Gittins v Serco Home Affairs

This an appeal by Mr Gittins against an order of DJ Besford dated 5^th December 2011 whereby he annulled the bankruptcy order which he had made against Mr Gittins on 23^rd December 2010.

It raises a number of interesting questions. However at the heart of the case is the question of whether Mr Gittins was able to pay his debts as they fell due on the date of the bankruptcy order. In annulling the order DJ Besford held that he was able to pay his debts as they fell due.

On behalf of Mr Gittins, Miss Kyriakides submits that DJ Besford’s decision was wrong and that he was insolvent at the time of the bankruptcy order. She accordingly submits that it should not have been annulled.

Before dealing with the appeal in more detail it is right that I should express my gratitude to both Miss Kyriakides and to Carrick Read Insolvency who have conducted this appeal on behalf of Mr Gittins on a pro bono basis. Their submissions have been of the greatest assistance and, if I may say so the appeal bundle is comprehensive.

There is little if any dispute as to the relevant facts which can be stated quite shortly. Mr Gittins is a prisoner. He has been detained in prison since 2003. He is currently detained at HMP Wolds, Brough East Yorkshire. Prior to that he was detained at HMP Dovegate, Uttoxeter, Staffordshire.

Serco is a private prison operator which is responsible for both HMP Wolds and HMP Dovecote.

Whilst detained Mr Gittins instituted proceedings against a prison officer (Jill Roberts) and Serco under the Race Relations Act. The action lasted 3 days in the Nottingham County Court and was dismissed with costs. On 6^th October 2009 a default costs certificate in the sum of £23,558.71 was issued and Mr Gittins became liable to pay that sum to Serco.

On 30^th April 2010 an application by Serco was heard by DJ Reeson in the Nottingham County Court. Serco appeared by Counsel. Mr Gittins appeared by telephone – presumably from prison. DJ Reeson made an order which, after setting out various recitals continued:

There was no appeal against the order. Furthermore in their evidence Serco have exhibited various similar orders made by other judges in other cases. These include an order by Judge Rubery in January 2007 in the Stoke on Trent County Court. According to Sharen James the Probation Service have also obtained similar orders.

Whilst in prison, prisoners are able to “earn” money undertaking various jobs. Any “earnings” are paid into an earnings account. In addition to the earnings account each prisoner also holds a private cash account. This account is used to receive money externally. Thus each prisoner holds two accounts (Footnote: ¹). Sharen James has helpfully exhibited the two accounts in respect of Mr Gittins which show:

On 18^th November 2010 Mr Gittins presented his own bankruptcy petition. In the course of the hearing before DJ Besford he said that his family had said that they would cease sending money for him if the deductions continued. There was further evidence that he had been advised by a debt worker from the CAB (Mrs Evans) that he could apply to vary the order or make himself bankrupt. He chose that option. The Court fees of £450 and £160 were provided by members of his family.

In his statement of affairs Mr Gittins disclosed no assets. He stated that he had no cash in a bank, building society or other account and no cash was held by anyone for him. He did disclose an income of £11.50 per week from working in the prison office. The only creditor was Serco whose debt was stated to be £23,558. [In fact by virtue of the costs order made by DJ Reeson and the liability to interest on the judgment debt the liability was substantially greater than that sum.]. He did not disclose the order of 30^th April 2010. The petition was considered by DJ Besford on 23^rd December 2010 who made a bankruptcy order at 12 p.m.

On 21^st February 2011 Serco’s solicitors DLA Piper UK LLP (“DLA”) wrote to DJ Besford a long letter making a number of points. The letter points out that Serco have adopted a different approach from the Home Office in enforcing costs orders against prisoners. It is Serco’s policy to enforce such orders against the prisoner accounts. It has been Serco’s policy to “educate” judges as to the existence of such accounts against which an adverse costs order could be enforced. It made the point that DJ Reeson had considered the matter and been happy to create an “enforcement order”. It suggested that the bankruptcy order was an abuse of the process of the Court. DJ Besford described the letter as interesting but made it clear that a proper application was necessary if Serco sought to annul the bankruptcy.

