The Official Receiver v Paul John Hollens

These are appeals by the Official Receiver against orders dated 28 July 2006 by District Judge Ashton sitting in bankruptcy in the Preston County Court whereby he refused to make the directions sought by the Official Receiver on an application under section 303(2A) to (2C) of the Insolvency Act 1986 (“the 1986 Act”). Both appeals raise the same issues. They arise in the course of bankruptcy proceedings relating to Paul John Hollens and his wife Jennie Rose Hollens to whom I shall refer simply as “the debtors”.

To understand what the directions were which the Official Receiver was seeking, and why, it is necessary to set out some of the background.

The debtors traded in partnership as P & J Catering Company which carried on business as a retail fast food business, operating from a mobile van. The van was an asset of the partnership. It is estimated to be worth between £4,000 and £6,000.

On 14 February 2006, the debtors each petitioned for his/her own bankruptcy. They did so pursuant to section 272 of the 1986 Act. Bankruptcy orders were made in respect of each debtor that same day. It is not in dispute that each was insolvent: their respective statements of affairs disclose deficiencies running into several thousands of pounds.

The Official Receiver decided in each case not to summon a meeting under section 293(1) of the 1986 Act. As a result, upon giving notice of that decision in accordance with section 293(2), he became - and has since remained - the trustee of the bankruptcy estate of each of the debtors. By force of section 306, their respective estates each vested in him accordingly.

The making of the two bankruptcy orders brought about, as one of its consequences, the dissolution of the partnership. See section 33(1) of the Partnership Act 1890. (That provision is expressed to be “subject to any agreement between the partners” but it has not been suggested that there was any such agreement.) The making of the two bankruptcy orders also resulted in each of the debtors ceasing to have power to bind the partnership (see section 38 of the Partnership Act 1890), and ceasing to have any control or power of disposition over its assets.

This meant that although, when a partnership is dissolved, each partner is entitled as against the other (or others) to have its affairs wound up, if necessary by obtaining an order of the court, so that the property of the partnership is applied in payment of its debts and liabilities leaving the surplus, if any, to be distributed to the former partners (see section 39 of the Partnership Act 1890), neither debtor, being a bankrupt, had any right or authority to wind up the partnership’s affairs. Nor did the Official Receiver: he had no automatic right, as such trustee and without further ado, simply to step into the shoes of the insolvent partner and act as if he were the partner in his/her place. His right, in his position as trustee of each debtor’s bankruptcy estate, was to receive whatever might be due to the estate on a winding-up of the partnership.

The practical effect therefore of the making of the individual bankruptcy orders was to leave the assets of the (now dissolved) partnership in limbo: the debtors, as the sole former partners, ceased to have power to deal with them; but the power to do so did not, as a consequence of the bankruptcy orders, become vested in the Official Receiver as trustee of the two bankruptcy estates. It was with a view to overcoming these difficulties and ensuring that the partnership’s affairs were also wound up that the Official Receiver applied to the court for directions.

There are essentially two available avenues for securing the winding-up of an insolvent partnership: (1) winding it up as an unregistered company (with or without the presentation of concurrent bankruptcy petitions against the members of the partnership) and (2) winding it up, otherwise than as an unregistered company, by the presentation by the members of the partnership of a joint bankruptcy petition. One of the questions raised by this appeal is whether by having recourse to the court’s power under section 303(2A) to (2C) of the 1986 Act there is, in effect, a third.

The first alternative (winding-up as an unregistered company), if invoked by a creditor, is provided by article 7 of (and schedule 3 to) the IPO in the case where there is no concurrent bankruptcy petition against any member (or former member) of the partnership in his capacity as such, and by article 8 of (and schedule 4 to) the IPO in the case where there are concurrent bankruptcy petitions presented against one or more members or former members of the partnership in their capacity as such. If invoked by a member of the partnership the first alternative is provided by article 9 of (and schedule 5 to) the IPO in the case where there is no concurrent bankruptcy petition against a member of the partnership in his capacity as such and by article 10 of (and schedule 6 to) the IPO in the case where there are concurrent bankruptcy petitions against all of its members in their capacity as such. Because the partnership is wound up as an unregistered company, the provisions of Part V of the 1986 Act are stated to be applicable subject to modification as provided for by the relevant article of (and schedule to) the IPO. In addition, various provisions of other Parts of the First Group of Parts of the 1986 Act (insofar as they apply to the winding-up of unregistered companies) are modified to the extent indicated by the relevant article and schedule. Separate provision is made to modify the 1986 Act where the member (or former member) against whom a concurrent petition is presented (in those cases where that course is followed) is a corporate member.

Common to all of the methods available under the first alternative is that the partnership is treated as an unregistered company and is wound up as such.

