Bathurst v The Official Receiver

This is the appeal of the Official Receiver, brought with the permission of Norris J. from the order of District Judge Fitzgerald made on 29^th January 2008, whereby he made a bankruptcy restrictions order against the bankrupt, Mr. Bathurst, for a period of three years only. The Official Receiver seeks such an order for a period of between six and ten years.

The relevant legislation is contained in Schedule 4A of the Insolvency Act 1986, and the procedure is governed by the Insolvency Rules 6.240 to 6.244, 6A.1, 6A.6 to 8. The relevant provisions in the Act contained in Schedule 4A are the following. Paragraph 2(1) reads as follows:

I should also refers to paras.(a) and (k) because they featured in the submissions of counsel for the bankrupt. Paragraph (a) provides that the court shall take into account:

In para.2(4) it says:

Paragraph 4 deals with the duration of a bankruptcy restriction order and provides, in subpara.(1):

Subpara.(2) provides:

In summary, therefore, if the conduct of the bankrupt is such as to make it appropriate to make an order, having regard in particular to the conduct referred to in para.2(2), then the court is bound to make a bankruptcy restrictions order for a period between two and 15 years, following the date of making of the order.

Unfortunately, the Act does not itself specify the consequences of such an order, that has to be determined by a consideration of other provisions. There is extant a list, I think maintained by the Official Receiver (of which I do not have a copy), which itemises some 30 consequences, but the most important are, first, that it serves as a prohibition on acting as a company director or being concerned in the management of a company: see the Company Directors Disqualification Act 1986 section 11(1)(b) as amended; a prohibition on acting as a receiver or manager of the property of a company on behalf of debenture holders under section 31 of the Insolvency Act or as an insolvency practitioner, under sections 389 and 390 of the Insolvency Act. It gives rise to a prohibition on obtaining credit in excess of the prescribed amount, currently £500, without disclosing certain information: see section 361A and 5 of the Insolvency Act. And it constitutes a liability to disqualification from certain public offices under section 268 of the Enterprise Act 2002.

The relevant facts are in this case are, in summary, as follows. Mr. Bathurst traded in damaged goods that he received from Argos and Littlewoods. His course of business was then to repair the goods and sell them on to independent traders. In addition, he bought an auction house and took certain leasehold premises from the person who ultimately ended up as his petitioning creditor. That was a Mr. Morley, who, on 17^th May 2005, served on Mr. Bathurst a statutory demand in respect of a debt of £17,277, the consideration for which was the rent and insurance under the lease of the commercial premises to which I have referred. The bankruptcy petition was presented by him on 13^th February 2006 to the St. Helens County Court. The petition was served on Mr. Bathurst personally on 12^th June 2006.

The events with which this application is concerned then started to occur. The first was on 13^th July 2006 when Mr. Bathurst created a charge to secure the sum of £70,085 on 32 Abbots Hall Avenue, a property he owned jointly with his wife, in favour of his cousin, Mr. David Foden. The liabilities to Mr. Foden were stated to have arisen in January and October 2004.

The bankruptcy petition was adjourned on 1^st August 2006, and some two months later, on 3^rd October 2006, Mr. Bathurst opened a new account with Abbey National, number X15029250. The bankruptcy order was made on 10^th October 2006. On 12^th October 2006, £13,398, being the proceeds of an insurance policy on the life of Mr. Bathurst with the Phoenix Insurance Company, was credited to the new Abbey National account to which I have referred, and £13,000 of that balance was withdrawn by Mr. Bathurst from that new account. A week later, on 25^th October 2006, Mr. Bathurst withdrew a further £300 from that account. He was interviewed by the Official Receiver on 26^th October 2006 fairly extensively but failed to disclose the new Abbey National account or the Phoenix insurance policy or the proceeds of sale or what he had done with them.

On 21^st November 2006, Mr. Bathurst went on holiday to the United States, spending some £400 on the fares and a further £1,500 from the Abbey National account when he got there. He was interviewed again by the Official Receiver on 10^th May 2007, the Official Receiver by then having found out from his own enquiries about the new account in the Abbey National and the money that had been received to its credit and disbursed from it. On that occasion Mr. Bathurst provided a narrative statement which did disclose the account and explained the dissipation or disposition of the funds contained in it.

The application for a bankruptcy restrictions order was made by the Official Receiver on 2^nd October 2007. The grounds on which he relies are, first, creating the charge in favour of his cousin by Mr. Bathurst at a time when he knew or ought to have known that he was insolvent, whereby £35,043 was rendered unavailable to pay his ordinary unsecured creditors, amounting to at least £47,449-odd. Secondly, removing property from his estate at a time when he knew or ought to have known that he was insolvent, namely £13,300, being the proceeds of the Phoenix insurance policy, of which he gave £9,000 to his daughter and dissipated the balance of £4,300, £1,900 of which was spent on the holiday in the United States. Thirdly, in failing to disclose the Phoenix Insurance Company policy, or the whereabouts of its proceeds, until the Official Receiver discovered it as a result of his own enquiries. Fourthly, the need to deter others and to protect potentially future creditors.

