The Official Receiver v Negus

MR JUSTICE NEWEY: The appeal now before me raises a question of wider significance. The point can be expressed as follows: is it a sufficient ground for refusing to make an income payments order under section 310 of the Insolvency Act 1986 in respect of a bankrupt that sums received under any order will not (or are unlikely to) enable a distribution to be made to the bankrupt’s unsecured creditors?

The background can be summarised shortly. The Respondent, Mr Jamie Negus, was adjudged bankrupt in the Brighton County Court on his own petition on 5 October 2010. On the same day, Mr Negus swore a statement of affairs disclosing that he had unsecured debts totalling £8,880.58 and no assets. He also stated, however, that he was employed as a motor parts administrator with a take-home pay of £1,000 per month.

On 20 April 2011, the Official Receiver applied for an income payments order to be made. The application came on for hearing before District Judge Merrick on 1 July 2011. By then, Mr Negus put his monthly expenditure at £920, and the Official Receiver accepted that figure. On that basis, the Official Receiver proposed that Mr Negus should be ordered to pay £40 a month (representing half of the difference between the £920 and Mr Negus’ monthly take-home pay of £1,000) for 36 months. The Official Receiver also envisaged, as I understand it, that Mr Negus would be ordered to pay £145 a month for six months. This was to reflect the fact that Mr Negus’ income would not have been subject to PAYE deductions during the period between the date of the bankruptcy order and the end of that tax year (because the income tax for that year will have constituted a bankruptcy debt and so been merely provable in the bankruptcy).

The application for an income payments order was not opposed by Mr Negus. District Judge Merrick nonetheless declined to make such an order. It can be seen from the transcript of the hearing that his concern was that any payments made under such an order would be exhausted by fees payable to the Official Receiver and the Secretary of State. For example, the District Judge observed in the course of the hearing:

“It is not for the purpose of the bankrupt’s estate. It is for the purposes of paying the Receiver’s costs”.

The District Judge went on to say that, in his view, “that is not what the idea is of bankruptcy”.

The relevant fees are laid down by the Insolvency Proceedings (Fees) Order 2004. Schedule 2 to that Order provides for a fee of £1,175 to be payable to the Official Receiver:

“For the performance by the official receiver of his general duties as official receiver on the making of a bankruptcy order, including his duty to investigate and report on the affairs of bankrupts …”.

The same Schedule provides for a fee to be charged by the Secretary of State at specified rates:

“For the performance of the Secretary of State’s general duties under the insolvency legislation in relation to the administration of the estate of each bankrupt …”.

Both fees are given priority over the claims of unsecured creditors. Thus, section 324(1) of the 1986 Act provides for funds to be distributed among creditors “subject to the retention of such sums as may be necessary for the expenses of the bankruptcy”.

As already mentioned, the Official Receiver’s application was made under section 310 of the 1986 Act. Section 310(1) provides as follows:

“The court may make an order (‘an income payments order’) claiming for the bankrupt’s estate so much of the income of the bankrupt during the period for which the order is in force as may be specified in the order”.

Sub-section (2) imposes a limit on what can be ordered. It states:

“The court shall not make an income payments order the effect of which would be to reduce the income of the bankrupt when taken together with any payments to which subsection (8) applies below what appears to the court to be necessary for meeting the reasonable domestic needs of the bankrupt and his family”.

Under sub-section (5), sums received under an income payments order form part of the “bankrupt’s estate”.

The expression “bankrupt’s estate” is defined in section 283 of the 1986 Act. It encompasses “property belonging to or vested in the bankrupt at the commencement of the bankruptcy” and also property which later provisions of the 1986 Act state are to form part of the “bankrupt’s estate”. Those provisions include both section 310 and section 307, dealing with after-acquired property. Section 307 provides that, subject to exceptions, a trustee in bankruptcy “may by notice in writing claim for the bankrupt’s estate any property which has been acquired by, or has devolved upon, the bankrupt since the commencement of the bankruptcy”.

The Official Receiver now appeals against District Judge Merrick’s decision. It is apparent from the transcript of the hearing before him that the District Judge was himself keen that there should be an appeal: he clearly thought that the point on which he decided against the Official Receiver should be tested. On the basis that the sums at stake in the present case are relatively small but the principles are of general importance to the functioning of the Insolvency Service, the Official Receiver (for whom Mr James Eadie QC and Mr Andreas Gledhill appeared) has indicated that, win or lose, he will not be seeking any order for costs against Mr Negus.

Despite the able submissions of Mr Peter Head (who appeared for Mr Negus), I have concluded that I should allow the appeal. My reasons include these.

In the first place, it seems to me that, had Parliament intended income payment orders to be made only where likely to be of benefit to unsecured creditors, it could be expected to have said so in terms. It has not. Section 310 does not state that benefit to unsecured creditors is a pre-requisite of an income payments order or even that such orders are to be made in the interests of creditors. There is express reference elsewhere in the same Part of the 1986 Act to “the interests of the bankrupt’s creditors” (see section 336), but no such wording is to be found in section 310. Notwithstanding the fact that a “bankrupt’s estate” falls to be used to pay fees ahead of creditors, section 310 simply provides for income to be claimed “for the bankrupt’s estate” and for sums received to form part of that estate. It is noteworthy, moreover, that, in the context of section 336, the “interests of creditors” have been held to include “their interest in having the expenses of the bankruptcy discharged so far as possible out of the assets of the bankrupt”, even where there is “no question of after-acquired property to be brought into account”: see Trustee of the Estate of Eric Bowe v Bowe [1997] BPIR 747, at 754.

