Lockston Group Inc v Wood

Platon Elenin (also known as Boris Abramovich Berezovsky) died on 23 March 2013 at his home in Berkshire. Once an exceptionally rich and politically powerful oligarch in post-Soviet Russia, he died insolvent. In October 2014 the deficit in his estate was estimated at not less than £40 million.

By an order made on 29 April 2013 Nicholas Wood and Kevin Hellard were appointed as receivers of the estate and by a further order made on 10 April 2014 they were appointed as General Administrators of the estate. By a grant of limited letters of administration dated 22 October 2014, they were appointed the personal representatives of the estate. By a petition presented on 30 October 2014, they applied for an order under the Administration of Insolvent Estates of Deceased Persons Order 1986 (the 1986 Order) for the administration of the insolvent estate in bankruptcy. The petition also sought an order that Mr Wood and Mr Hellard, together with Michael Leeds, be appointed as trustees of the insolvent estate. Mr Wood, Mr Hellard and Mr Leeds (the Grant Thornton nominees) are all partners or directors of Grant Thornton UK LLP.

At the first hearing of the petition on 6 November 2014, a number of parties claiming to be creditors of the estate appeared by counsel, including Lockston Group Inc (Lockston), which makes the application before me. Morgan J adjourned the petition to a date no later than 30 January 2015 and made a declaration that as at the date of the order the court was satisfied that the estate was insolvent and that the petitioners should administer the estate pending the determination of the petition. The order contained directions for a preliminary meeting of all persons claiming to be creditors to consider on a non-binding basis the identity of the appropriate person or persons to be appointed as trustees. At the meeting, JSC Baltic International Bank (BIB) proposed that two partners in KPMG (the KPMG nominees) should be appointed as trustees. Their appointment was supported by a number of other creditors or parties claiming to be creditors, including Lockston. Other creditors supported the appointment of the Grant Thornton nominees as trustees and, on the basis of values given to claims for voting purposes, some of which were disputed, a majority on the non-binding vote was in favour of the appointment of the Grant Thornton nominees.

At the adjourned hearing of the petition on 26 January 2015, Morgan J made an order under the 1986 Order that the estate of the deceased be administered in bankruptcy.

In accordance with the order of Morgan J dated 6 November 2014, the first meeting of creditors to consider a resolution for the appointment of trustees took place later on 26 January 2015, notice of the meeting having previously been given to all persons claiming to be creditors of the estate in accordance with the order. The appointment of either the Grant Thornton nominees or the KPMG nominees as trustees was considered at the meeting. The Respondent, as chairman of the meeting, declared as passed a resolution to appoint the Grant Thornton nominees. The total value of the votes in favour of their appointment was given as £128,986,545 and the value in favour of the appointment of the KPMG nominees was given as £116,364,421.

The declared results of the meeting are challenged by Lockston which issued the present application on 6 February 2015, seeking, among other relief a declaration that the KPMG nominees were appointed as trustees at the meeting.

Lockston’s case is based on submissions that the chairman did not correctly apply the relevant statutory provisions when admitting claims to proof for the purposes of voting. He converted foreign currency debts into sterling at the exchange rate(s) prevailing on the date of the Deceased’s death and allowed interest to be proved down to that date but not beyond it. Lockston submits that the correct date for both purposes was the date on which the insolvency administration order (the IAO) was made.

The difference in dates makes a very substantial difference to the amounts of some admitted proofs. It is common ground that if the claims of two creditors, JSC Aeroflot Russian Airlines (Aeroflot) and The Government of the Samara Region of the Russian Federation (Samara), denominated in Russian rubles, had been converted into sterling as at the exchange rate prevailing at the date of the IAO, the KPMG nominees, not the Grant Thornton nominees, would have been appointed as trustees of the estate. The sterling amounts of the claims of Aeroflot and Samara, would be reduced from approximately £17 million and £20.5 million respectively to £9.37 million and £11 million as a result of the devaluation of the ruble against sterling between the date of the Deceased’s death and the date of the IAO. By contrast, the claims of Lockston and BIB would increase from approximately £28.78 million and £66.58 million respectively to £33.18 million and £121.88 million, if interest from the date of death to the date of the IAO were provable.

While Mr Wood is the named respondent to the application, Lockston served it on the Grant Thornton nominees and all creditors who sought to vote at the meeting, as interested parties. The application is supported by BIB, although it does not take issue with the disallowance of interest down to the date of the IAO, while reserving its position for the future. The application is opposed by Mr Wood as the respondent and by the Grant Thornton nominees, whose position is that they were duly appointed as the trustees at the meeting on 26 January 2015. They are supported by Aeroflot and Samara.

