Clarke v Cognita Schools Ltd (t/a Hydesville Tower School)

Bankruptcy orders were last year made against the appellants, Mrs Cherry Clarke and her husband Mr Lambert Clarke, in the County Court at Birmingham. The Clarkes now appeal against those orders. The points raised by the case have wider significance.

The relevant facts can be stated very shortly.

On 9 December 2013, Cognita Schools Limited (trading as Hydesville Tower School) (“Cognita”) obtained judgment against Mr and Mrs Clarke for £7,862.75 plus interest and costs.

On 26 April 2014, Cognita served statutory demands on the Clarkes. In each demand, Cognita claimed to be owed £8,477.87 on the strength of the judgment it had obtained in the preceding December.

On 27 April 2014, the Clarkes issued applications to set aside the statutory demands. The applications asked that the demands be set aside on the ground that there was “discrepancy in the figures”.

On 9 May 2014, Deputy District Judge Downton, sitting in the County Court at Birmingham, ordered the Clarkes’ applications to be dismissed, “No sufficient cause having been shown”. Each order was made pursuant to rule 6.5(1) of the Insolvency Rules 1986, which empowers the Court, if satisfied that no sufficient cause is shown for an application to set aside a statutory demand, to dismiss it without giving notice to the creditor. The Clarkes’ position is that they did not receive these orders.

On 25 June 2014, Cognita presented bankruptcy petitions against the Clarkes in the County Court at Birmingham. The petitions asserted that the Clarkes owed a total of £23,332.16 by way of “outstanding monies owed to the creditor by the debtor for the non-payment of school fees incurred by judgment dated 9^th December 2013 plus interest and debt recovery costs”.

The petitions came before District Judge Bull on 24 September 2014. The bankruptcy orders against which the Clarkes appeal were made. The Judge took the view that the debt alleged in the petitions was overstated (since the statutory demands related to a lesser sum), but that that was immaterial: the petitions, he considered, could proceed so long as the debt demanded and proved exceeded £750, which it did.

Section 264 of the Insolvency Act 1986 states that a bankruptcy petition may be presented against an individual by, among others, one of the individual’s creditors. By section 267(2), such a petition can be presented in respect of a debt or debts only if certain conditions are satisfied. One of the conditions is that “the debt, or each of the debts, is a debt which the debtor appears either to be unable to pay or to have no reasonable prospect of being able to pay” (see section 267(2)(c)). By virtue of section 268(1), a debtor “appears to be unable to pay a debt” for the purposes of section 267(2)(c) only if either execution or other process in respect of the debt has been returned unsatisfied or a statutory demand has been served and “at least 3 weeks have elapsed since the demand was served and the demand has neither been complied with nor set aside in accordance with the rules”. Another of the conditions laid down by section 267(2) is that:

“(d)

there is no outstanding application to set aside a statutory demand served (under section 268 below) in respect of the debt or any of the debts”.

Chapter 1 of Part 6 of the Insolvency Rules 1986 deals with statutory demands. Rule 6.4 allows a debtor to apply for an order setting aside a statutory demand. As, however, I have already indicated, rule 6.5(1) provides:

“On receipt of an application under Rule 6.4, the court may, if satisfied that no sufficient cause is shown for it, dismiss it without giving notice to the creditor. As from (inclusive) the date on which the application is dismissed, the time limited for compliance with the statutory demand runs again.”

Section 375(1) of the Insolvency Act is also of relevance. This provides:

“Every court having jurisdiction for the purposes of the Parts in this Group may review, rescind or vary any order made by it in the exercise of that jurisdiction.”

The argument advanced at the hearing by Mr Jamie McCracken, who appeared for the Clarkes, was based on the proposition that the orders of 9 May 2014 ought to have contained a statement notifying the Clarkes that they could apply to have the orders set aside, varied or stayed. Since the orders did not in fact include such a statement, the Clarkes’ applications to set aside the statutory demands that had been served on them had not (so Mr McCracken submitted) been effectively determined: there was (and is) thus, in the case of each of the Clarkes, an “outstanding application to set aside a statutory demand” within the meaning of section 267(2)(d) of the Insolvency Act. It follows, according to Mr McCracken, that one of the conditions set out in section 267(2) was not met and, hence, that no petition could properly be presented and no bankruptcy order properly made.

Two key issues arise:

I shall take these points in turn.

CPR 3.3(4) states that the Court “may make an order of its own initiative, without hearing the parties or giving them an opportunity to make representations”. Where an order is made on this basis, CPR 3.3(5) is applicable. This provides:

“Where the court has made an order under paragraph (4)–

(a)

a party affected by the order may apply to have it set aside, varied or stayed; and

(b)

the order must contain a statement of the right to make such an application.”