The application to annul was made on 12^th October 2011. It was supported by a four page document setting out the grounds relied on. In summary it submitted that the bankruptcy order should not have been made on the grounds that Mr Gittins was not insolvent. After setting out the history it relied on the fact that DJ Reeson looked at Mr Gittins’s ability to pay the debt having regard to his income/receipts in prison and having done so made the order of 30^th April 2010. It pointed out that Mr Gittins had no living costs. It pointed to the “protected” income provision in the order and made the point that Serco was seeking flexible repayments according to the order made by DJ Reeson. It pointed out that repayments in accordance with DJ Reeson’s order were made between June and December 2010. It suggested that as Mr Gittins’s means had been considered in detail by DJ Reeson in Nottingham it was an abuse of process by Mr Gittins to petition for bankruptcy to the Kingston-upon- Hull County Court without disclosing the order of 30^th April 2010. It suggested that Mr Gittins had misled the Court.

In support of the application Serco relied on two witness statements from a finance officer, Sharen James. It is not necessary to refer to this in any more detail. In summary she submitted that DJ Reeson’s order ensured that Mr Gittins could pay his debts as they fell due; the order worked and bankruptcy was not relevant.

The application came before DJ Besford on 5^th December 2011. Serco was represented by Counsel. Mr Gittins was unrepresented though he did have assistance from Ms Evans from the Citizens Advice Bureau. There is a transcript of the proceedings and of the judgment. In the course of his submissions Mr Gittins said that he needed or spent around £25 - £30 per week in prison. He is earning £11.50 per week and his family are supplementing that income. As already noted his family have told him that they would stop sending money if Serco continued to make the deductions. He pointed out that Serco was making deductions from the moneys that were being sent in by his family. He also said that the order was causing him extreme hardship caused by the protected level of £30 per week. He needed to spend £25 - £30 per week in prison.

At one stage Miss Linklater submitted (though, to be fair, not with any force) that DJ Besford should not have taken into account anything said by Mr Gittins as he had not filed a witness statement. I do not accept that submission. This was the first hearing of the application. Serco’s evidence had been served only a matter of days before the hearing. Mr Gittins was a litigant in person. Miss Linklater did not object to what was said at the hearing. In my view it was both sensible and pragmatic for DJ Besford to listen to both Mr Gittins and Ms Evans without the need for a witness statement and a consequent adjournment.

Miss Linklater also sought to rely on a passage in the transcript where Mr Gittins accepted that he was up to date with the payments under the order [transcript page 3 lines 14 – 16]. It is in fact plain from the Schedule that was before DJ Besford that there were arrears of about £200. DJ Besford was not referred specifically to the Schedule. Mr Gittins was a litigant in person; he had only received the evidence shortly before the hearing and may well not have appreciated the significance of the Schedule. He was not, after all making payments under the Schedule. Moneys were being taken pursuant to clause 2 of DJ Reeson's Order. In my view there is no reason to deal with the case on a false basis. Mr Gittins was in arrears at the time of the bankruptcy order and should be treated as such.

In the course of her submissions to DJ Besford Miss Linklater referred to two authorities – Paulin v Paulin [2010] 1 WLR 1057 and BNY Corporate Trustee Services v Eurosail UK 2000 PLC [2011]. 1 WLR 2524 DJ Besford referred to Re A Debtor (17 of 1996) [1967] Ch 590 which he described as being on all fours with this case. In his judgment DJ Besford in effect accepted the submission of Miss Linklater. In paragraph 7 he put the matter thus:

Under section 272 of the Insolvency Act 1986 (“the 1986 Act”) a debtor's petition may be presented to the court only on the grounds that the debtor is unable to pay his debts.

Section 282(1) of the 1986 Act provides that the court may annul a bankruptcy order if it at any time appears to the court… (a) that, on the grounds existing at the time the order was made, the order ought not to have been made.

As Wilson LJ pointed out in paragraph 40 of Paulin a court may annul a bankruptcy order if it concludes that, on the date of that order, the bankrupt was able to pay his debts. But, even if it so concludes, the word 'may' confers upon the court a discretion whether to annul the order.

In paragraph 41 of Paulin Wilson LJ addressed the relevant test to determine if the bankrupt is unable to pay his debts:

In Re A Debtor (No 17 of 1996) a court had ordered D to pay damages to C in the sum of £2,400, payable by instalments of 25 shillings a week. D could afford to pay the instalments but obtained an order for his bankruptcy on the basis that he was unable to pay £2,400. A Divisional Court of the Chancery Division upheld the annulment of the order. It held that, in that £2,400 was not presently payable, it was irrelevant that D could not presently pay it that D was able to pay his debts and that the presentation of his petition had been an abuse of the process of the court.