There are three ways in which the insolvent estate of a deceased person may be administered. First, if a bankruptcy order has been made, or a creditor’s bankruptcy petition has been presented, before the date of death, the proceedings continue, unless the court otherwise orders, as if the debtor were alive, with the small number of modifications to the Insolvency Act 1986 (the Act) specified in schedule 2 to the 1986 Order: see article 5. Secondly, in the case of death before the presentation of a bankruptcy petition, the estate may be administered in bankruptcy on the making of an IAO. In such a case, a large number of the provisions relating to bankruptcy in the Act apply, but with significant modifications: article 3 of the 1986 Order. Thirdly, the estate may be administered otherwise than in bankruptcy, in which case, subject to very limited exceptions, article 4(1) of the 1986 Order provides:

“… the same provisions as may be in force for the time being under the law of bankruptcy with respect to the assets of individuals adjudged bankrupt shall apply to the administration of the estate with respect to the respective rights of secured and unsecured creditors, to debts and liabilities provable, to the valuation of future and contingent liabilities and to the priorities of debts and other payments.”

In the case of an administration in bankruptcy commenced by the making of an IAO, article 3 provides:

“The provisions of the Act specified in Parts II and III of Schedule 1 to this Order shall apply to the administration in bankruptcy of the insolvent estates of deceased persons dying before presentation of a bankruptcy petition with the modifications specified in those Parts and with any further such modifications as may be necessary to render them applicable to the estate of a deceased person and in particular with the modifications specified in Part I of that Schedule, and the provisions of the Rules, the Insolvency Regulations 1986 and any order made under section 415 of the Act (fees and deposits) shall apply accordingly.”

Parts I and II of schedule 1 are relevant to the present case, while part III, which deals with individual voluntary arrangements, is not.

Part II applies, in whole or in part, a large number of the sections in part X of the Act dealing with the bankruptcy of individuals, subject to specific modifications set out in part II of the schedule. I will later refer to a number of these sections and the modifications to them.

Part I of schedule 1 provides that, except insofar as the context otherwise requires, references apposite to the administration of a deceased’s estate are substituted for seven widely used words or phrases in the sections specified in part II of schedule 1. There are two which are particularly in point on this application: “the date of the insolvency administration order” is substituted for “the commencement of the bankruptcy” and “an insolvency administration order” is substituted for “a bankruptcy order”.

There are no specified modifications to the Insolvency Rules 1986 (the Rules), but, as can be seen above, article 3(1) provides that the provisions of the Rules apply so as to be consistent with the modifications made by article 3(1) and schedule 1.

The provisions of part X of the Act particularly relevant to the present issues are those dealing with or having a bearing on the definition, quantification and admission to proof of debts and liabilities. Those provisions are supplemented by further provisions in part X of the Rules.

Section 278 provides that the bankruptcy of an individual commences on the day on which the bankruptcy order is made. Section 283(1) provides that a bankrupt’s estate comprises all property belonging to or vested in the bankrupt at the commencement of the bankruptcy. Section 288, read with rule 6.58, requires the bankrupt to prepare a statement of affairs containing particulars of his assets and liabilities as at the commencement of the bankruptcy. Section 307 empowers the trustee in bankruptcy to claim for the estate any property which has been acquired by or devolved upon the bankrupt since the commencement of the bankruptcy.

Section 322 provides that the proof of any bankruptcy debt by a creditor and the admission or rejection of any proof shall take place in accordance with the Rules. “Bankruptcy debt” is defined in section 382(1):

“(1)

“Bankruptcy debt”, in relation to a bankrupt, means (subject to the next subsection) any of the following —

(a)

any debt or liability to which he is subject at the commencement of the bankruptcy,

(b)

any debt or liability to which he may become subject after the commencement of the bankruptcy (including after his discharge from bankruptcy) by reason of any obligation incurred before the commencement of the bankruptcy,

(c)

any amount specified in pursuance of section 39(3)(c) of the Powers of Criminal Courts Act 1973 in any criminal bankruptcy order made against him before the commencement of the bankruptcy, and

(d)

any interest provable as mentioned in section 322(2) in Chapter IV of Part IX.”

All debts and liabilities, whether present or future, certain or contingent, fixed or ascertained or capable of being ascertained by fixed rules or as a matter of opinion fall within this definition: section 382(3). The effect of section 382(2) is that a liability in tort is a bankruptcy debt if the cause of action accrued before the commencement of the bankruptcy.

Section 322(2) provides that, where a bankruptcy debt bears interest, the interest is provable as part of the debt except in so far as it is payable in respect of any period after the commencement of the bankruptcy. This reflects the law established well over 200 years ago: see In re Lehman Brothers International (Europe) [2015] EWHC 2269 (Ch) at [46] et seq.

The payment of post-bankruptcy interest is governed by section 328(4) and (5):

“(4)

Any surplus remaining after the payment of the debts that are preferential or rank equally under subsection (3) shall be applied in paying interest on those debts in respect of the periods during which they have been outstanding since the commencement of the bankruptcy; and interest on preferential debts ranks equally with interest on debts other than preferential debts.