Rule 6.5(1) of the Insolvency Rules, pursuant to which the orders of 9 May 2014 were made, contains nothing comparable to CPR 3.3(5). Neither rule 6.5(1) itself, nor any other provision of the Rules, expressly says that an order made under rule 6.5(1) must state that a party affected by the order has a right to apply to have it set aside, varied or stayed.

However, rule 7.51A of the Insolvency Rules provides for the Civil Procedure Rules to apply to insolvency proceedings to some extent. Rule 7.51A(1) contains a table dealing with the application of Parts 6, 18, 31, 37, 44, 47 and 52 of the Civil Procedure Rules, and, more importantly for present purposes, rule 7.51A(2) states:

“Subject to paragraph (3), the provisions of the CPR (including any related practice direction) not referred to in the table apply to proceedings under the Act [i.e. the Insolvency Act] and Rules [i.e. the Insolvency Rules] with any necessary modifications, except so far as inconsistent with these Rules.”

The Clarkes’ case is that rule 7.51A(2) operates to apply CPR 3.3(5) to orders made under rule 6.5(1) of the Insolvency Rules. There is, Mr McCracken submitted, no inconsistency between CPR 3.3(5) and rule 6.5(1) of the Rules. An order pursuant to rule 6.5(1) must therefore comply with CPR 3.3(5) and so “contain a statement of the right to make” an application to have the order set aside, varied or stayed.

On balance, however, I take the view that CPR 3.3(5) does not apply to orders made under rule 6.5(1) of the Insolvency Rules. My reasons include these:

In short, it seems to me that an order under rule 6.5(1) of the Insolvency Rules does not have to state that the debtor can apply to have it set aside, varied or stayed and, therefore, that the orders of 9 May 2014 were not defective.

The conclusions I have arrived at above are sufficient to dispose of the present appeals. In case, however, I am wrong thus far, I shall go on to consider what the position would be if, contrary to my view, the orders of 9 May 2014 ought to have included a statement such as CPR 3.3(5) provides for.

In the course of the hearing, Mr McCracken submitted that an order under rule 6.5(1) of the Insolvency Rules which failed to state that the debtor could apply to have it set aside, varied or stayed would not be effective as it stood. In written submissions, he maintained that a debtor who has issued an application to set aside a statutory demand has an “outstanding application to set aside a statutory demand” (for the purposes of section 267(2)(d) of the Insolvency Act) unless and until he has been served with an order notifying him of his right to apply to set aside and the time allowed for such an application has expired.

Mr McCracken’s submissions, if correct, would have very serious implications. They would probably mean that numerous bankruptcy orders are open to challenge. Nor would the consequences be limited to insolvency proceedings. Orders made in ordinary civil proceedings which overlooked, say, the requirements of CPR 3.3(5) or CPR 23.9(3) (which provides for certain orders to contain a statement of the right to make an application to set aside or vary under CPR 23.10) could be rendered nugatory.

In my view, however, Mr McCracken’s submissions are not well-founded. It seems to me that an order which omits a statement required by the Civil Procedure Rules must, at least in general, be effective unless and until set aside. That proposition derives support from, for example, the decision of the Privy Council in Isaacs v Robertson [1985] AC 97, where Lord Diplock, giving the judgment of the Board, thought it “well established” that “an order made by a court of unlimited jurisdiction … must be obeyed unless and until it has been set aside by the court” (see 101). Likewise, in Re Mid East Trading Ltd [1998] BCC 726 Chadwick LJ, giving the judgment of the Court of Appeal, observed (at 744) that, “Save in proceedings to set the order aside, it is not open to this court to treat as a nullity an order which has been made by the High Court in its winding-up jurisdiction and which is not the subject of any appeal”.

In the context of section 267(2)(d) of the Insolvency Act, Evans-Lombe J held in Ahmad v Commissioners of Inland Revenue [2004] EWHC 2292 (Ch), [2005] BPIR 541 that the existence of a pending appeal against the dismissal of an application to set aside a statutory demand did not preclude the presentation of a winding up petition: it seemed to Evans-Lombe J (at paragraph 8) that, at the date the petition was presented, “there was not an outstanding application to set aside a relevant statutory demand because that application had failed, and been dismissed”. That decision is in keeping with In re a Debtor (No 44 of 1978) [1980] 1 WLR 665, which was concerned with a provision in the Bankruptcy Rules 1952 which barred the making of a receiving order until an application to set aside a bankruptcy notice had been “heard”. Browne-Wilkinson J concluded that, “where there has been an actual hearing by the registrar, the application has been ‘heard’ for the purposes of the rule once the registrar has given his decision, notwithstanding that there is an appeal pending against that decision”.

The position would, as it seems to me, be similar if an order under rule 6.5(1) of the Insolvency Rules ought to include, but did not, a statement such as CPR 3.3(5) provides for. The order would be valid unless and until set aside, and there would in the meantime be “no outstanding application to set aside a statutory demand” within the meaning of section 267(2)(d) of the Insolvency Act.

In the circumstances, I shall dismiss the appeals.