The crucial part of the judgment is at p 595:

It is to be noted that this case concerned section 6 of the Bankruptcy Act 1914. Miss Kyriakides has pointed out that the position may be different under the 1986 Act. She has drawn my attention to section 382(3) incorporated by virtue of section 385 which provides:

Thus she submits (although only as a secondary submission) that a future liability is relevant under the 1986 Act.

I was referred to two recent cases in relation to the meaning of inability to pay debts in the case of companies. The statutory provisions in relation to companies are different from those relating to individuals. However guidance can be obtained from the approach.

In BNY one of the issues to be determined in that case was whether the trustees of certain interest bearing notes were entitled to serve an enforcement notice following an event of default. One such event of default was defined in the terms and conditions as “the issuer being unable to pay its debts as they fall due” or “within the meaning of sections 123(1) or (2) … of [the 1986 Act] being deemed unable to pay its debts”

Section 123(1) describes five situations in which '[a] company is deemed unable to pay its debts', including (e) if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due.' Section 123(2) provides:

Thus the Court had to construe the effect of section 123(2) when taken with section 123(1)(e). Lord Neuberger MR expressed his conclusion in paragraphs 47 to 49 of the judgment

I was also referred to the decision of Briggs J in Re Cheyne Finance [2008] 2AER 987 but I do not find it necessary to refer to that case in any detail. It is to be noted that in paragraph 50 of BNY Lord Neuberger MR interpreted the judgment as meaning that section 123(1)(e) does not require slavish adherence to the immediate present.

It seems to me plain from these authorities that the primary test for an inability to pay debts as the fall due for an individual under section 272 is the cash flow test in respect of assets and immediate liabilities. However there is a limited role in respect of future liabilities which comes into play when it can be said that the individual’s use of cash or other assets for current purposes can be said to be a fraud on the future creditors.

In paragraphs 44 to 48 of Paulin Wilson LJ considered the question of whether abuse of process was a separate ground for annulment. He made the point in paragraph 48 that save in very exceptional case where a debtor is unable to pay his debts at the date of the petition its presentation is not an abuse of the process of the court.

In paragraph 52 of Paulin Wilson LJ cited with apparent approval a passage from Artman v Artman [1996] BPIR 511, 514:

I first had the opportunity to consider the papers in this appeal in detail some two days before the hearing. It seemed to me that there must be considerable doubt as to whether DJ Reeson had jurisdiction to make the order of 30^th April 2010. In those circumstances I caused an e-mail to be sent to Counsel indicating that I should like to receive submissions on the jurisdiction to make the order.

I am grateful both to Miss Kyriakides and Miss Linklater for preparing submissions at short notice. However Miss Linklater submitted as her primary case that I should not embark on any consideration of DJ Reeson’s jurisdiction. She made the point that the order was an order of the Court and that there had been no appeal against it. She referred me to a number of authorities all of which are based on a well-known passage from the judgment of Romer LJ in Hadkinson v Hadkinson [1952] P 285, 288;

Whilst I see the force of the authorities cited by Miss Linklater I do not think they apply to this situation. No one has suggested that there has been a breach of DJ Reeson’s order. Moneys have been deducted in accordance with it. This Court is a court of competent jurisdiction and there are, in my judgment sound reasons why it should address the question of jurisdiction.

First, it seems to me to be relevant to the question of construction which arises under the order. Second it is relevant to the question of discretion. If, as Miss Kyriakides submits, the order was made without jurisdiction an appeal against the order even though out of time would have a very good prospect of success. Without DJ Reeson's Order there is no doubt that Mr Gittins is unable to pay his debts as they fall due and thus the bankruptcy order was properly made. It would seem to be pointless to exercise a discretion to annul the bankruptcy if the result is that the parties will have be put to the expense of an appeal against DJ Reeson's Order so as to enable Mr Gittins to petition again for his bankruptcy.

Third, this situation is not unique to Mr Gittins. It is Serco’s policy to apply for orders such as this against all prisoners who sue them unsuccessfully. In this case (and I suspect in all of the other cases where such orders have been made) Mr Gittins was unrepresented before DJ Reeson. There is no evidence before me as to what material was put before DJ Reeson on the question of jurisdiction though it is possible he was shown the order of HH Judge Rubery and invited to follow it.