(5)

The rate of interest payable under subsection (4) in respect of any debt is whichever is the greater of the following—

(a)

the rate specified in section 17 of the Judgments Act 1838 at the commencement of the bankruptcy, and

(b)

the rate applicable to that debt apart from the bankruptcy.”

The Rules relevant to the proof of debts are contained in Chapter 8 of Part 6 of the Rules. Rule 6.98, dealing with the contents of a creditor’s proof of debt, requires it to state the total amount of the claim “as at the date of the bankruptcy order”.

Rule 6.113 makes further provision as regards interest. In certain circumstances, a proof may include interest on the debt for periods before the bankruptcy order, although not previously reserved or agreed. For example, if the debt is due by virtue of a written instrument and payable at a certain time, interest may be claimed for the period from that time to the date of the bankruptcy order.

As regards debts in foreign currencies, rule 6.111(1) provides:

“For the purpose of proving a debt incurred or payable in a currency other than sterling, the amount of the debt shall be converted into sterling at the official exchange rate prevailing on the date of the bankruptcy order.”

This gave effect to judicial decisions made after the decision of the House of Lords in Miliangos v George Frank (Textiles) Ltd [1976] AC 443 but before any statutory provision was made for the conversion of foreign currency debts for the purposes of proof: see In re Dynamics Corporation of America [1976] 1 WLR 757 and In re Lines Bros Ltd [1983] Ch 1.

These provisions, and the common law rules on which they are based, produce a coherent and consistent structure for the rateable payment of bankruptcy debts. As has frequently been observed, the distribution of an insolvent estate among the general body of creditors on a pari passu basis is, as it has always been, a fundamental feature of our insolvency law. It applies to distributions across all the various forms of insolvency proceedings: the bankruptcy of individuals and the administration and liquidation of companies.

A pari passu distribution among creditors requires a common date and a common currency for the ascertainment and quantification of debts. This has been explained in a number of authorities: see Stein v Blake [1996] 1 AC 243 at 252-253, Wight v Eckhardt Marine GmbH [2004] 1 AC 147 at [28]-[29].

In In re Dynamics Corporation of America, Oliver J said at p.761:

“I take it to be well established that the purpose of both the Bankruptcy Act 1914 and its predecessors, and of the winding up provisions of the Companies Act 1948 and its predecessors, was to ascertain the liabilities of the bankrupt or of the company, as the case may be, as at the date of the bankruptcy or liquidation, and to secure the division of the debtor’s property among the claimants pro rata according to the value of their claims at that date.”

At p.764 Oliver J said:

“The provisions of both the Companies Act 1948 and the Bankruptcy Act 1914 with regard to the submission of proof are I think all directed to this end, that is to say, to ascertaining what, at the relevant date, were the liabilities of the company or the bankrupt as the case may be, in order to determine what at that date is the denominator in the fraction of which the numerator will be the net realised value of the property available for distribution. It is only in this way that a rateable, or pari passu, distribution of the available property can be achieved, and it is, as I see it, axiomatic that the claims of the creditors amongst whom the division is to be effected must all be crystallised at the same date, even though the actual ascertainment may not be possible at that date, for otherwise one is not comparing like with like; and, indeed, this, as it seems to me, is implicit in the provisions of section 302 of the Act of 1948, which provides: “Subject to the provisions of this Act as to preferential payments, the property of a company shall, on its winding up, be applied in satisfaction of its liabilities pari passu, …”

It can be seen that these requirements are achieved in the case of bankruptcy by taking the commencement of the bankruptcy as the common date for all these purposes, just as for a company it is the date on which it goes into liquidation or administration.

Mr Parker QC, appearing for Lockston and BIB, referred to In re Hawkins, Decd [1972] Ch 714, where Megarry J, “bereft of any direct statutory guidance or any clear principle upon which I can rely” (p.722), held that in the administration of a deceased’s estate, where the solvency of the estate was doubtful, foreign currency claims should be converted into sterling as at the date of the court’s order for administration. The decision does not assist in the present case, because the estate was not being administered in bankruptcy under section 130 of the Bankruptcy Act 1914, or in administration under section 34 of the Administration of Estates Act 1925, in which the bankruptcy rules applied as if the date of death were the date of the receiving order (see Pritchard v Westminster Bank Ltd [1969] 1 WLR 547).

Mr Parker also referred to In re Sagor [1930] WN 149. The issue was whether, in the case of an insolvent estate being administered under section 10 of the Judicature Act 1875, interest should be allowed up to the date of the order for administration in the executor’s action or in the creditor’s action. Clauson J held that it was the latter. It was not contended by any party that interest should be allowed only up to the date of death. Whether or not this decision was correct in the light of the statutory provisions then in force, it would not be correct if the administration order had been made under section 34 of the Administration of Estates Act 1925, which was replaced by article 4 of the 1986 Order.

The effect of the relevant specific modifications set out in part II of schedule 1 to the 1986 Order to the relevant provisions of the 1986 Act is as follows.

