Sands v Layne & Anor

(a) Mr Carlos Layne, the First Defendant, was a tenant of the Second Defendant (“WDC”) in respect of commercial premises at 148 Desborough Road, High Wycombe between 2001 and 2007, when the lease was surrendered leaving substantial arrears of rent outstanding. On 15 July 2009 WDC obtained default judgment in respect of these arrears for £32,308.53 and costs.

The district judge granted permission for the amendment at a hearing on 5 May 2011. At the same time he adjourned the hearing of the amended petition until 7 July 2011, directing that Mr Layne should file and serve an affidavit setting out his grounds for opposing the petition on the basis that he was offering security for the debt, and provide details of all charges over his property. In the event, while detailing the charges, the witness statement which Mr Layne produced on 25 May 2011 offered no security and only an immediate payment of £1,000 and instalments for the time being of £100 per month, with the hope of increasing that to £200 if and when he found full-time employment (being currently on JSA). In subsequent correspondence, he revised these figures upwards, but they were rejected by WDC on 4 July 2011 on the grounds the offer was not an offer of security, it was not reasonable, and there was no reasonable prospect of payment in full being made within a reasonable time. Mr Layne set out these matters in a letter to the court dated 7 July 2011, attaching copies of his correspondence with WDC, which he suggested was acting unreasonably in refusing his offer.

The district judge began the hearing on 7 July 2011 by noting that the letter made no mention of an offer of security, as had been mooted on the previous hearing. Thus, he observed, the only defence being advanced was that the refusal to accept the offer of instalments was unreasonable, which, given the time that would be required for full payment, the judge did not accept. Having satisfied himself that there were no supporting creditors, he therefore made the bankruptcy order sought by WDC.

On 4 August 2011 Mr Layne applied for permission to appeal against the making of that order (and since, he had belatedly discovered that he was one week out of time, for an extension of time to do so). In a supporting statement he said that if he had been invited to address the court below he would have explained that he did wish to offer security, indicating by reference to documents which had been before the district judge that there was equity of about £68,000 in his present home (Footnote: ¹). In his grounds of appeal (verified by a statement of truth) he further stated that he remained solvent in that his assets exceeded his liabilities (Footnote: ²). The relief sought by the appeal was that the bankruptcy order should be set aside and the hearing of the petition restored to a date 8 weeks after the determination of the appeal to enable Mr Layne to secure (and/or compound) the debt by granting WDC a charge over his home. By a letter dated 22 August 2011 he formally offered to execute such a charge in return for WDC’s agreement to rescind the bankruptcy order and/or consent to his appeal.

On 30 August 2011 the Official Receiver summoned a meeting of creditors for 22 September 2011, when Mr Colin Nicholls was appointed as trustee in bankruptcy, subsequently replaced in April 2012 by the applicant (jointly with a colleague removed in May 2013). The trustee was assisted as case-worker by Ms Harriet Barnes until she left the employment of his firm, RSM Tenon, in September 2013.

On 9 March 2012 Peter Smith J ordered that the application for permission to appeal should be heard by a High Court Judge followed immediately, if permission were granted, by the hearing of the appeal. In the event, it came before me, sitting as a Deputy High Court Judge, on 19 June 2012. On the basis of the materials in the appeal bundle it appeared that the essential question which the court would have to determine was whether, having regard to section 271(3) of the Act, the order below could or should stand in the light, particularly, of the offer in the letter of 22 August 2011. In the event, the parties resolved that question by agreement, requesting me at the hearing to make a consent order under which the bankruptcy order was set aside on the basis, recorded in the order, that Mr Layne’s interest in his home stood charged with payment of £61,000, to be paid by monthly instalments ending in April 2016 (Footnote: ³).

I made an order in those terms. The charge was registered, and Mr Layne has since – albeit with some lapses – paid the agreed instalments.

Throughout Mr Layne kept Ms Barnes apprised of developments, in particular:

On 3 July 2012 the Applicant (presumably “ghosted” by Ms Barnes, whose reference appears on this and later letters) wrote to the court seeking a copy ofthe application, witness statements, and judge’s notes. In December 2012 Ms Barnes received a voice-mail from an officer at the court, explaining that he had retrieved the file from storage but it did not contain a copy of the application and that he was not permitted to provide a copy of the judge’s notes. The Applicant recorded this in a letter dated 17 December 2012, asking to be provided with a written judgment. On 28 May 2013 the Applicant expressed his disappointment that he had not yet received a substantive response, which was required “in order for me to proceed with my administration”. On 7 June 2013 the Chancery Appeals section of HMCTS replied stating after consulting the appeal file that the court had been presented with the consent order on 19 June 2012 which negated the need for further hearing and indeed ended the appeal without any further orders or judgments being given.