On this occasion Mr Gittins has had the inestimable advantage of the assistance free of charge from experienced insolvency counsel and solicitors. That is an advantage he and other prisoners faced with these applications would be unlikely to have in future applications.

In my view this is an ideal opportunity to consider the jurisdiction of the court to make orders such as DJ Reeson's Order and I propose to do so.

I have set out the order above. As can be seen there are two operative clauses. Clause 1 requires Mr Gittins to make “a 4 weekly contribution” to outstanding costs in accordance with a formula. The formula is based on Mr Gittins’s “income and/or receipts from any source”. Thus it includes money sent to him by his family. The formula provides for a protected income of £30 and then requires Mr Gittins to contribute a variable but ascertainable percentage of any excess over that sum. Clause 2 directs Serco to deduct the contribution from Mr Gittins’s prisoner account directly.

The sum payable under clause 1 is, of course, uncertain because it depends on a future event – that is to say the amount or amounts of Mr Gittins’s receipts from all sources. It is thus an order to pay an uncertain future amount to Serco.

Equally the direction under clause 2 requires Serco to deduct an uncertain future amount from an account or accounts which at the time of DJ Reeson's Order had less than £75 in them.

It is extremely difficult to find any legal justification for clause 2 of the order. It cannot be a third party debt order within CPR 72.2. Apart from the fact that the appropriate procedure for such an order has not been followed (there is no interim order) a third party debt order can only be made in respect of debts due from the third party to the judgment debtor. The only debt due as at 30^th April 2010 from Serco to Mr Gittins was the sum of less than £75.

Miss Linklater suggested that it could be justified on the basis of being a charging order under the Charging Orders Act 1979 (“the 1979 Act”). Apart from the fact that the procedure for obtaining a charging order has not been followed it does not seem to me that a charging order can be obtained over the fluctuating balance in the accounts held by Serco. Under section 2 of the 1979 Act a charging order may be obtained only on an interest in an asset of a kind mentioned in subsection (2) or an interest under any trust. Subsection (2) lists various interests including land, stocks shares and unit trust. Plainly those do not apply. Miss Linklater suggests this is an interest under a trust. I cannot accept that submission. First it seems to me that the relationship between Serco and Mr Gittins is a debtor creditor relationship. Second, as Miss Kyriakides pointed out, it is extremely difficult to identify the trust property. It emerged during the hearing that prisoners’ funds are kept in one separate bank account at Barclays Bank. The prisoner’s accounts are internal records kept by Serco in respect of each prisoner. In those circumstances it is very difficult to see what is being charged.

Miss Linklater also suggested that it was justified by virtue of the law of set off. No authority was cited in support of this proposition. In any event I have difficulty in seeing how in the absence of a contractual right to set off the concept of set-off applies in respect of a judgment debt and a future unascertained uncertain sum.

It seems to me that there was no jurisdiction to make the order in Clause 2.

Miss Linklater invites me to treat clause 1 as an instalment order. Under section 71 of the County Courts Act 1984 the Court has power to order that a money sum be paid “by such instalments payable at such times as the court may fix”. CPR 40.11 requires a money judgment (including costs) to be complied within 14 days unless the judgment specifies a different date for compliance (including specifying payment by instalments). Paragraph 12 of Practice Direction 40B provides that where a judgment is to be paid by instalments, the judgment should set out the total amount of the judgment, the amount of each instalment, the number of instalments and the date on which each is to be paid and to whom the instalment should be paid.

DJ Reeson’s order does not specify the amount of each instalment; nor does it specify the number of instalments. It is impossible for it to do so. Whilst it provides a formula for determining the amount of the instalment that formula depends on an uncertain future event. Furthermore the order is not couched in the terms of an instalment order. Whilst it refers to the costs outstanding of £23,558.71 it provides that Mr Gittins is to make “a contribution towards the outstanding costs liability”. It does not provide that it is payable by instalments. To my mind the concept of making a contribution towards outstanding costs and paying the costs by instalments are different. Indeed the reference to the costs being outstanding strongly suggests that they remain due.

In my judgment, clause 1 of DJ Reeson’s order is not an instalment order within section 71 of the County Courts Act and/or CPR 40.11. Miss Linklater did not suggest that there was any other jurisdiction under which DJ Reeson's Order could have been made. It follows in my view that there was no jurisdiction to make clause 1 of the order.