Section 278 is modified so that the bankruptcy commences with the day on which the IAO is made: sch 1, part II, para 10.

However, the estate comprises all the deceased’s assets at the date of death (section 283, as modified by sch 1, part II, para 12) and the definition of bankruptcy debts in section 382 is modified to refer to the date of death of the deceased debtor in place of the commencement of the bankruptcy: sch 1, part II, paras 12 and 31.

Section 288, which requires a bankrupt to submit a statement of his affairs to the Official Receiver, is modified so as to require the personal representative of the deceased to submit to the Official Receiver a statement of the deceased’s affairs “containing particulars of the assets and liabilities of the estate as at the date of the insolvency administration order” (not the date of the death of the deceased) in Form 7 set out in schedule 3 to the 1986 Order: sch 1, part II, para 12.

Sections 308 to 327 of the Act are made applicable without any modification: sch 1, part II, para 23. There is therefore no specific modification to section 322(2) providing that where a bankruptcy debt bears interest, it “is provable as part of the debt except insofar as it is payable in respect of any period after the commencement of the bankruptcy.” The effect of schedule 1, part I to the 1986 Order is that the date of the IAO is substituted for “the commencement of the bankruptcy”, except insofar as the context otherwise requires.

Sections 328 and 329 apply with the modification that, for the words “commencement of the bankruptcy”, there are substituted the words “date of death of the deceased debtor”: sch 1, part I, para 24. Accordingly, section 328(4) has the effect that any surplus is applied in paying interest on proved debts for the periods during which they have been outstanding since the date of death of the deceased debtor. Likewise, the applicable rate of interest under the Judgments Act 1833 is that applicable at the date of death of the deceased debtor, rather than the date of the IAO.

The relevant time under section 341 of the Act, for the purposes of transactions at an undervalue and preferences, ends with the date of death of the deceased debtor, rather than the date of presentation of the petition for an IAO: sch 1, part II, para 27. Likewise, the trustee may claim for the estate any property which has been acquired by or has devolved upon the deceased since the date of death: sch 1, part II, para 22.

Section 387(6), which provides that the relevant date for determining the existence and amount of a preferential debt is the date of the making of the bankruptcy order, applies with the substitution for that date of a reference to the date of death of the deceased debtor (not the date on which the IAO is made).

Mr Parker QC on behalf of Lockston submitted that the purpose and effect of the general amendments made by part I of schedule 1, and the limited extent of the amendments made by part II, is to produce different dates for the identification of bankruptcy debts and for their quantification respectively. Bankruptcy debts are identified as at the date of death of the deceased debtor, by reason of the amendments made to the definition of bankruptcy debt in section 382, but they are quantified as at the date of the IAO. Mr Parker observed that while section 382 identifies bankruptcy debts, it says nothing about their quantification.

Consistently with this approach, Mr Parker submitted that debts denominated in foreign currencies are converted into sterling for the purposes of proof as at the date of the IAO and interest on interest-bearing debts is provable down to the date of the IAO. All parties are agreed that the dates for conversion and provable interest must be the same as the date as at which bankruptcy debts are quantified. The difference is that the Grant Thornton nominees, Aeroflot and Samara submit that the date of quantification is the same as the date on which bankruptcy debts are identified, i.e. the date of death.

Mr Parker started with the amendment made by schedule 1, part II, para. 10 to section 278, whereby the bankruptcy of the deceased commences on the date on which the IAO is made. If the effect of that amendment is read across to section 322(2), which is not amended by schedule 1, part II and which provides that interest is provable except in so far as it is payable in respect of any period after the commencement of the bankruptcy, it follows that unpaid interest is provable for any period down to the date of the IAO. Amendments made by schedule 1, part II, unlike those made by part I, are not subject to the qualification “except in so far as the context otherwise requires”.

Alternatively, Mr Parker relied on the general amendment made by schedule 1, part I substituting “the date of the insolvency administration order” for “the commencement of the bankruptcy”. The latter is the phrase used in section 322(2) and also in rule 6.111 dealing with the conversion of foreign currency debts.

Mr Parker relied on other provisions of the Act as amended by schedule 1 in support of his submission that the date of the IAO is the date as at which bankruptcy debts are to be quantified.

He submitted that the modification to section 288 so as to provide that the statement of affairs must give “particulars of the assets and liabilities of the estate as at the date of the insolvency administration order” indicates that it is to be the date for quantifying the claims of creditors for the purposes of proof and payment.

Paragraph 15 of schedule 1, part II, applying and modifying section 288, requires the statement of affairs to be in Form 7, set out in schedule 3 to the 1986 Order. Form 7 requires the maker to state on oath that it is a statement of the affairs of the deceased debtor “as at ……..the date of the insolvency administration/bankruptcy order”. Part C of the Form is a list of the general creditors, giving in column 4 the creditor’s claim at the date of death and in column 5 the creditor’s claim at the date of the IAO, both in £ sterling. Mr Parker submitted that the two separate columns support his submission that bankruptcy debts are identified as at the date of death and quantified as the date of the IAO. If they were quantified as the date of death, it would be pointless to state their amount as the date of the IAO.

