Bank of Baroda v Patel

This is an appeal brought with the permission of this court against an order made by District Judge Freeborough on 19 December 2007 by which he ordered:

The order was made in relation to the bankruptcy of Mr Subhashchandra Patel. Mr Patel's trustee in bankruptcy is now Mr Paul Clark. The present appellant, the Bank of Baroda ("the bank") claims to be the principal creditor of Mr Patel. It has proved in his bankruptcy. By an arrangement between Mr Patel's wife, Mrs Patel, and the bank Mrs Patel paid the bank £22,000 in March 1997. That is the £22,000 referred to in paragraph (3) of the order.

One of the issues which arises on this appeal is what that payment by Mrs Patel was for. Was it, as she contends, a payment agreed to be in full and final settlement of all her husband's indebtedness to the bank or was it, as the trustee in bankruptcy concluded and the bank now contends, paid in consideration of the removal of a charging order which the bank had registered against the matrimonial home at 55 Henley Avenue, North Cheam, Surrey? The district judge appears to have concluded on the materials before him that the payment was in full and final settlement of the complete indebtedness of Mr Patel to the bank.

Mr Robinson, who appears for Mr and Mrs Patel, submits that this was the correct conclusion on the materials before the district judge and that he arrived at his conclusion without any defect in procedure. Mr Riley, for the bank, submits that the district judge was clearly wrong to reach the conclusion he did on the facts. He says that it is clear beyond reasonable argument on the evidence that the agreement made between Mrs Patel and the bank related only to the discharge of the bank's charging order and not to full and final settlement of the full underlying debt of Mr Patel. Mr Riley also says the district judge applied the wrong legal test to the matter before him. He also criticises the procedure which led up to the district judge's order, saying that it was clearly unfair to the bank in various respects.

The approach applicable on an appeal of this kind is set out in the insolvency practice direction in the White Book, volume 2, page 1231, paragraph 17.18, which provides in subparagraph (1):

It is relevant to set out at the outset two provisions in the insolvency regime which are relevant to the determination of this appeal. First, section 303 of the Insolvency Act 1986, headed "General Control of Trustee by the Court", provides at subsection (1):

The other provision to which I refer is rule 6.105 of the Insolvency Rules 1986. That is headed "Appeal against decision on proof" and provides:

Mr Riley contrasts the legal test applicable by the court under rule 6.105 on the one hand and section 303 on the other. Rule 6.105, he says, leads to a rehearing on the merits where the court will examine for itself the underlying matters without being bound by the decision of the trustee in bankruptcy. That rule is not applicable in the present case. Mrs Patel is not the bankrupt, nor is she a creditor, and no appeal was made under that rule. Instead, at the suggestion of the district judge, the challenge to the trustee's decision to admit the bank's debt to proof was brought under section 303. The test to be applied by the court under section 303 is materially different from that applicable under rule 6.105. Under section 303 the court is not required or entitled to conduct a rehearing on the underlying merits but has to inquire whether the trustee has acted perversely or in bad faith in some way. The leading authorities on this which I was taken to are, first, Osborne v Cole [1999] BPIR 251, a decision of Registrar Baister. At page 255G Registrar Baister set out the test applicable under section 303 thus:

That test applicable under section 303 was approved and applied by Warren J in Supperstone v Hurst (No 3) [2006] BPIR 1263 at paragraph 3. The present application was made to the district judge under section 303 and it was the legal test under section 303 that the district judge should have directed himself on and then applied.

Having set out that legal framework, I turn to rehearse the factual background to this case. On 24 July 1986 the bank obtained judgment in its favour against Mr Patel based upon guarantee obligations that he had assumed in the sum of £253,900.22. On 7 August 1987 the bank secured in its favour a charging order over Mr Patel's interest in the matrimonial home at 55 Henley Avenue in respect of the then outstanding balance due on the judgment of £180,043.22. On 9 September 1987 a bankruptcy order was made in respect of Mr Patel on his own petition. In due course a schedule of creditors' claims as at 11 July 2007 was prepared. According to that schedule the outstanding creditors at that time were the bank in the sum of £158,043.22, Andrews Industrial Equipment Limited in the sum of £5,084.79 and a Mr CC Patel, who had a claim but one which had not been submitted for proof in the bankruptcy.