The second alternative, a joint bankruptcy petition presented by all of the members, is provided by article 11 of (and schedule 7 to) the IPO. It differs from the methods available under the first alternative in that (a), subject to what follows, it can only be invoked by the members themselves, (b) the members who present the joint petition must constitute all of the members of the partnership in question and (c) it results in the winding-up of the partnership otherwise than as an unregistered company. In other words the partnership is wound up under the bankruptcy regime contained in the Second Group of Parts of the 1986 Act rather than under the company winding-up regimes contained in the First Group of Parts.

Coming to the instant cases, it was open to the Official Receiver in order to seek to achieve a winding-up of the partnership’s affairs to persuade a creditor of the partnership to petition for its winding-up. The evidence indicates that there is a debt due to a bank and a sum due in respect of unpaid VAT. Another course was for him to invoke section 221A of the 1986 Act, ie section 221 of that Act modified by paragraph 3 of part 1 of schedule 3 to the IPO, and petition as “trustee of an individual member’s, or of a former individual member’s, estate”. See section 221A(1)(c). (The modification to section 221 is among those made pursuant to article 7 of the IPO). In both cases the partnership would have been wound up as an unregistered company under the applicable provisions, as modified, of the First Group of Parts of the 1986 Act.

But there was, as the Official Receiver conceived the position to be, an alternative. This was to apply under section 303(2A) to (2C) of the 1986 Act. These subsections are modifications made to section 303 by article 14(2) of the IPO. Article 14(2) provides as follows:

“14(2) At the end of section 303 of the Act there shall be inserted the following subsections-

‘(2A) Where at any time a bankruptcy petition has been presented to the court against any person, whether under the provisions of the Insolvent Partnership Order 1994 or not, the attention of the court is drawn to the fact that the person in question is a member of an insolvent partnership, the court may make an order as to the future conduct of the insolvency proceedings and any such order may apply any provisions of that Order with any necessary modifications.

(2B) Where a bankruptcy petition has been presented against more than one individual in the circumstances mentioned in subsection (2A) above, the court may give such directions for consolidating the proceedings, or any of them, as it thinks just.

(2C) Any order or directions under subsection (2A) or (2B) may be made or given on the application of the official receiver, any responsible insolvency practitioner, the trustee of the Partnership or any other interested person and may include provisions as to the administration of the joint estate of the Partnership, and in particular how it and the separate estate of any member are to be administered.’.”

(There are equivalent modifications, contained in article 14(1), to the corresponding section, section 168, of the 1986 Act in the case of winding-up proceedings against “any person (including an insolvent partnership or any other body which may be wound up under Part V of the [1986] Act as an unregistered company)...”)

The Official Receiver applied, invoking those provisions, to District Judge Ashton by a conjoined application made in the separate bankruptcies of the two debtors. After reciting that the two debtors had stated that they had carried on business as P & J Catering Company and were the only partners in the business, that, as the partnership had not been wound up, he was unable to deal with its assets, and that the main asset was the mobile van, the application sought the following relief:

“(i)

That, under the provisions of Article 14(2) of the Insolvent Partnerships Order 1994, the proceedings be consolidated under the number Preston 37 of 2006.

(ii)

That the partnership be administered as if the individual members had presented a joint bankruptcy petition by virtue of Article 11 of the Insolvent Partnerships Order 1994 with all provisions of Article 11 and Schedule 7 of the Insolvent Partnerships Order 1994 applying to the administration of various estates.

(ii)

That the title of the proceedings be amended and that the new description be as follows…”

There then followed a proposed new description which I do not need to set out.

As I have mentioned the district judge refused to make any of the directions sought. A preliminary question arises before I consider the reasons for that decision against which the Official Receiver now appeals. That is whether subsections (2A) to (2C) enable the court to grant the relief sought by paragraph 2 of his application, namely, winding up the affairs of the partnership and administering its property as if the debtors had themselves presented a joint petition even though in fact they had not. This was not a matter which the district judge considered: he assumed that the power to do so existed. Mindful, however, of the fact that on this appeal, as on the hearing before the district judge on 28 July, the debtors were unrepresented, Miss Rebecca Stubbs, appearing on behalf of the Official Receiver, presented arguments both for and against whether the district judge had the power to grant the direction which the Official Receiver was seeking.