Section 323, dealing with set-off, is made applicable by schedule 1, part II, without any specific amendment. Accordingly, set-off applies to debts arising before the date of the IAO (in place of the commencement of the bankruptcy).

The 1986 Order makes no amendments as such to the Insolvency Rules, but provides at the end of article 3 that they “shall apply accordingly”. Mr Parker submitted that it follows from the substitution of the date of the IAO for references to the commencement of the bankruptcy, and the substitution of the IAO for references to the bankruptcy order, made by schedule 1, part I, and from the effect of the specific amendments made by part II, that the date of the IAO is the applicable date in those rules dealing with the quantification of bankruptcy debts.

For example, rule 6.98(1), dealing with the contents of a proof of debt, would require a statement of the total amount of the claim as at the date of the IAO in place of its amount as at the date of the bankruptcy order. Conversion of foreign currency debts into sterling in accordance with rule 6.111 would be at the rate prevailing on the date of the IAO in place of the date of the bankruptcy order. In the circumstances specified in rule 6.113, interest, although not previously reserved or agreed, could be proved for periods before the date of the IAO, in place of the date of the bankruptcy order.

Mr Parker submitted that this produces a regime that is consistent with other insolvency proceedings. In bankruptcy and in the administration or liquidation of companies, debts are quantified as at the date of the order that commences the relevant insolvency proceeding. Likewise, in the administration of the insolvent estate of a deceased person, debts are quantified as at the date of the IAO. This accords with the underlying requirement for a pari passu distribution of the available assets among the creditors because the date of the IAO is the notional date of discharge of the proved debts. The exceptional feature introduced by the 1986 Order is that provable debts are to be identified as at the date of death. Mr Parker submitted that the reason for this is to exclude any debts or liabilities that have arisen since the date of death, recognizing that the death of the debtor before the commencement of the insolvency proceeding is the feature that distinguishes an administration under the 1986 Order from other insolvency proceedings.

I am unable to accept these submissions.

There are a number of grounds for rejecting Lockston’s case, but the primary ground is that it is inconsistent with a fundamental feature of insolvency law, that there is to be a single date for the ascertainment of liabilities. If exceptionally in the case of IAOs it was intended to have separate dates for the identification and quantification of liabilities, express provision in clear terms would be made. Not only is there no such express provision, but the applicable provisions of the Act as modified by the 1986 Order, and of the Insolvency Rules applied “accordingly”, are consistent with the usual approach.

There is no provision in the Act which states in terms that debts and liabilities are to be quantified as at a particular date, but section 382(1), defining “bankruptcy debt”, has that effect. A bankruptcy debt is defined to include:

“(a)

any debt or liability to which he is subject at the commencement of the bankruptcy.

(b)

any debt or liability to which he may become subject after the commencement of the bankruptcy (including after his discharge from bankruptcy) by reason of any obligation incurred before the commencement of the bankruptcy.”

Paragraph (a) applies as much to the amount of a debt or liability as it does to its existence. If, at the date of the commencement of the bankruptcy, the debtor owes a presently payable debt of £100, the debt to which he is subject is the debt of £100, not just a presently payable debt of an amount to be fixed as at some other date. If, as at that date, the debtor is subject to an accrued but unquantified debt, it will be quantified as that date. The same is true of a contingent liability, to which paragraph (b) applies. Section 322(3) requires the trustee to estimate the value of the contingent liability. It does not specify the date as at which the valuation is to take place, but it is well-established by the authorities that it is the same date as the date as at which bankruptcy debts are identified, i.e. in an ordinary bankruptcy, the commencement of the bankruptcy.

That the correct approach in the case of administrations in bankruptcy of a deceased’s estate is also to identify and quantify debts and liabilities as at the same date is confirmed by the modifications to the provisions of the Act dealing with preferential debts. Section 386 provides that preferential debts are those listed in schedule 6. Section 387 defines the “relevant date” as it appears in schedule 6, the relevant date being “the date which determines the existence and amount of a preferential debt” (emphasis added). Section 387 is modified by paragraph 35 of part II of schedule 1 so as to substitute the date of death of the deceased debtor for the making of the bankruptcy order.

It is also confirmed, subject to submissions of Mr Parker which I consider below, by the provision for the payment of interest on proved debts. I have earlier set out section 328(4) and (5) which provide for the payment of interest on all proved debts out of any surplus remaining after the payment of all proved debts (statutory interest). Such interest is payable for the periods that they have been outstanding since the commencement of the bankruptcy, which is modified by paragraph 24 of part II of schedule 1 to refer to the date of death of the deceased debtor. It would be contrary to the whole basis of statutory interest for it to be payable for periods before the date as at which the underlying debt was quantified for the purposes of proof.