Secondly, the scheme of the 1986 Act provides no warrant for treating the fees payable to the Official Receiver and Secretary of State as less important than the claims of unsecured creditors. To the contrary, Parliament has chosen to give the fees priority over unsecured debts. Had Parliament instead decided that the fees should rank no higher than unsecured debts, the District Judge’s concerns could not have arisen: an income payments order would have been likely to benefit creditors as well as the Official Receiver and Secretary of State. It would be very odd if the Official Receiver and Secretary of State were in a worse position as a result of the priority they have been given. Parliament can hardly have intended that to be the case.

A third point is that the bankruptcy regime is not concerned exclusively with the distribution of assets among creditors. It has a public aspect. As was pointed out in the Report of the Review Committee on Insolvency Law and Practice (1982) Cmnd. 8558 (at paragraph 1734), insolvency proceedings “have never been treated in English law as an exclusively private matter between the debtor and his creditors; the community itself has always been recognised as having an important interest in them”. Bankruptcy also has the advantage from the bankrupt’s point of view that he is released from his debts. It does not strike me as inconsistent with the “idea ... of bankruptcy” (to use the District Judge’s words) that a bankrupt should be required to contribute to the costs associated with his bankruptcy if his income exceeds the level “necessary for meeting the reasonable domestic needs of the bankrupt and his family” (to quote from section 310(2) of the 1986 Act). That is especially so where (as in the present case) the bankrupt presented the bankruptcy petition himself, presumably with a view to securing the benefits that the regime affords to debtors.

A fourth point, though I think one of lesser significance, is that, even if the sums payable under an income payments order are not of themselves going to be sufficient to allow a distribution to be made to unsecured creditors, they could prove to be of benefit to such creditors if the “bankrupt’s estate” were otherwise augmented, for example by a claim for after-acquired property under section 307. Mr Head argued that a person in Mr Negus’ position is unlikely to acquire property within the scope of section 307, but the possibility cannot be excluded. Even the impecunious sometimes win money on the lottery, for instance.

A degree of support for the Official Receiver’s case can also, as it seems to me, be derived from section 307 in a different way. It is plain that property can be claimed under that section regardless of whether doing so is likely to be of benefit to unsecured creditors. That tends to confirm, in my view, that Parliament was not concerned only with the interests of unsecured creditors.

Mr Head emphasised the differences between section 307 and section 310. As he pointed out, a trustee in bankruptcy can lay claim to after-acquired property under section 307 simply by serving a notice. In contrast, a bankrupt will not have to contribute income unless a Court order to that effect is made, and, since section 310(1) says that the Court “may” make an order, the making of an order involves an exercise of discretion. Mr Head argued that the respects in which sections 307 and 310 diverge reflect the particular importance and sensitivity of a bankrupt’s income. With income, the Court must, Mr Head submitted, seek to achieve proportionality between the needs of the bankrupt and the interests of creditors. In support of this proposition, Mr Head referred to passages from Re Rayatt [1998] BPIR 495 (at 502503) and Kilvert v Flackett [1998] BPIR 721 (at 723-724).

None of this, however, seems to me to justify treating fees due to the Official Receiver and Secretary of State as of less importance than provable debts in the context of section 310. There is no reason to suppose that the Judges in Re Rayatt and Kilvert v Flackett had the distinction between the two in mind. Nor is there any reason to think that the differences between section 307 and 310 are attributable to the distinction.

Further, Mr Head drew my attention to other authorities in which there has been reference to income payment orders being made for the benefit of creditors. In none of these cases, however, was it relevant to distinguish between fees and provable debts. In the circumstances, I do not think the passages to which I was referred take matters any further.

In all the circumstances, it seems to me that the District Judge was not, with respect, entitled to approach matters in the way he did. My answer to the question posed at the beginning of this judgment is “No”: it is not, in my judgment, a sufficient reason for refusing to make an income payments order that sums received under the order are unlikely to enable a distribution to be made to unsecured creditors. In fact, my own view is that the prospect of an income payments order being of no benefit to unsecured creditors is not even, as such, a relevant consideration to be taken into account when deciding whether to make an income payments order. Given the scheme of the 1986 Act, the Court cannot properly, to my mind, treat the Official Receiver’s and Secretary of State’s fees as less important than provable debts when deciding whether to make an income payments order.

In the present case (and there are potentially many comparable cases), an additional reason for making an income payments order is to be found in the fact that, as already mentioned, Mr Negus’ income will not have been subject to PAYE deductions between the date of the bankruptcy order and the end of that tax year. The bankruptcy order will thus have increased his take-home pay by some £145 a month over that period. There is a good deal of force in the argument that, in the absence of an income payments order, bankruptcy will have given Mr Negus a windfall. On the view I take of the case, however, this point is not critical. The appeal should anyway be allowed for the reasons given earlier in this judgment.

I shall, accordingly, allow the Official Receiver’s appeal.