By a letter dated 6 January 1989 Mrs Patel wrote to the bank. The letter was headed "Ref: 55 Henley Avenue" and it said:

In a letter dated 15 July 1989 the bank's solicitors wrote to the then trustee indicating that they understood that Mrs Patel was seeking to raise finance to buy out Mr Patel's half share in the property at 55 Henley Avenue. They said:

On 16 August 1989 the trustee wrote to Mr D'Souza of the solicitors who were acting for the Patels. In this letter the trustee said:

The trustee sent a chasing letter dated 22 November 1989 in relation to that request for information. On 18 February 1991 the bank issued an originating summons for an order for the sale of the property against Mr and Mrs Patel and joining the trustee in bankruptcy for Mr Patel. Mr Rohilla swore an affidavit for the bank in those proceedings setting out the financial background. At paragraph 7 he said:

At paragraph 9 he said:

On 28 February 1992 Mrs Patel's solicitors wrote to the bank's solicitors. The letter stated that they had been taking Mrs Patel's instructions on Mr Rohilla's affidavit. They referred to paragraph 9 of that affidavit and then they said:

On 31 March 1992 Mrs Patel's solicitors wrote again to the bank's solicitors indicating once more that her case would be that she was entitled to substantially more than 50 per cent of the equity in the house. The letter indicated that Mrs Patel was prepared to offer the sum of £25,000, being the figure mentioned by the bank in an earlier letter. There was then a long and essentially unexplained gap in the correspondence.

The next significant document before me is a letter dated 16 April 1996 from the bank's solicitors to Mrs Patel's solicitors indicating that while there had been delay in the matter the bank was now anxious to proceed. The letter concluded:

We then come to a series of critical letters which are at the heart of the argument between the parties as to the true meaning of the agreement made between them. On 17 May 1996 Mrs Patel's solicitors wrote to the bank's solicitors. They said:

In my judgment, this is an important and significant letter. It is to be noted that the reference was to full and final settlement of the bank's interest in 55 Henley Avenue itself, that is to say the property. No reference was made to the underlying debt still outstanding from Mr Patel in favour of the bank. The bank's solicitors responded by letter of 10 March 1997 stating:

That letter was clearly in the run of this correspondence an acceptance of the offer that had been made in the letter from Mrs Patel. That offer had been made in terms of removing the bank's interest in the property at 55 Henley Avenue and had not been put in terms of full and final settlement of Mr Patel’s debt (that is to say, to discharge the underlying debt still owed by Mr Patel to the bank). In my judgment, it is clear that the letter on behalf of the bank dated 10 March 1997 was indicating simple acceptance of that offer that had been made and the reference in it to “full and final settlement” was intended to be simply an echo of the language which had been used in the letter containing the offer from Mrs Patel.

Mrs Patel's solicitors wrote again on 11 March 1997 stating:

In my view, the relevant agreement had been formed before this letter was sent, but this letter is of significance since in my judgment it confirms that the focus of the agreement which the parties had taken themselves to make was the release of the charging order, and that it was this which was the consideration in contemplation for the sum of £22,000 which Mrs Patel was to pay.

The bank's solicitors responded the same day saying:

They provided the bank's client account details. The same comments apply to this letter as to Mrs Patel's solicitors’ letter of that date. The relevant agreement had already been made by the time this letter was sent but, in my judgment, it is again of significance that this letter also indicates that the focus of what the parties had in mind was payment of £22,000 in consideration for release of the charging order which the bank at that stage had over 55 Henley Avenue and was threatening to enforce by way of proceedings.

On 19 March 1997 Mrs Patel's solicitors wrote once again, indicating that they were able to complete the matter by 28 March. They said:

Form 71 was the relevant Land Registry form for removal of a caution which had been entered on the Land Registry in respect of the charging order which the bank had obtained. In due course a draft form of the Land Registry (form 71) was provided to Mrs Patel's solicitors and was found to be acceptable to her. She paid the bank the £22,000 and received in return form 71 duly signed and dated. The documents reviewed above are the critical documents in relation to the formation of the agreement between Mrs Patel and the bank.