In the administration of a deceased’s estate in bankruptcy, section 382 applies with the substitution of the date of death of the deceased for the commencement of the bankruptcy. It follows both as a matter of basic principles of insolvency law and as a matter of the construction and application of section 382, as modified by the 1986 Order, that the quantification of debts and liabilities is to be carried out as at the date of death.

As regards the conversion of foreign currency debts into sterling for the purposes of proof, it follows from the analysis in the authorities, including in particular In re Dynamics Corporation of America and In re Lines Bros Ltd, that the conversion should also be as at the same date. Mr Parker relies on the wording of rule 6.111 of the Insolvency Rules, which states that the conversion is to be at the rate prevailing on the date of the bankruptcy order. Reading that with article 3 of, and part I of schedule 1 to, the 1986 Order, he submits that rule 6.111 applies with the substitution of the date of the IAO for the date of the bankruptcy order. Part I of schedule 1 does not, of course, modify the Rules, only the sections of the Act specified in part II of the schedule. The Rules are to be read “accordingly”, i.e. in conformity with those sections as modified by article 3(1). Given the modification of section 382 made by paragraph 31 of part II to substitute the date of death of the deceased debtor for the commencement of the bankruptcy, the conclusion is inescapable that rule 6.111 is to be modified in the same way.

As regards proof for interest, I have earlier referred to the basic position in insolvency that interest is provable as a debt only up to the date of commencement of the insolvency, being the date as at which all provable debts are identified and quantified. Interest after that date, even if the debtor has a contractual or other right to it apart from the insolvency, is payable only out of surplus. Section 322(2) gives effect to this approach in the case of bankruptcy by providing that, where a debt bears interest, the interest is provable as part of the debt except in respect of any period after the commencement of the bankruptcy.

Section 322 is, among other sections, applied by paragraph 23 of part II of schedule 1 to the 1986 Order without any express modification.

Mr Parker’s first submission is that section 322(2) must be read with section 278, as modified by paragraph 10 of part II of schedule 1. Section 278, in its unmodified form, provides that a bankruptcy “commences with the day on which the [bankruptcy] order is made”. It is modified by paragraph 10 to provide that an administration in bankruptcy of a deceased’s insolvent estate “commences with the day on which the insolvency administration order is made.” Mr Parker submitted that the reference to “the commencement of the bankruptcy” in section 322(2) must be read in the light of the modified section 278 to mean that interest is provable except in respect of any period after the date of the IAO. Section 322(2), as well as section 278, is therefore modified by paragraph 10 of part II of schedule 1. Modifications made by part II are not subject to any qualification such as that at the start of part I (“Except in so far as the context otherwise requires”) and it is not therefore possible to read section 322(2) as modified in any other way. Moreover, because it is modified by part II, the terms of article 3 make clear that the modifications made by part I are inapplicable.

I do not accept this submission. The term used in section 322(2) is “the commencement of the bankruptcy”. Part I of schedule 1 provides that in those sections specified in part II which refer to “the commencement of the bankruptcy” there is to be substituted “the date of the insolvency administration order”. Section 322(2) is one of those sections. Paragraph 10 of part II modifies only section 278 which contains a different phrase. Mr Parker is therefore wrong, in my judgment, to submit that section 322(2) is modified by part II. It is modified by part I and any such modification is accordingly subject to the qualification at the start of part I.

Mr Parker submitted alternatively that section 322(2) should be read with the modification made by part I, and that the context does not require otherwise. In my view, this is a clear case in which the context does otherwise require, in order to avoid the inconsistency that would otherwise exist with the rest of regime dealing with provable debts. If the substitution of the date of the IAO is not to apply, then some other modification to section 322(2) is necessary and must be made in accordance with article 3(1): the sections specified in part II of schedule 1 apply “with any further such modifications as may be necessary to render them applicable to the estate of a deceased person”. The necessary modification is to substitute the date of death of the deceased debtor for the commencement of the bankruptcy.

This prevents the inconsistency which would otherwise exist between the application of section 322(2) and section 328(4). It clearly cannot have been intended that a creditor could prove for interest for the period down to the date of the IAO and be paid statutory interest for the period between the date of death and the date of the IAO.

Mr Parker submitted that, on a close analysis of section 328(4) as modified by the 1986 Order, no such inconsistency exists. Statutory interest is payable on proved debts “in respect of the periods during which they have been outstanding since the [date of death of the deceased debtor]”. Under section 322(2), interest on an interest-bearing debt is “provable as part of the debt”. Therefore the interest which may be proved under section 322(2) is not a separate debt for the purpose of proving but, as part of the proved debt comprising principal and interest, is outstanding only from the date of the IAO.

Even if this construction were correct, it would not alter my conclusions on the proper interpretation of the relevant provisions as applied and modified by the 1986 Order. The existence or otherwise of an inconsistency in the treatment of interest under section 322 and 328 is not an essential part of the reasons which have led to my conclusions.