The argument against proceeds on the footing that what the subsections are concerned to empower is the consolidation of existing proceedings and, in particular, that the reference in subsection (2A) to “an insolvent partnership” when coupled with the later reference in the subsection to “the insolvency proceedings” assumes that an order has already been made pursuant to either article 7 of Part IV or article 9 of Part V of the IPO, ie that the partnership is already being wound up as an unregistered company. Support for this may be found in the use of the words “joint estate” in the expression “joint estate of the partnership” where it appears in subsection (2C). By article 2(1) “joint estate” is defined to mean “the partnership property of an insolvent partnership in respect of which an order is made by virtue of Part IV or V of this Order” thereby suggesting that the partnership must already be in the course of winding-up. Then there is article 19(6) of the IPO which provides that:

“(6)

Bankruptcy proceedings may be consolidated by virtue of article 14(2) above irrespective of whether they were commenced under the Bankruptcy Act 1914 or the Insolvency Act 1986 or by virtue of the Insolvent Partnerships Order 1986 or this Order, and the court shall, in the case of proceedings commenced under or by virtue of different enactments, make provision for the manner in which the consolidated proceedings are to be conducted.”

From this wording, it might be argued, article 14(2) is concerned, and only concerned, with the consolidation of existing insolvency proceedings relating to, inter alia, a partnership and one or more of its individual partners.

I do not consider that such a narrow view of the scope of the subsections is correct. First, if that were its true width, subsection (2A) would be deprived of much of its apparent scope. Indeed, subsections (2B) and (2C) would suffice to achieve consolidation without the need to refer to subsection (2A) except for an explanation of the “circumstances” referred to in subsection (2B). By contrast, subsection (2A) empowers the court, in the circumstances mentioned (ie where a bankruptcy petition has been presented against any person and the court becomes aware that the person in question is a member of an insolvent partnership), to regulate “the future conduct of the insolvency proceedings”, namely any proceedings under the 1986 Act, the IPO or the Insolvency Rule 1986: see the definition of “insolvency proceedings” contained in article 2(1). In doing so the court “may apply any provisions” of the IPO “with any necessary modifications”. These are words of very wide scope. Second, if the intention had been to confine the operation of the subsections to the case where the partnership was already in the course of being wound up, the reference in subsection (2A) to “an insolvent partnership” would surely have been qualified by words (or words to the effect of) “in respect of which a winding-up order has been made”. There is no such qualification.

That said, the scope of the provisions is not unlimited. A precondition for the exercise of the power conferred by them is that the partnership in question is insolvent. That means that it must appear to the court from evidence that the partnership is insolvent. Moreover, where as here the court is being asked to order that the partnership be administered as if the individual members had presented a joint bankruptcy petition, the court must be satisfied that the order which it is being asked to make is one that it could have made if the individual members had in fact presented a joint bankruptcy petition. This means showing that the partnership is unable to pay its debts. See article 11 of the IPO and, in particular, paragraph 5 of schedule 7 modifying section 272 of the 1986 Act, which only permits the individual members of a partnership to petition for the winding-up of their partnership (otherwise than as an unregistered company) if the partnership is unable to pay its debts.

Although I was initially doubtful about the matter, I am satisfied that the partnership was unable to pay its debts as they fell due in that there was, at the very least, an unpaid liability for VAT. The existence of that liability was not in dispute, nor was the fact that the partnership had taken no steps to discharge it.

I am therefore of the view that the district judge had power to make the directions which the Official Receiver was seeking. It is now necessary to examine why he refused to make those directions, determine whether his refusal ought to be set aside and, if so, consider what directions should now be given.

The matter first came before the district judge on 4 May 2006 when it was adjourned. It came before him again on 28 July. At the first hearing the debtors were represented. At the latter they appeared in person. The Official Receiver was represented on both occasions by a Mrs Nash who communicated by means of a video link. I have been provided with a transcript of what occurred at both hearings. It is clear from the transcripts that the district judge was moved by the plight in which the debtors found themselves. The debtors, when they appeared before me on this appeal, were at pains to point out, as I accept, that they were a hard working, self-supporting couple who had not had to rely on state-funded handouts in the past and had no wish to do so or be a burden on others in the future and who, despite health problems (in the case of Mrs Hollens), wished simply to be able to continue to earn a living. For that purpose, as they explained to the district judge, they needed to have the use of the mobile van.

Sympathy for the difficulties facing the debtors and their wish to continue to have the use of the mobile van led the district judge to consider that there was what he described as a “lacuna” in the provisions of the 1986 Act. This was that the mobile van, if it had been owned by Mr Hollens on his own (ie had not been a partnership asset), would have constituted an exempt asset and not therefore within the definition of the bankrupt's estate (and subject therefore to realisation for the benefit of the bankrupt’s creditors) contained in section 283 of the 1986 Act, subsection (2)(a) of which provides that the definition should not apply to what may loosely be described as tools of the bankrupt’s trade. On the other hand, there was no such exemption - the supposed “lacuna” - where the bankrupt had traded through the medium of a partnership and the tool of the trade was an asset of that partnership.