In his report in support of that application, dated 15^th November 2007, the Official Receiver suggested that the conduct of Mr. Bathurst warranted a bankruptcy restrictions order for nine years. On 21^st December 2007, Mr. Bathurst made a witness statement in opposition to the application, in which he conceded that he had given a preference to his cousin, Mr. Foden, by granting the charge as alleged, and that the gift to his daughter, whilst understandable, was in fact wrong.

The hearing before the District Judge took place on 29^th January 2008, and, as I have indicated, he considered it appropriate to make a bankruptcy order for three years only. At the hearing it was conceded that the conduct of Mr. Bathurst warranted the making of an order, the only issue being its duration. The District Judge was told that solicitors had been instructed to advise on the prospect of setting aside the charge in favour of Mr. Foden. The District Judge considered it was appropriate to take account of the fact that the charge might well be set aside, so that to that extent there would be no loss to the bankrupt's estate. He considered that the appropriate period in all the circumstances for the bankruptcy restrictions order was three years. His conclusion in that respect appears on p.8 of the transcript of the hearing, where the following appears, starting at line 10:

Then the District Judge, addressing Mr. Bathurst, said: "Is that right, Mr. Bathurst, effectively?", to which Mr. Bathurst responded: "Yes". The District Judge then continued:

Accordingly, he made the three year bankruptcy restrictions order to which I have referred.

The Official Receiver's appellant's notice was issued on 19^th February 2008. He recognised the need to obtain permission to appeal, and that part of the application came before Norris J. on the papers on 17^th April 2008. He gave permission to appeal because he considered that there was a real prospect of establishing an error of principle in the District Judge placing the case in lowest bracket because the consequences of the charge might be mitigated at some future time at some unknown cost.

On this appeal the case for the Official Receiver has taken the following form. He accepts that he must establish an error of principle, and he seeks to establish errors of principle under a number of headings. The first is that the judge failed to take account of certain material matters which he should have taken into account, and in that category comes Mr. Bathurst's failure to cooperate with the Official Receiver by failing to disclose the Abbey National bank account in his interview on 26^th October 2006, and, secondly, the fact that substantial sums, £4,300, were spent by him on a holiday and on other personal expenses. Then he goes on to allege that the judge erred in principle in taking into account matters which he should not have done, namely the possibility that the charge in favour of Mr. Foden might be set aside, and the moral obligation felt by Mr. Bathurst regarding his daughter as justifying payment to her of £9,000.

Thus, the Official Receiver submits on that basis that the judge failed to apply the principles established by Re Sevenoaks Stationers (Retail) Limited [1991] 1 Ch 164, which Mr. Henderson QC, sitting as a Deputy Judge of the Chancery Division, considered in Randhawa v. Official Receiver [2006] EWHC 2946, should be applied by analogy to the parallel case of bankruptcy restrictions orders. That conclusion was followed by Mr. Stuart Isaacs QC in the Official Receiver v. Pyman [2007] EWHC 2002. Fourthly, counsel for the Official Receiver contends that the judge should have had regard to the need for cooperation by the bankrupt with the Official Receiver, the need to deter bankrupts from dissipating funds which should be available to pay their creditors, the gravity of the conduct of Mr. Bathurst and the overall purpose of the making of the bankruptcy restrictions order.

Counsel for Mr. Bathurst submitted that the District Judge did take account of Mr. Bathurst's failure to cooperate because, as he indicated at the beginning of the hearing, he had read the documents, including the skeleton arguments, and therefore would have been aware of the allegation made in that respect. He submits that the District Judge was right to take account of the likely impact of the conduct complained of and/or that it is a legitimate mitigating factor. It was in that connection that he referred to paras.(a) and (k) of para.2(2) of Schedule 4A to the Insolvency Act 1986. He submitted that the moral obligation of Mr. Bathurst to his daughter was a legitimate factor for the District Judge to take into account, and he contended that the District Judge did take sufficient account of the disposition of the balance of £4,300 from the £13,300 taken out of the new Abbey National account.