But, as it happens, I do not accept Mr Parker’s construction on this point. Although interest on an interest-bearing debt is provable as “part of the debt”, it does not thereby lose its own character as a debt which has been outstanding since its due date for payment. Take the case where the principal has been paid, but not the interest. (The debtor may have been entitled to appropriate the payment to the principal or it may have suited the creditor to appropriate it to principal, not interest.) The interest would be outstanding during a period since the date of death of the debtor, so entitling the creditor to statutory interest on it from that date under section 328(4) as applied and modified by the 1986 Order.

Overall, I consider that, on their true construction, the relevant provisions fix one date, the date of death of the debtor, as the date as at which the assets comprising the insolvent estate are identified and as at which the debts and liabilities are identified and quantified, including the conversion of foreign currency debts into sterling, and as the date up to which interest may be proved and after which statutory interest runs. It produces a coherent and consistent regime.

There are further factors which support the conclusion that this is the correct interpretation of the Act and the Rules, as modified by the 1986 Order.

First, it is consistent with all the other formal personal and corporate insolvency regimes. It is a clear objective of the legislation, as it was of the Report of the Review Committee on Insolvency Law and Practice chaired by Sir Kenneth Cork (Cmnd. 8558) (the Cork Report), that there should be consistency so far as possible across the different insolvency processes.

Second, it is consistent with the other regimes applicable to the administration of an insolvent estate of a deceased debtor.

I have earlier set out article 4(1) of the 1986 Order. Its effect is that in the administrations to which it applies, there is a single date for the identification and quantification of debts and liabilities, including the conversion of foreign currency debts and the treatment and payment of interest, all as provided in the Insolvency Act and Rules. As there is no bankruptcy order, the relevant date must be the date of death of the debtor. This was not disputed by Mr Parker. He submitted that the tail of article 4 should not wag the dog of article 3. No doubt that is right, but if what appears to be the correct interpretation of article 3 is consistent with the other regimes prescribed by the 1986 Order, as well as consistent with other insolvency processes, that is a supporting consideration.

It is also consistent with the position in a bankruptcy commenced by an order made either before the death of the debtor or after the death of the debtor on a petition presented before his death. In such cases, the bankruptcy proceeds so far as relevant as if the debtor were still alive, so that debts and liabilities will be identified and quantified as at the date of the order: article 5(1) of the 1986 Order.

Third, such comment in the authorities and textbooks as there is supports this conclusion.

In re Palmer, decd (A Debtor) [1994] Ch 316 concerned the meaning of section 283, as applied and modified by the 1986 Order, in relation to a house owned by the deceased and his wife as joint tenants. The issues in the present case did not arise and were not considered, but Balcombe LJ, who gave the leading judgment in the Court of Appeal, observed at p.346 that “the whole tenor of the Act and the Order of 1986…is to draw a line at the moment of the death of the debtor. The bulk of the Act covers what happens down to the moment of the death of the debtor; section 421 and the Order of 1986 cover the position after that death.”

In The Law of Insolvency (4^th ed. 2014), Professor Ian Fletcher said of the 1986 Order (at para. 12-002):

“The overall aim is that the unsatisfied creditors of a deceased insolvent should be enabled to receive such payment as might have been forthcoming to them by way of dividend if the debtor’s adjudication had preceded his death.”

Fourth, the conclusion is consistent with the law as it applied to the predecessor regime under section 130 of the Bankruptcy Act 1914: see the Cork Report at para. 1697. Mr Parker accepted this but pointed out, quite rightly, that the new insolvency legislation in 1986 introduced wholesale reforms to insolvency law and, at least where the provisions differ from the previous law, are to be construed as new provisions. It would, however, be surprising if the law on this particular issue had been changed without any recommendation or reference to it in the Cork Report or in the Government’s White Paper (A Revised Framework for Insolvency Law, 1984, Cmnd. 9175), all the more so when harmonisation across the disparate forms of insolvency proceedings was a major objective of the legislation. There is no indication of the purpose of, or mischief to be addressed by, any such change.

Mr Parker relied on a number of factors, in addition to those discussed above, in support of Lockston’s case.

First, he relied on the modification of section 278 to the effect that the administration commences with the day on which the IAO is made. Since in all other insolvency proceedings, liabilities are quantified as at the date of commencement of the proceedings, it was consistent and logical if the same applied to administration proceedings under the 1986 Order. I have already set out my reasons for considering that the correct date for quantifying liabilities is the same date as their identification, i.e. the date of death of the deceased debtor.

Mr Parker built on the analysis in In re Humber Ironworks and Shipbuilding Co (1869) LR 4 Ch App 643, cited by Oliver J in In re Dynamics Corporation of America, of the commencement of an insolvency proceeding as being the notional date of discharge of all debts. It followed, he submitted, that the date of an IAO was likewise the notional date of discharge, so that liabilities fell to be quantified as at that date. I do not accept that the date of the IAO can be characterised in this way, in circumstances where the assets and provable debts are identified by reference to the date of death, as are the existence and amount of preferential debts. If the date of the IAO were the notional date of discharge, statutory interest would be payable only from that date, but by reason of section 328(4) it is payable for periods from the date of death.