There is some similarity between the order made by DJ Reeson and an Attachment of Earnings Order under the Attachment of Earnings Act 1971 (“the 1971 Act”) in that the order for provides for a protected earnings of £30 per fortnight. However it is plainly not such an order for a number of reasons. Serco is not Mr Gittins’s employer within the meaning of the Act. The order is not couched in the terms of an Attachment of Earnings Order. Even if it were such an order it would not, in my view mean that the balance of the judgment sum was not due. Under section 8(2)(b) of the 1971 Act where an Attachment of Earnings Order is in force no other form of execution shall issue against the property of the debtor without the leave of the county court. That does not, however, mean that the debt is not due.

As noted above the test applied by DJ Besford in paragraph 7 of his judgment was:

With great respect that test is erroneous in so far as it refers to a demand. It is clear from the statute and the authorities set out in section 3.1 above that the question is whether he was able to pay the debts that had fallen due.

Miss Kyriakides submitted originally that there were two debts that Mr Gittins could not pay – that is to say the balance of the sums due under the costs certificate and interest on it. In her reply she added the arrears of the sums payable under DJ Reeson's Order.

She submitted that as DJ Reeson's Order was not an instalment order the whole of the sum under the order remained due. She pointed out by reference to section 74 of the County Courts Act 1984, paragraphs 2, 3 and 4 of the The County Courts (Interest on Judgment Debts) Order 1991 Serco was entitled to interest on the default costs at the very least from the date of the relevant costs order to the date of DJ Reeson's Order on 30^th April 2010 and possibly longer. The sum involved was approximately £2,000. Mr Gittins was plainly unable to pay that sum. Finally she submitted that Mr Gittins was unable to pay the £200 arrears.

In answer to these submissions Miss Linklater submitted that DJ Reeson's Order was an instalment order and thus had the effect of deferring Mr Gittins’s liability to pay. I have dealt with that submission above and will say no more about it. In the alternative she submitted that as a result of the order there was an enforceable contract between Mr Gittins and Serco under which Serco were prevented from enforcing the whole of the judgment whilst the order was in force. She relied on Mr Gittins’s failure to appeal the order as his consent. She accepted that some interest would have arisen but contended that DJ Reeson's Order should be construed so as to include the interest. Alternatively that the enforceable contract would prevent enforcement of the interest. Finally she said it would not be right to allow the appeal on the basis of the £200 arrears as that was not the basis upon which the matter was argued before DJ Besford.

Save that there have been some minor amendments to the statutory provisions referred to by Miss Kyriakides I prefer her submissions on the first two issues. The current provisions are set out in the very recent judgment of the Court of Appeal in Simcoe v Jacuzzi UK plc [2012] EWCA Civ 137. It is not necessary for me to set out the provisions.

I agree with Miss Kyriakides that if DJ Reeson's Order was not an instalment order the whole of the balance of the judgment remained due. On any view Mr Gittins was unable to pay it. In my view the suggestion that there was an enforceable contract with Mr Gittins arising out of DJ Reeson's Order is quite untenable. The order was not a consent order. The removal of funds under the order was the unilateral act of Serco. There is no document suggesting that the effect of the order is to make the balance due unenforceable. There is no document from Mr Gittins suggesting that he was accepting that as being the position. It is in my view quite impossible to treat the failure by Mr Gittins to appeal as giving rise to an acceptance under a contract.

It is equally plain that Mr Gittins was unable to pay the interest due under the costs certificate. He was not in a position to pay £2,000 or anything like that sum. In my view that interest is not included in DJ Reeson's Order. The order in the recital expressly refers to “[Serco’s] costs of £23,558” and later requires “[Mr Gittins] to make a contribution towards the outstanding costs”. In my judgment the reference to outstanding costs is a reference to the costs of £23,558 and not to those costs and statutory interest. If Serco had wanted to include the interest the order should have provided for it expressly.

In those circumstances it is not necessary to consider further the question of whether Mr Gittins could have paid the £200 arrears under the order. There is however considerable force in Miss Kyriakides’s submission that Mr Gittins was unable to do so.

DJ Besford did not consider the question of discretion in any detail. However where, as here, Mr Gittins is unable to pay his debts as they fell due it was not an abuse of process to petition for bankruptcy. Equally it seems to me that it cannot be said that the bankruptcy order ought not to have been made. It follows in my view that DJ Besford should not have annulled the bankruptcy order.

I would allow this appeal.