On 25 June 2013 the applicant issued an application seeking an order that the consent order of 29 June 2012 should be rescinded pursuant to section 375 of the Insolvency Act, 1986 (the text of which I set out later in this judgment at paragraph 13). It is unclear what impelled or motivated the applicant to make that application. Though the Applicant mentioned the fact that he had outstanding fees of about £6,000, earned before the bankruptcy order had been rescinded, the application seeks no relief in that regard, and the court could have dealt with that question without reinstating the bankruptcy order: see Appleyard v Wewelwala [2013] 1 WLR 752 (Footnote: ⁴).

On 7 November 2013 the district judge ruled that he had no jurisdiction to order rescission of an order made by the High Court and transferred the application to the High Court. It came on for hearing before me (Footnote: ⁵) on 23 October 2014.

The gravamen of the applicant’s submission is that Mr Layne and WDC had sought solely to deal with matters as between themselves and failed to take into account “their obligations towards me as Trustee of the Bankrupt’s estate and more importantly the other unsecured creditors … whose claims presently exceed £300,000” (Footnote: ⁶). As expanded orally, it is said by the applicant that the parties should have drawn the court’s attention to the existence of unsecured creditors and/or notified the applicant so that he could defend their interests, if, as the figures suggested (and contrary to Mr Layne’s statement in his grounds of appeal that he was solvent in terms of net assets), the provision of the security would prejudice them. That submission raises a number of important and indeed fundamental questions.

Section 375 of the Act, headed “Appeals etc. from courts exercising insolvency jurisdiction”, provides that

“(1)Every court having jurisdiction for the purposes of the Parts in this Group [sc. individual insolvency matters] may review, rescind or vary any order made by it in the exercise of that jurisdiction.

(2)An appeal from a decision made in the exercise of jurisdiction for the purposes of those Parts by a county court or by a registrar in bankruptcy of the High Court lies to a single judge of the High Court; and an appeal from a decision of that judge on such an appeal lies to the Court of Appeal.

Does section 375(1), as the applicant contends, empower review etc. of an order made by a judge of the High Court on appeal under section 375(2)? That proposition was shortly rejected by Briggs J in Appleyard v Wewelwala [2013] 1 WLR 752, commenting that

“[i]t would be surprising if it contemplated review, at first instance, of the exercise of appellate jurisdiction since, on its language, it would then permit a Bankruptcy Registrar (for example) to review the decision of a High Court Judge on appeal”.

Any element of surprise which that might occasion would at least in my case be significantly tempered by the fact that such a situation would appear to exist in the case of an application to set aside a bankruptcy order under section 282(1) of the Act. In any event, any sense of institutional discomfort can be simply overcome by a practice of adjourning the application to a judge of the appropriate court or level, as indeed happened in Appleyard. More fundamentally, I find myself unable to agree with the suggestion that such a result could be consistent with the language of section 375(1), which I read as contemplating review by a court only of an order made by it. The real question is rather to my mind whether the sub-section empowers an appellate court (in casu the High Court) to revisit an order which was made for the first time by it on appeal, which might include a positive order against the bankrupt refused by the county court or registrar as well as one setting aside an order made below – I can see no basis in the language of section 375(1) for distinguishing between these two possible situations.

In the context of section 375 as a whole and its distinction between first-instance and appellate review, it appears to me at least fairly arguable that sub-section (1) should be interpreted as restricted to the review by first instance courts of decisions made by them. Such a reading is however capable of producing results which some may regard as anomalous. In these circumstances I confess that my view on this point of statutory construction has wavered, and continues to do so. Ultimately, however, I am unable to say that in its result the decision of Briggs J was clearly wrong in its result, and it is therefore appropriate that I should follow and apply it. On that basis, the application fails in limine.

Given my diffidence as to this conclusion, I should and will however consider the further questions which would arise if section 375(1) did extend jurisdictionally to an appellate decision.

While a court might readily assume that, in the absence of contrary information there would normally (and hence probably) be at least some other unsecured creditors, what matters is the quantum of their debts and how recovery of them might be affected by the provision of the security and revocation of the bankruptcy order. That information was not before the court on the appeal hearing. Though even now it is not addressed in any detail in the evidence and might have had to be investigated further, for the purposes of this judgment I shall assume that the figures were in June 2013 such that the provision of the security would have been prejudicial to the interests of other unsecured creditors.