Mr Parker further submitted that if section 278 as modified, and the substitution in other sections of the date of the IAO for the commencement of the bankruptcy, do not have the effect of fixing the date of the IAO as the date on which debts are quantified, they serve no purpose. While it is true that the commencement of an administration under the 1986 Order is less significant than the commencement of an ordinary bankruptcy, as a result of the modifications made by part II of schedule 1 to sections 283-285, 328-329, 341, 382 and 387, it is nonetheless the relevant date for a number of other applicable sections, including sections 343, 346 and 347.

Second, some reliance was placed on section 267 which, as modified, provides that a petition by a creditor must be based on a debt outstanding at the date of presentation of the petition, not the date of death. It was suggested that this indicated that debts were to be quantified as at the date of the IAO, if made. It is hardly surprising that a creditor’s petition must be based on an outstanding debt, but I cannot see that it lends support to Lockston’s case in the face of the considerations discussed above.

Third, Mr Parker referred to section 323 which provides for set-off of debts and liabilities between the debtor and a creditor. It applies “where before the commencement of the bankruptcy” there have been mutual dealings between the bankrupt and “any creditor of the bankrupt proving or claiming to prove for a bankruptcy debt”: section 323(1). Only the balance left after set-off “is provable as a bankruptcy debt” or is payable to the trustee as part of the bankrupt’s estate: section 323(4). Section 323 is applied to the administration in bankruptcy of a deceased’s estate by para 23 of part II of schedule 1 without any modification. Mr Parker accordingly submitted that “the commencement of the bankruptcy” is to be read as the date of the IAO.

In my judgment, this is not correct. In addition to the overarching considerations of insolvency law already discussed, section 323(1) provides for set-off of debts due from a creditor against any amount claimed as “a bankruptcy debt” and section 323(4) provides that a net amount due to the creditor is provable as “a bankruptcy debt”. As earlier discussed, in these administrations in bankruptcy, “bankruptcy debt” means a debt or liability to which the debtor is subject at the date of death or to which the debtor may become subject by reason of an obligation incurred before the date of death: section 382(1), as modified by part II of schedule 1. This strongly suggests the context of section 323 provides an exception to the general provisions of part I of schedule 1, and that for the purposes of article 3 it is necessary to modify section 323 to render it applicable to the estate of a deceased person.

Fourth, Mr Parker placed considerable reliance on the requirement for a statement of affairs, giving “particulars of the assets and liabilities of the estate as at the date of the insolvency administration order” and also on requirements set out in Form 7 which, as he observed, is part of the 1986 Order. Form 7 provides that it is a statement “as at …..the date of the insolvency administration/bankruptcy order”. Section C is a list of the creditors which must state in separate columns the “Creditor’s claim at date of death” and “Creditor’s claim at date of insolvency administration bankruptcy order”, in £ sterling in both cases.

Mr Parker submitted that, taken as a whole, these provisions supported Lockston’s case that debts were to be quantified as at the date of the IAO.

I do not accept this submission, for a number of reasons. First, as it is clear that the assets of the estate and the provable debts are to be identified as at the date of death, the requirement that the statement of affairs is to contain particulars of the assets and liabilities as at the date of the IAO can provide no sound basis for saying that the liabilities are to be quantified as at the date of the IAO. Secondly, the contents of Section C of Form 7 are consistent with the debts being quantified as at the date of death. The amounts of claims must be stated in £ sterling at that date as well as at the date of the IAO. If they were to be quantified as at the latter date, it is not clear why their amounts would need to be stated as at the date of death. The more obvious reason for requiring the amounts to be stated at both dates is that some debts may have been paid in the course of the administration of the estate before the IAO was made, which could be a lengthy period in which the estate was, or was thought to be, solvent. Some support for this can be found in Section H which requires a statement of receipts and payments since the date of death. Thirdly, and in any event, any support which Lockston might derive from the modified section 288 and Form 7 is inconsequential when set against the considerations in favour of the view that the provable debts are to be quantified as the date of death.

For the reasons given in this judgment, many of which reflect the submissions of Mr Atherton QC and Mr Davenport QC for their respective clients, I have come to the clear conclusion that provable debts in the administration in bankruptcy of a deceased’s estate under the 1986 Order are to be quantified, as well as identified, as at the date of death of the deceased. Debts denominated in foreign currencies are to be converted into sterling for the purposes of proof as at that date and interest on interest-bearing debts is provable up to but not after the date of death. Interest after the date of death is payable on all proved debts out of any surplus after the payment of such debts.

It follows that the resolution to appoint the Grant Thornton nominees as trustees of the estate was validly passed at the meeting of creditors on 26 January 2015, and no further issue falls to be decided on Lockston’s application.