In this case the trustee in bankruptcy had to decide himself whether the bank's claim to continue to be entitled to the underlying debt owed by Mr Patel to it, less a deduction of £22,000 in respect of the sum received from Mrs Patel, could continue to be treated as a matter for proof in the bankruptcy. The trustee looked into the facts, sought comments from the bank and from Mrs Patel and decided himself that the bank's position was correct, namely that the underlying debt had not been extinguished by the agreement and the payment and that the bank should continue to be admitted to prove in the bankruptcy for the outstanding balance of that underlying debt.

In due course Mrs Patel sought to challenge that decision by reference to the agreement. Her contention was that on proper construction of the agreement between herself and the bank, when the bank referred to full and final settlement it was to be taken to indicate an agreement between them that her payment of £22,000 would be in full and final settlement of the full underlying debt of her husband and not simply in respect of release of the charging order over the matrimonial home.

Proceedings were brought before District Judge Freeborough, who indicated his view that the appropriate method for Mrs Patel to bring such a challenge before the court was to issue an application to challenge the trustee's decision under section 303 of the Insolvency Act. Accordingly Mrs Patel issued proceedings to pursue that course. The directions which District Judge Freeborough made on that occasion, on 24 July 2007, were in these terms:

Of the two alternatives, that is to say an application under section 303 or simply meeting and defending the proceedings brought by the trustee for possession and an order for sale of the property, Mrs Patel opted to issue her application under section 303 and it was that application which came before the district judge.

So far as the availability of an application under section 303 on the part of Mrs Patel was concerned, Mr Riley made a preliminary objection as to her standing to rely upon that provision. He said that she did not have a sufficient interest to be able to use and rely upon section 303 of the Act. The relevant test to which reference was made appears from the case of Port v Auger [1994] 1 WLR 862 at page 874A per Harman J, who said:

This submission of Mr Riley I cannot accept. The trustee at this stage was seeking possession of the matrimonial home. If Mrs Patel's contentions were correct, the most substantial creditor in the bankruptcy would be removed and her chances of being able to avoid a sale of the matrimonial home would have been hugely improved. I have no doubt that she was entitled to proceed under section 303, applying the relevant test.

I have then to examine the district judge's decision and the order that he made on 19 December 2007. In my judgment, the decision was wrong as a matter of substance and the order was made after adoption of a procedure which was materially unfair to the bank. So far as the merits of the case are concerned, each side says that there is a clear answer to be given on the material now available to the court without any need for the matter to be remitted for any kind of further examination below. Mr Robinson, for Mrs Patel, says that it is clear that the agreement that was made between the parties in 1997 is to be construed as involving full and final settlement of the underlying debt due from Mr Patel to the bank in return for the £22,000 which she paid to the bank, which would also involve the discharge of the charging order. Mr Riley, for the bank, says that it is clear that on an objective construction of the relevant letters the agreement simply meant that Mrs Patel was to pay the £22,000 in consideration for removal of the charging order and the caution on the register, and the payment was not in full and final settlement of the underlying debt due from Mr Patel.

So far as the argument addressed to the actual construction of the relevant letters in this case is concerned, the directions proposed by the trustee and the Patels in the course of the possession proceedings brought by the trustee and the section 303 application made by Mrs Patel contemplated that there should be disclosure and oral evidence given at a full trial. I have given anxious consideration to whether I am in a position to decide - in effect on a summary judgment basis - the proper construction of the agreement made in 1997. It is clear that the court does not have all the documents in the correspondence over many years between the parties, but it is also clear that the court does have before it the relevant letters in which the relevant agreement was made. The witness statements served in the proceedings essentially do no more than rehearse the documents which are available and comment on them. They do not suggest that there is anything more of significance to be added by way of relevant factual background which might be explored at trial.

Mr Robinson suggested that there were two reasons why it would not be appropriate for me to proceed to give judgment in relation to the meaning of the agreement. First, he said that there were clearly gaps in the documentation and in particular there had been no disclosure given by the trustee in bankruptcy. So far as that is concerned, the trustee in bankruptcy of course was not a party to the relevant agreement and there is no indication that he is in possession of documents or relevant evidence which might throw any significant relevant light upon what the parties (Mrs Patel and the bank) said to each other in their own correspondence. Moreover, I remind myself of the basic principle in relation to the court's approach to summary judgment, that the court will not ordinarily allow a case to go forward to trial simply because there is a possibility of some further evidence arising (see paragraph 24.2.3 in the White Book, volume 1, at page 559).