This concern, which he considered to be an injustice in the statutory scheme, led the district judge to refuse the Official Receiver’s application in its totality. The order he made recited in terms that it appeared to the court “that the assets of the Partnership involving both bankrupts would be exempt if owned by either of them individually”. There was no reasoned judgment but in the course of the exchanges between Mrs Nash and the district judge during the hearing on 28 July the latter made the following observations:

“Well, what is going through my mind is if I simply refuse to make a winding-up order on the partnership on your application, we have established the situation that would have applied if this had been an exempt asset. Then if the partnership creditors want to rock the boat, that is up to them. But why do you need to do that?”

And later:

“Mrs Nash, we are not here commercially talking big sums of money. I am aware of my responsibilities, but also very concerned about the fact that normal exemption is being denied this husband and wife because of the way the law works. What would be the position if I simply said I am not going to make the winding-up order because of that reason? Where would that leave it? Would it leave it that it would be up to the creditors of the partnership to apply?”

And yet later:

“You see, I am tempted simply to say I am not prepared to make this winding-up order because it would deprive them of an exemption that they would have had if the van had been in the name of one of them… So given that that is in my mind - I mean I am doubtful whether they can survive, but they want to try and that is their choice not mine … I am thinking of simply saying I am not making a winding-up order…”

And, finally,

“What I an anxious to do is to flag up the fact that - as I keep saying - because they owned it jointly in a partnership they cannot keep it as an exempt asset to keep the business on and I am endeavouring to find a way of making that possible. And the way seems to me to say I simply will not make the winding-up order on your application.”

The district judge was therefore motivated in refusing any relief on the Official Receiver’s application by what he saw as the injustice of the position.

In my view that was an incorrect approach for him to have adopted in dealing with the application. If a person chooses to trade through a partnership or a limited company and the relevant tool of the trade is an asset of that partnership or limited company, the item in question is liable to be realised for the benefit of creditors in the event of the insolvent winding-up of the partnership or company. The fact that the item would have been exempt if the person in question had traded on his own account and had become insolvent is nothing to the point. In itself, it provides no justification for refusing to wind up the partnership on the application of the Official Receiver, leaving it to a creditor to apply should such a creditor choose to do so.

It follows therefore that the district judge’s decision must be set aside.

That leaves for decision what order the court should now make. Given the small sums involved, I do not propose to remit the matter to the district judge to consider afresh the Official Receiver’s application. The appropriate course is to give the directions that the Official Receiver seeks so that the former partnership (P & J Catering Company) can be administered as if the debtors had presented a joint bankruptcy petition, direct that the provisions of article 11 of, and schedule 7 to, the IPO should apply to the administration of the three estates and direct that the proceedings be consolidated and their title amended as sought. Given the extreme simplicity of the estates and their very close identity - indeed the evidence suggests that the debtors did not clearly distinguish between the partnership's assets and liabilities and their own - this seems to me to be a paradigm case for the exercise of the powers contained in section 303(2A) to (2C). They provide a quick and cheap method of securing that the partnership’s assets (essentially the mobile van) are applied, first, in payment of any debts and liabilities of the partnership and, subject thereto, in payment of the debts in the two individual bankruptcies.

I should also add that the fact that a few days before the hearing of this appeal the debtors each obtained his/her discharge from bankruptcy does not deprive the court of the power to grant relief under section 303 (as modified). The partnership is nonetheless an insolvent partnership. Its assets continue to be available to meet its debts and the debts proved and provable in the debtors’ individual bankruptcies. See section 281 of the 1986 Act.

As I have mentioned, the debtors appeared on this appeal in person. Not surprisingly, much of what passed between Miss Stubbs and myself in the course of the appeal was beyond their understanding: the interrelationship of the IPO and the 1986 Act is very far from straightforward even for those familiar with insolvency law and practice. Understanding how the scheme works is not assisted by its mode of presentation, namely a series of articles each applying and, by reference to separate schedules, modifying various provisions of the 1986 Act. The process of understanding is made more difficult by the fact that some of the articles provide for modifications to the 1986 Act by reference to modifications introduced by other articles so that it requires much cross-referencing and, at a practical level, much thumbing through the pages of the IPO to establish just what the schedule of modifications is which is to apply to the particular insolvency proceedings.

I am satisfied, however, that such opposition to the appeal and to the relief which, if his appeal succeeded, the Official Receiver was seeking as the debtors might have felt able to articulate if they had had a greater understanding of the issues involved, over and above their concerns to which I have already referred, would not justify denying to the Official Receiver the directions that he was seeking. Faced with the prior claims of their various creditors, the voices of the two debtors are not ones which carry much if any weight in the exercise of the court’s discretion under section 303 as modified. The alternative course open to the Official Receiver, as I have mentioned, would have been to petition under section 221A(1)(c) of the 1986 Act for the winding-up of the partnership as an unregistered company where any opposition by the debtors would likewise carry little if any weight.