Any such prejudice would necessarily presuppose that Mr Layne was not net asset solvent. One can therefore refine and reformulate the point of principle as follows: where refusal by the petitioning creditor of a proposal for security would be unreasonable, may the court nonetheless make a bankruptcy order if the debtor is insolvent and unsecured creditors would therefore be adversely affected by the security, and indeed override the joint wishes of the two parties in this regard? In the context of an appeal against the making of such an order that question would relate to the decision whether or not to rescind it, but the same considerations of principle must obtain as in the case of an original hearing at first instance, and it is simpler for analytic purposes to focus directly on the latter.

The grounds on which the court may act are set out in section 271(3) of the Act as follows:

“The court may dismiss the petition if it is satisfied that the debtor is able to pay all his debts or is satisfied—

(a)

that the debtor has made an offer to secure or compound for a debt in respect of which the petition is presented,

(b)

that the acceptance of that offer would have required the dismissal of the petition, and

(c)

that the offer has been unreasonably refused;

and, in determining for the purposes of this subsection whether the debtor is able to pay all his debts, the court shall take into account his contingent and prospective liabilities.”

It can be noted that the first ground for dismissal is solvency of the debtor, the ability to pay all his debts. The second ground – an offer to secure or compound – must therefore be intended to apply even where the debtor is not so able: otherwise this ground would have no separate raison d’être. Such discretion as may be inherent in the word “may” cannot therefore properly be deployed to contrary effect. Indeed, though in the absence of targeted argument on this point I express no concluded view, the sole function of the word may well be to permit the substitution of a supporting creditor or the transfer to it of carriage of the petition.

That is not to say that other unsecured creditors are abandoned by the law in such a situation. Even if (in the absence of an existing and timeous statutory demand by it) such a creditor is unable to be substituted on the basis of its own debt, it can present a fresh petition in its own name. If it took that course (and did so within 6 months) and obtained a bankruptcy order, the court would in due course have power to set aside the provision of the security as a preference under sections 340 and 341 of the Act, though under section 340(4) it would be necessary to establish that a desire to prefer had influenced the debtor’s decision to grant the security. There is however nothing in the legislation to suggest that the court is required to or should anticipate and pre-guess such steps by refusing an order on the original petition. It would also grossly complicate, especially in the light of section 340(4), the everyday resolution of petitions where the petitioning creditor agrees to accept security in return for withdrawing (Footnote: ⁷). Even if that were wrong, I am unable to envisage any justification for anticipatory protection of other creditors wider or more favourable than that offered by sections 340 and 341. In this connection, there has of course been no investigation before me as whether the “desire” demanded by section 340(3) was present in the instant case.

In short, in so far as other unsecured creditors may be affected by the provision of the security to the petitioner, the statute provides a targeted remedy in what it considers suitable cases, and it is neither necessary nor appropriate for their interests to be addressed in the context of the bilateral dispute between the petitioning creditor and the debtor and in particular the issue whether, where security is offered and rejected, a bankruptcy order should be made or refused. This must apply as much to an appeal as to a hearing at first instance.

A further important question is whether the applicant has standing to bring the present application. Any such proposition must, as I see it, fail at the outset, unless he can as a minimum establish that he would have been entitled to be joined as a respondent to the appeal in order to oppose it (and even that condition may not always be sufficient).

The applicant’s argument on this point suffered from a serious dose of circularity. The position and status of a trustee in bankruptcy predicates and is the result of an adjudication by the court on the lis between the creditor and the debtor created by the petition. It would therefore be quite illogical that he should participate in that adjudication, and indeed such participation would be ex hypothesi impossible at first instance. I can see no reason why the position, in result, should be any different on an appeal. Counsel for the applicant points out that by that time the order had been made, he had been appointed trustee, and Mr Layne’s property had been vested in him. But the purpose of the appeal was to decide whether the bankruptcy order should stand. If the order fell and there was no bankruptcy, all consequences dependent on it – the trusteeship and the vesting - disappeared with it (Footnote: ⁸). In ultimate analysis, the applicant had himself no interest in the outcome of the decision (Footnote: ⁹).

The applicant’s standing to bring the present application cannot be superior.

Even if that were wrong, the court, before granting such an application, may and should in my view have regard to events occurring since the date of the order which it is sought to rescind. In the present case, there was a delay of almost a year before the application was made. If the applicant had enjoyed any standing in the matter, it would have behoved him to act with far greater zeal and expedition than the exchange of letters with the court to which I referred earlier in paragraph 9. Had he done so, and obtained the relief which he seeks, the date of potential discharge of Mr Layne from the resultant bankruptcy would have been correspondingly accelerated. These are matters which I would have wished to consider before deciding whether, if otherwise well-founded, the application should be dismissed as a matter of discretion. In the absence of fuller submissions on this point, and since it is unnecessary for my decision, however, I refrain from examining it further.

For these several reasons I dismiss this application.