It is common ground that the general guidance in relation to directors' disqualification given by the Court of Appeal in Re Sevenoaks Stationers (Retail) Limited should be applied, by analogy, to the comparable field of bankruptcy restrictions orders. As I pointed out in Secretary of State for Trade and Industry v. McTigue [1996] 2 BCLC 477, at 485, the categories of case there explained are principles to which judges must have regard in the exercise of their discretion as to the period of the disqualification or the bankruptcy restrictions order, as the case may be. The period of three years fixed on by the District Judge in this case indicates that he regarded the case as one in which a bankruptcy restrictions order was required but that, that said, the case is relatively not very serious. It is the contention of the Official Receiver that the District Judge could only have come to that conclusion by some error in principle.

The first alleged error is to have paid no (or no sufficient) regard to the failure of the bankrupt to cooperate with the Official Receiver or the trustee. This is conduct to which the court is specifically directed to pay regard by section 2(2)(m) in the relevant schedule to the Insolvency Act. The importance of that duty was emphasised by me in Secretary of State for Trade and Industry v. McTigue at p.489 where I said this:

The fact is that the District Judge made no reference to this allegation. Counsel for Mr. Bathurst contends that I should not assume from that that the District Judge overlooked it, as he had said on more than one occasion that he had read the papers, including the skeleton arguments. But the concluding passage in the transcript, which I have read, suggests strongly that he had overlooked it. By the stage recorded on p.8 of the transcript, the District Judge had already discounted the gravity of the allegation relating to the charge and was considering the disposition of the proceeds of the Phoenix policy. His conclusion at p.8, lines 28 to 31, which I have read, shows that in fixing the period of three years, he only took account of that allegation, namely the disposition of the funds in favour of the daughter. In that respect, he erred in principle in failing to take account of a most material aspect of the conduct of Mr. Bathurst, namely his failure to cooperate with the Official Receiver by disclosing at the first interview the existence of the new Abbey National account and the sums which had been received to its credit and paid out of it.

It is also the case that in dealing with the proceeds of the Phoenix policy the District Judge appeared to consider that the issue of the moral obligation to his daughter applied to the whole of the £13,000, but it did not. £4,300 was spent on a holiday and other personal expenditure. The District Judge seems not to have taken account of this conduct either.

Accordingly, in those two material respects the District Judge failed to take account of matters he should have taken into consideration.

I also accept the submission that he did take account of matters that he should not have done. His consideration of the charge appears in the passage I have already quoted, but also from an earlier passage at p.6 where, between lines 18 and 31, he said this:

The fate of the charge was unknown to the District Judge, but the Act specifies that the relevant conduct is "giving a preference" as defined by section 340 of the Insolvency Act. Every such preference is, by definition, susceptible to being set aside. If that is a relevant consideration, then it is nullifying the effect of the enactment in para.(d). It may be that in suitable cases if the preference is set aside, particularly with the assistance of the bankrupt, that that may be considered a mitigating factor. But there was no such cooperation in this case. The charge had not been set aside, nor was it known how long it might take or how much it might cost to do so. In my view, it was an error of principle to discount the seriousness of the behaviour of the bankrupt in giving the preference in the first place by the ability of the court to set it aside at a later stage.

It was also suggested that the District Judge was wrong to take account of the moral obligation the bankrupt felt towards his daughter. That he did take account of it appears from the passage in the transcript at p.8, lines 28 to 31, which I have read, because although he described it as misconduct, he evidently minimised its seriousness in considering that it only warranted a bankruptcy restrictions order for the minimum period. I do not agree. It was a gift of £9,000 of money which should have been available to pay the bankrupt's creditors. The reason why it is not so available, whilst understandable, should not be condoned.

Finally, it is suggested that the whole approach of the District Judge was wrong in that he looked to the effect on the bankrupt's creditors of the conduct complained of without paying any (or any sufficient) regard to its gravity or the need to deter others from such conduct. It must be remembered that Parliament introduced bankruptcy restrictions orders via the Enterprise Act 2002 to offset the effect of a reduction in the period of automatic discharge from bankruptcy from three years to one in cases where the bankrupt's conduct made it appropriate to impose some further restrictions on his future ability to incur liabilities or to engage in commerce. I was told by counsel for the Official Receiver that the numbers of bankruptcy restrictions orders (or undertakings in lieu of an order) is running at under 2,000 a year, and represents less than 3% of the total number of bankruptcies in the same year.

In my view, the protection that bankruptcy restrictions orders afford to the public should not be underestimated, nor their deterrent effect undermined by too readily finding extenuating circumstances for conduct identified by Parliament as worthy of criticism when enacting section 4A 2(2). For these reasons, I am satisfied that the District Judge did err in principle by imposing a bankruptcy restrictions order for a period of three years only. In my view, this case came within the intermediate category as described in Sevenoaks Stationers, and warranted a bankruptcy restriction order for the full period of nine years for which the Official Receiver contended. Accordingly, I allow the appeal and substitute 29^th January 2019 for 29^th January 2011 where the latter appears in the order. Yes, Mr. Nersessian?