Secondly, Mr Robinson referred to one paragraph in the witness statement of Mr D'Souza in the proceedings: paragraph 15. At paragraph 15 Mr D'Souza referred to the letter from him (as Mrs Patel's solicitor) to the bank's solicitors dated 28 February 1992 and also to the letter dated 31 March 1992 from Mrs Patel to the bank in which she made her offer. He went on to say:

Mr Robinson suggested that this was an indication that there might be a need for oral evidence at a trial before the true construction of the exchanges in 1997 between the parties could be confidently arrived at by the court. I do not accept that. It seems to me that insofar as Mr D'Souza is saying anything in paragraph 15, he is referring to his own subjective understanding of what he intended to achieve in this earlier correspondence. He was not there referring directly to the later correspondence in which the relevant agreement was formed and on ordinary principles of objective interpretation of contractual documents I consider that that reference in Mr D'Souza's evidence is not a sufficient foundation which should deter the court from reaching its own view now at this stage on the basis of the material before it as to the proper construction of the agreement. So I have concluded that I am in a position now to decide on the true construction of the agreement. I also note that it will save costs if I do so rather than remit the matter to be argued all over again below.

So far as the meaning of the agreement made in 1997 is concerned, I have already indicated that in my judgment it is clear that what was agreed was that Mrs Patel should pay £22,000 in consideration for the removal of the charging order which the bank had over the matrimonial property. No reference was made in the correspondence to full and final discharge of the underlying debt owed by Mr Patel to the bank and, in my judgment, the agreement did not extend to that underlying obligation at all.

Mr Robinson directed my attention to the financial background to the agreement that was made and said that this was relevant in the court seeking to make commercial sense of the documents it had before it, referring to Mannai Investment Co Limited v Eagle Star Life Assurance Co Limited [1997] AC 749 at 771. He made the point that on the figures given in the bank's own application for a charging order the value of Mr Patel's interest in 55 Henley Avenue was not greatly higher than the £22,000 that Mrs Patel agreed to pay and he suggested that the court should take into account in construing the correspondence the fact that to a significant degree the bank would in the course of the bankruptcy and possession proceedings taken by the trustee in bankruptcy be able to achieve a similar effect to that which it could achieve if it had simply enforced its own charging order. The conclusion he suggested should be drawn was that the parties must objectively have understood that the agreement being made was for removal both of the charging order and of the underlying debt of Mr Patel so that the bank should not be enabled in the course of the bankruptcy effectively to secure a significant part of the value of the matrimonial property.

In my view, there are three difficulties with this submission. First, this interpretation is inconsistent with what I consider to be the clear language used in the relevant letters. The clear language must be the primary source for the court's construction of an agreement.

Secondly, in my view the submission overlooks significant points of difference between what the bank would be able to do enforcing its own security in the form of the charging order, which it was threatening to do at the time the agreement was made, compared with what might happen in the bankruptcy proceedings, which would depend not upon the decision of the bank but upon the decisions made by the trustee. The timetable in this case itself indicates that there might be scope for greater delay in the bankruptcy proceedings leading to an order for possession of the home. There might be scope for easier negotiations between the Patels and the trustee in bankruptcy. It seems to me to be clear that there was a significant scope for a different outcome for Mrs Patel depending upon whether the bank was left to enforce its own charging order, which it was then proposing immediately to do, or whether matters were simply left to be dealt with more slowly in the course of the bankruptcy itself.

Thirdly, it seems to me that the submissions made by Mr Robinson blurred to an excessive degree what in commercial terms is a clear distinction between the security interest achieved by the charging order and the underlying unsecured debt. In legal and commercial terms these are and were quite distinct things. If Mrs Patel had intended to make an offer directed to the underlying debt of her husband, then in my judgment much clearer language would have been required to be used in her letter of offer to achieve that effect than was in fact used.

If, however, I am wrong in my construction of the agreement and there was some room for reasonable doubt about its true construction, Mr Riley correctly refers to the relevant test which the district judge should have applied under section 303. Mr Riley submits, and I accept, that it could not be said that the trustee had acted unreasonably in concluding that the bank's claimed debt which continues in existence should be admitted to proof in the bankruptcy. It is clear from the transcript of the hearing before the district judge that he did not direct himself by reference to the proper test applicable under section 303 or apply that test. If he had, in my judgment, he should have concluded that there was no perversity or wrongdoing of any kind on the part of the trustee in his reaching his own conclusion that the underlying debt remained outstanding and should be admitted to proof in the bankruptcy and accordingly - applying the appropriate test under section 303 - the trustee's decision should have been allowed to stand. For that reason also the appeal to this court should be allowed.

