

Before it becomes necessary, by reason of Article 8, to give section 335A(3) a different interpretation from that which it otherwise has, it is first necessary to conclude that, without that different interpretation, it would be incompatible with Article 8. Unlike in Barca v Mears, in the present case the Article 8 point was raised before the District Judge, who decided that it did not affect his conclusion.

The Respondent, relying upon Harrow LBC v Qazi [2004] AC 983, submitted that there was no incompatibility with Article 8. Qazi does not appear to have been cited to Mr Strauss QC in Barca v Mears. In Qazi, the majority view of the House of Lords was that Article 8 could not be relied on to defeat proprietary or contractual rights to possession or confer a right to be provided with a home, and see also Leeds City Council v Price [2005] 1 WLR 1825 (C.A.), in which I was told that judgment is currently awaited from the House of Lords. I am inclined to accept the Appellant’s submission that Qazi does not establish that Article 8 is irrelevant in the present case: neither Mr Kirkup had nor does the Respondent have a proprietary or contractual right to possession. Mr Kirkup’s ability to obtain possession, had he not been bankrupt, would have depended upon a successful application by him under section 14 of the Trusts of Land and Appointment of Trustees Act 1996, on which the court would be required to have regard to the matters in section 15 of that Act. The Appellant would also have been able, on any such application, to apply herself under Schedule 1 of the Childrens Act 1989 for a transfer of Mr Kirkup’s interest to her for the benefit of the children. The Respondent’s ability to obtain possession is dependent upon the success of his application under section 335A. On either basis, there is, therefore, no right to possession against the Appellant. If Article 8 were relevant, it would be necessary to consider Article 8(2) also before concluding that the right conferred by Article 8(1) had been violated.

It is, however, unnecessary to determine the point because even if a wider interpretation of exceptional circumstances is required, the District Judge’s conclusion that there were no exceptional circumstances is in my judgment correct. The District Judge appears to have himself reached that conclusion even on a wider interpretation of section 335A(3). The Article 8 point was argued before him and he appears to have taken account of all the circumstances as favourably as he could to the Appellant. Even if he did not himself approach section 335A(3) on that wider basis, adopting that approach myself and having regard to the circumstances referred to in paragraphs 5, 6 and 10 of the District Judge’s judgment, I would uphold his decision.

It will be cold comfort for the Appellant to be told once again that nobody can fail to have sympathy for the position in which, through no fault of theirs, she and her family find themselves. This appeal must be dismissed.

As things stand, the sale of the property may take place within less than two weeks from now. In other words, the District Judge allowed a period of some 3½ months from the time of his order before the sale could take place. It was common ground that it is open to me under paragraph 17.17(2)(a) of the Practice Direction to vary the District Judge’s order. Although this appeal is dismissed, common humanity requires that the Appellant now be given a little further time to try to arrange her affairs and make provision for her children. I therefore propose to vary the District Judge’s order to the extent that I direct that the sale of the property shall not take place before 18 April 2006.