The Official Receiver v Bathurst

I gave judgment on this appeal on Wednesday 21^st May 2008. For the reasons I then explained, which are recorded in the transcript of the judgment I approved two days later, I allowed the appeal of the Official Receiver and substituted a period of nine years for the period of three years for which the bankruptcy restrictions order against Mr. Bathurst, made by District Judge Fitzgerald on 29^th January 2008, was to subsist. My order was drawn up on 27^th May 2008.

On 2^nd June 2008, counsel for Mr. Bathurst wrote to my clerk concerning an inaccuracy in the arguments presented to me at the hearing, which was reflected in my judgment and formed part of my reasoning. Counsel for Mr. Bathurst did not then suggest that the error, if it was one, would justify a different conclusion from that to which I had come; he merely expressed his anxiety to do whatever I might require of him. I am grateful to counsel for Mr. Bathurst for bringing the matter to my attention.

On the same day, counsel for the Official Receiver responded to the letter from counsel for Mr. Bathurst in a letter also addressed to my clerk. He noted that I had not been asked to take any particular course of action but pointed out that under section 375 of the Insolvency Act 1986, as applied by Miss Hazel Williamson QC (as she then was) in Re 38 Building Ltd. (No.2) [2000] BPIR 15, a judge is entitled to review his own order. By inference he invited me to do so because my judgment was being relied on in a similar appeal due to be heard next week and was generating a certain amount of interest within the insolvency profession.

I will not recite the facts of the appeal again for they are to be found fully described in the transcript of my judgment to which I have already referred. The inaccuracy to which counsel for Mr. Bathurst drew my attention arose in relation to the charge over property owned jointly with his wife, created by Mr. Bathurst in favour of his cousin on 13^th July 2006 to secure pre-existing debts of £70,085. In the application for a bankruptcy restrictions order, the Official Receiver relied on this conduct of Mr. Bathurst, at a time when he knew (or ought to have known) that he was insolvent, as rendering unavailable to pay his ordinary unsecured creditors (then amounting to £47,449 worth) property to the value of £35,043.

The confusion arose when, in his evidence in answer to this application, Mr. Bathurst admitted that he had thereby given "a preference". Thereafter the District Judge, both counsel in their submissions to me, and I in my judgment on this appeal, mistakenly assumed that the conduct on which the Official Receiver relied constituted a preference within the statutory definition contained in section 340 of the Insolvency Act 1986. If it did, then it constituted conduct to which the court is specifically required to have regard by the terms of para.2(2)(d), schedule 4A, Insolvency Act 1986. In fact, as counsel for Mr. Bathurst pointed out in his letter, the giving of the charge did not constitute a preference because it was granted after the presentation of the bankruptcy petition on 13^th February 2006. Accordingly, it was not granted at a relevant time as defined in section 341, and could not be a voidable preference under section 340. Parts of my judgment were based on the assumption, shared by all, that the grant of the charge was a voidable preference. That assumption was wrong.

The question then arose whether and, if so, how I should seek to correct the mistake. The transcript of my judgment had been corrected and released, and the order had been drawn up. Section 375 of the Insolvency Act 1986 provides in subsection (1):

In the case to which I have referred, Miss Hazel Williamson QC, sitting as a Deputy High Court Judge of the Chancery Division, held that the equivalent provision in the case of companies contained in insolvency rule 7.47(1) entitled a judge to review his or her own decision. She held that the power should be sparingly exercised but extended to re-examining the basis for a previous order if only to conclude that there is no reason to vary it: see p.161 at letter F. Neither party sought to challenge that decision or its application in the case before me.

In the circumstances of this case, it appeared to me to be plain that I should exercise the jurisdiction conferred by section 375(1) of the Insolvency Act 1986 to review my earlier decision in order to determine whether the mistake to which I have referred undermined the basis on which I made it.

On being informed of my decision, counsel for Mr. Bathurst submitted further written submissions. He now contends that as the charge was wholly void, the attempt to create a preference was ineffective. He submits that in consequence the conduct of Mr. Bathurst in attempting to create the charge should be left out of account or be regarded as less serious. He argued that such conduct warranted a shorter period for the bankruptcy restrictions order than that which would be appropriate to a case involving the creation of a charge which was voidable because it constituted a voidable preference under section 340.

By contrast, counsel for the Official Receiver submits that the fact that the charge was void, not voidable, should make no difference to the outcome of this appeal. In either event, so he submits, the conduct of Mr. Bathurst in relation to the charge should be taken into account and is no less reprehensible or no less requiring deterrence, because the legal consequence is different from that which had been originally envisaged.

In considering these rival submissions, it is appropriate to start with the original allegation made by the Official Receiver in his report to the court dated 15^th November 2007. In that document (and I quote from the appeal bundle, section 8, p.28) the relevant allegation made in para.2 was as follows:

It is now common ground that the conduct of Mr. Bathurst in granting the charge in July 2006 was not a voidable preference for the purpose of para.2(2)(d) of schedule 4A of the Insolvency Act 1986. It is also common ground that the charge was void pursuant to section 284 of the Insolvency Act 1986. That section provides that the disposition to which it applies is void except to the extent that it is made with the consent of the court or is subsequently ratified by the court. In addition, subsection (4) preserves the position of the bona fide purchaser for value without notice. It is in the following terms:

Section 278 provides that a bankruptcy commences with the making of the bankruptcy order. It follows that a charge created after the presentation of the petition but before the making of a bankruptcy order is not devoid of any legal effect. It may be ratified by the court and it may give rise to beneficial interests in the bona fide purchaser for value without notice of the presentation of the petition.

It follows that the charge which Mr. Bathurst considered that he was giving did not have the effect attributed to it by the Official Receiver in the fourth bullet point for, being void, it did not of itself render any assets unavailable to satisfy the creditors of Mr. Bathurst. But nor was it ineffective to the extent that the submissions of counsel for Mr. Bathurst suggest. The conduct of Mr. Bathurst was capable of having the effect suggested by the Official Receiver. Whether or not it did so would depend upon whether Mr. Foden could bring himself within the terms of section 284(4).

Does all this make any difference? Under para.2(1) of Schedule 4A of the Insolvency Act 1986, the court is directed to have regard to all conduct of the bankrupt in determining whether it is appropriate to make a bankruptcy restrictions order. Paragraph 2(2) specifies conduct of particular kinds. Those kinds generically indicate want of probity or prudence in the conduct of the bankrupt or his affairs. In my judgment, the conduct of Mr. Bathurst of which the Official Receiver complains was of that nature. There can be no doubt that he knew of his insolvency at the time he purported to grant the charge. Equally, there can be no doubt that he intended to prefer, in a non-technical sense, his cousin by producing the effect, if he could, on which the Official Receiver relied. It appears to me that such conduct is as reprehensible and as warranting deterrence as it would have been if the charge had been granted at the relevant time for the purposes of section 341. The fact that the intention to prefer may have been frustrated by the provisions of section 284 of the Insolvency Act cannot, in my view, avail Mr. Bathurst.

It follows that, in my judgment, the fact that the grant of the charge was not a voidable preference under section 340 but void under section 284 makes no difference to the outcome of this appeal. Though that conduct did not come within para.2(2)(d) of schedule 4A, it is just as relevant under para.2(1) and makes a bankruptcy restrictions order for nine rather than three years equally appropriate. Accordingly, having taken the opportunity to review my order under section 375(1), I see no reason to alter it. However, the judgment I gave on 21^st May 2008, as recorded in the transcript to which I have referred, should now be read in the light of the further modified reasons I have just given.