Mr Robinson made reference to the case of Ex parte James [1874] LR Ch App 609 and the decision of the Court of Appeal in Re TH Knitwear (Wholesale) Limited [1988] 1 All ER at page 860, in particular at pages 867J to 869C. Under the doctrine in Ex parte James it is clear that the court has power to control the actions of a trustee in bankruptcy, but only in circumstances where it is necessary for directions to be issued by the court to ensure that the trustee, as the court's own officer, behaves as honestly as other people and in an honourable and high-minded way. In such cases a court will issue directions controlling what a trustee in bankruptcy does, even if this means overriding rights which persons interested might otherwise be entitled to claim on a strict application of the rules of law and of equity in the technical sense.

The difficulty, in my judgment, for Mr Robinson in seeking to rely upon Ex parte James is twofold. First, the bank itself clearly is not an officer of the court and, moreover, it has done nothing wrong. It is, as a creditor, entitled to seek to promote its own interests by any lawful means open to it, and that is all that it has done in these proceedings. Secondly, the trustee in bankruptcy has done nothing wrong. All that he has done has been to examine - properly in my view - the underlying debt and whether it continues to exist, giving fair opportunity to the Patels and the bank to make observations to him about it, and then, having concluded reasonably that the underlying debt does continue, to admit that debt in the bankruptcy for the benefit of the bank. In my judgment, there is nothing in the Ex parte James point which in any way alters the analysis of the case which I have already set out. So on the main part of the appeal I consider that the appeal should be allowed and the order made by the district judge should be set aside.

It is relevant for completeness to mention further two aspects of the order made by the district judge on 19 December 2007. The first additional aspect is that at paragraph (2) of the order the district judge ordered that the Bank of Baroda do pay the defendant's costs of the application. So far as that is concerned, it follows from the judgment that I have given that that order should be set aside and I will hear the parties on the costs consequences of doing that; but I should add that I would in any event have accepted Mr Riley's submission that the procedure before the making of that costs order was not such as to enable the bank to have a fair opportunity of meeting the case against it in relation to the costs.

The mandatory procedure if a third party to proceedings who has not been joined to those proceedings as a party is to be made liable for costs is set out in CPR 48.2. It requires that the person to be made liable for costs should be joined first as a party in the proceedings. That is an important matter, in my view, in order to give proper notice to such a party that they may be on risk of having a money order made against them by the court. Although in the directions in this case the district judge directed that the application should be served on the bank, he did not distinctly order that the bank should be joined as a party. Moreover, there was no indication in the directions order or in anything said or done by the Patels leading up to the hearing on 19 December 2007 to indicate to the bank that such an application for the bank as a non-party to be ordered to pay costs in the proceedings might be made against them. Accordingly, I would in any event have set aside that costs order on the grounds that it was issued in circumstances which were materially unfair to the bank.

The second costs matter relates to paragraph (3) of the order made on 19 December 2007, by which the district judge ordered the bank to pay the costs and expenses incurred in the bankruptcy after receipt of the £22,000 from Mrs Patel. Here again it follows from my judgment on the principal merits in this case that that costs order should be set aside; but again I would also have accepted the submission made by Mr Riley that this costs order was issued in circumstances which were materially unfair to the bank.

The usual rule in relation to the costs of a bankruptcy under rule 6.224 of the Insolvency Rules is that the costs and expenses are paid out of the estate. In my judgment, it would require clear notice to be given to a party against whom it was to be claimed that that ordinary rule should be departed from and that that party should pay the costs of the bankruptcy before such an order could fairly be made. Indeed, in my view it would be necessary to issue an application joining that person as a party to the application so that they were clearly and properly on notice that they had to meet such a case. Nothing of that kind happened in these proceedings. The bank had no notice that a claim was to be made against it to pay such costs and had no opportunity to put in any evidence or present any argument about it. So, quite apart from my judgment on the merits of the case, I would have allowed the appeal against that costs order in any event.