Wicks v Russell & Anor

In this judgment, section references are references to the Insolvency Act 1986 as modified and applied by the Administration of Insolvent Estates of Deceased Persons Order 1986 (“the Order”) and as amended by section 12 of the Insolvency Act 2000.

This is an appeal from the decision of District Judge AS Jones (brought with his permission) made on 30^th June of this year.

By his decision, the District Judge refused the Appellant’s application to annul an Insolvency Administration Order (“IAO”) made on 31^st May 2006 in the estate of Barry Smith, who died intestate on 6^th July 2002.

There is no doubt that Barry Smith was insolvent when he died. What is said however is that the applicant for the IAO was not a creditor of Barry Smith at the date of his death, so that the IAO should never have been made.

The Appellant is Barry Smith’s former partner, who inherited a jointly held property by survivorship on his death. She had formerly inherited this property from her mother, and had transferred it into the joint names of herself and Barry Smith some years before he died.

The trustee in bankruptcy appointed following the IAO is the First Respondent to this appeal. He has made an application under section 421A against the Appellant seeking to require her to pay the value of Barry Smith’s half share in the property to him, there being (it is said) no other assets in the estate from which Barry Smith’s liabilities might be met. That application is not before me. It is sufficient to note that, if the appeal is allowed and the IAO annulled, the trustee’s application would lapse. Though another bankruptcy might ensue, fresh section 421A proceedings would be barred, as there is a 5 year period of limitation, time running from the death. Barry Smith died more than 6 years ago. Though the present proceedings were brought in time, fresh proceedings would not be.

The Second Respondent, Kevin Parkes, is Barry Smith’s son-in-law. He was also the successful petitioner for the IAO made in May 2006. Following the death, he paid the funeral expenses and certain legal fees in connection with investigating Barry Smith’s affairs, which he claims as administration expenses. He petitioned for an IAO purportedly as creditor in respect of those funeral and administration expenses. They appear now to have been accepted by the trustee as properly incurred. The trustee is required under section 305(5) to have regard to any claim for payment of such expenses, subject to there being funds available for their payment.

Section 282(1)(a) provides that the Court may annul an IAO on the ground that it should not have been made.

It is said that the IAO should not have been made in this case because Mr Parkes had no standing to petition.

Section 264 provides that a creditor’s petition may be presented “by one of the individual’s creditors ... in Form 1 set out in Schedule 3 …”

Section 267(2) provides that a creditor’s petition may be presented to the court in respect of a debt or debts only if, had the debtor been alive at the time the petition is presented:-

Section 272 provides for a “debtor’s” petition [for the meaning of debtor, see paragraphs 17 and 24 below] to be presented on the grounds that the “estate of a deceased debtor is insolvent”, in Form 6 in Schedule 3 (which is a form providing, unsurprisingly, for a petition by a personal representative).

Section 383 defines creditor as meaning a person to whom any of the bankruptcy debts is owed.

Section 382(1) defines “bankruptcy debt” (so far as presently material) as:-

“(a)

any debt or liability to which he [meaning the bankrupt, as to which see paragraphs 17 and 21 below] is subject at the date of the death of the deceased debtor

(b)

any debt or liability to which he [see paragraphs 17 and 21 below] may become subject after the date of death of the deceased debtor … by reason of any obligation incurred before the date of death of the deceased debtor.”

Section 382(3) provides that it is immaterial whether the debt or liability is present or future or whether it is certain or contingent.

Section 382(4) defines “liability” as including (amongst other things) any liability under an enactment, and any liability to make restitution.

Part I of Schedule I of the Order provides that for the expressions “the bankrupt” and “the debtor” there shall (except where the context otherwise requires) be substituted a reference to “the deceased debtor or his personal representative (or if there is no personal representative such person as the court may order) as the case may require”.

Paragraph 4(2) of the Order provides that the reasonable funeral, testamentary and administration expenses have priority over preferential debts.

The District Judge held that the expression “any debt or liability” in section 382(1)(a) should be construed widely so as to include funeral expenses as a contingent liability. He said nothing about administration expenses, but presumably the same argument would apply.

I respectfully differ from the conclusion of the District Judge on this point. Contingent liabilities are undoubtedly included, but was this a contingent liability of the deceased? It seems to me that, at the date of death, these were not contingent liabilities of anyone in any relevant sense. Section 382(1)(b) deals with future and contingent liabilities by reference to obligations incurred before the deceased’s death. Barry Smith incurred no obligation during his lifetime in respect of funeral or administration expenses. If the District Judge is right, section 382(1)(b) can be ignored, as any liability arising during the course of administration will always fall within section 382(1)(a). I do not think it is right to adopt a construction of sub-section (a) which allows sub-section (b) to be ignored.

In those circumstances, the reference to “he” (meaning the bankrupt) in section 382 can only be a reference to the deceased debtor, not his personal representatives, as only he can have been liable (not his personal representatives) whether immediately, prospectively or contingently, at the date of his death. At the date of his death, there were no personal representatives, and there are none today.

This construction is confirmed by section 267(2), which requires the court to consider what the position would have been had the deceased been alive at the time the petition was presented. Had he been alive, there would by definition have been no funeral or testamentary expenses. The references to “debtor” in sub-paragraphs (a) and (b) of that sub-section must also, in my judgment, given the stated hypothesis, be construed in context as references to the deceased debtor, not his personal representatives, or anyone else who might pay the funeral and administration expenses.

It follows in my judgment that Mr Parkes had no standing to petition for an IAO as someone to whom a bankruptcy debt was owed at the date of death.

I should add that I do not consider this conclusion to be especially surprising. Section 272 permits a debtor’s petition to be presented. The expression “debtor” must in this context have the extended definition in Part I of Schedule I, summarised in paragraph 17 above. Thus, a personal representative can petition, as both the specified form, and the definition of “a debtor’s petition” in Part I of Schedule I, confirm. Ordinarily, it is the personal representatives (or someone close to them) who will pay the funeral expenses and administration expenses, which have priority. If they need an IAO, there will not normally be a problem over having standing to petition. They need merely take out a grant and then petition as personal representative. In many cases, it will be enough for them to administer the estate in bankruptcy without obtaining an IAO.

Miss Jackson for the Respondents has a fall-back position. She says that even if I conclude (which I do) that Mr Parkes had no standing to petition, I have a discretion as to whether or not to annul the IAO, and should not do so, as the estate is undoubtedly insolvent. Moreover, creditors may suffer real hardship as the benefit of the section 421A proceedings will be lost, without hope of revival given the 5-year limitation period.

I undoubtedly do have a discretion under section 282, as the word “may” confirms. The circumstance that the original order was made on the application of someone having no standing to petition is no doubt something which I should have serious regard to. Nevertheless, bankruptcy is a class remedy and it behoves me to have regard also to the interests of the creditors as a body.

In Guinan III v Caldwell Associates Ltd[2004] BPIR 531, Neuberger J (as he then was) had this to say on the question of the exercise of the discretion under section 282:

“As I have mentioned, there is a discretion even if there is an arguable case, but it seems to me that unless there are special circumstances such as other creditors who have undoubted debts, or clear other evidence of insolvency, or facts such as were before the Court of Appeal in Askew v Peter Dominic Ltd [1997] BPIR 163, namely that the debt in question was not challenged, then it seems to me, save in exceptional circumstances, that it must be right not to uphold a bankruptcy order.”

Here there are in my judgment special circumstances, namely the undoubted insolvency of Barry Smith, and the loss of a potential remedy if the IAO is now annulled. Whilst Neuberger J’s comments were made in the context of a disputed debt, the position so far as discretion is concerned is no different where what is challenged is the standing of the original petitioner. Indeed, it may well be that, in the case of a deceased debtor, who will not suffer the disabilities and stigma of bankruptcy during his lifetime, the circumstances for the exercise of the discretion to annul are (where insolvency is established) even more circumscribed than in the case of a living debtor.

Mr Whitaker says that the creditors have until recently been entirely supine and, even now, only one outside creditor with a genuine claim has bothered to prove. I do not think that is decisive. It may well be that other creditors, once it is known (if that becomes the case) that there are assets available for distribution, will show an interest. The fact that they have not bothered to throw good money after bad up till now is no reason for depriving them collectively of the class remedy of bankruptcy to which they are entitled.

As the District Judge did not exercise any discretion under section 282, it falls to me to do so. I exercise that discretion by declining to annul the IAO, as the interests of creditors collectively outweigh the interests of the Appellant in having the IAO annulled. In reaching that conclusion, I do not overlook the potential hardship to the Appellant of facing a claim – under section 421A - that may turn out to be unjustified, or which may leave her homeless after the 5-year period of limitation has expired. I cannot form any view on the merits of that claim. As the District Judge observed, the merits will be considered at the hearing of the section 421A application. The fact that the 5-year period has now expired is not decisive. The claim was commenced in time, and, in the absence of any suggestion of abuse by the trustee or inordinate delay in prosecuting that claim, the fact that it would now be statute-barred is no reason for exercising the discretion adversely to the creditors as a class.

Although, therefore, my reasoning differs from that of the District Judge, the appeal is dismissed.