Azuonye v Kent

MRS JUSTICE FALK: This is an appeal against an order made on 16 January 2018 by District Judge Coonan in the Croydon County Court that a second bankruptcy order in respect of the appellant, Dr Azuonye, did not have the effect of discharging an income payments order operating under a previous bankruptcy order. Permission to appeal was refused by the judge but was given by Rose J in response to an out-of-time application on 29 June 2018. The trustee in both bankruptcies, Mrs Imogen Kent, is the same and is the respondent to this appeal. The respondent was represented at the hearing by Mr Colclough, who also appeared before me. The appellant appears in person. The appeal concerns a narrow point of law, namely whether an obligation to make future payments under an income payments order (IPO) made pursuant to section 310 of the Insolvency Act 1986 survives a later bankruptcy order where the earlier bankruptcy has been discharged.

The appellant was first made bankrupt on 28 April 2015. The trustee issued an application for an income payments order on 26 April 2016, two days before the appellant's automatic discharge from bankruptcy on 28 April 2016. An income payments order was made on 22 November 2016 in the amount of £1,000 per month, and the appellant was ordered to disclose information about his income and expenditure. I was informed by counsel for the trustee that the appellant has been found by the County Court to have failed to comply with the disclosure order. The appellant also failed to attend a subsequent hearing on 13 June 2017. At that hearing the income payments order was increased to £2,500 a month. The appellant subsequently sought to set aside or vary the order, and the trustee cross-applied to increase the amount. At a hearing in September 2017 a second disclosure order was made, with which I understand the appellant also failed to comply, despite it being reissued with a penal notice.

The appellant was made bankrupt for a second time on his own application on 4 December 2017. The trustee in the first bankruptcy was subsequently appointed as the trustee of the second bankruptcy. The appellant wrote to the County Court claiming that the second bankruptcy order automatically discharged the earlier IPO. That argument was rejected at a hearing on 16 January 2018. The appellant subsequently discontinued his application to set aside or vary the IPO, but the trustee's application to increase the amount payable remained live and was dealt with by a further order dated 20 March 2018, which increased the IPO to £3,000 per month. To be clear, this is an appeal against the 16 January decision that the IPO did survive the second bankruptcy.

Turning to the judge's decision, which I appreciate was given in the middle of a busy list and is fairly brief, Judge Coonan noted that, unlike the position of undischarged bankrupts, there was no specific provision in the Insolvency Act 1986 that covered the position. However, the judge noted that the IPO is a statutory mechanism. She referred to section 285(3) of the Insolvency Act, which provides that after the making of a bankruptcy order, creditors in respect of provable debts have no remedy and may not take proceedings against the bankrupt. The judge did not accept that the IPO amounted to a provable debt which was affected by the later bankruptcy. This was because of the ability of the court to vary payments, and the judge referred to a passage to that effect in Muir Hunter on Personal Insolvency. Judge Coonan also noted that the creditors in the first bankruptcy would not be creditors in the second, and she was not persuaded that the trustee was a creditor for the purposes of section 285(3). The embargo in that section did not therefore apply. Judge Coonan added that it would be a surprising result if a bankrupt could prevent continued performance of an IPO in respect of debts provable and expenses incurred in a first bankruptcy simply by making himself bankrupt a second time, and commented that section 281, which deals with discharge, states that it has no effect on the functions of the trustee.

The appellant is seeking an order setting aside the order made on 16 January. He also seeks the refund of all money collected under the IPO since the commencement of the second bankruptcy on 4 December 2017. The appellant sought written advice from Irwin Mitchell, which he produced in support of his case, and developed his own submissions based on that advice. In summary, my understanding of the appellant's submissions are as follows.

An IPO is bankruptcy-specific and relates to the bankruptcy in respect of which it is made. Section 310(5) of the Insolvency Act makes it clear that income paid under it forms part of the bankrupt's estate.

Section 335 of the Insolvency Act read with section 334 makes specific provision for the effect of an IPO made in an earlier bankruptcy where an undischarged bankrupt is made subject to a further bankruptcy order. The effect of those provisions is that the IPO is effectively transferred to the second bankruptcy, and the trustee in the first bankruptcy may also prove in the second bankruptcy in respect of unsatisfied debts from the first.

However, the appellant submits that these provisions (section 334 and 335) do not apply to discharged bankrupts and there is no other specific provision that would allow an existing IPO to be used to claim any income for the benefit of creditors of the first bankruptcy after the commencement of the later bankruptcy. The consequence, so the appellant says, of the exclusion of discharged bankrupts from section 335 is that an IPO does not continue in force after a second bankruptcy where the earlier bankruptcy has been discharged. In other words, the effect is the opposite of section 335. The appellant submits that section 335(2) explicitly deals with an undischarged bankrupt and an IPO, and the absence of explicit provision for discharged bankrupts means that the opposite applies and no amounts are payable after the commencement of the second bankruptcy. Furthermore, the trustee in the first bankruptcy cannot claim in the later bankruptcy on behalf of creditors in the first.

The appellant also relied on section 285(3) of the Insolvency Act as preventing creditors in the first bankruptcy claiming against the estate in the second and, more broadly, claims that the IPO was operating in respect of income which represents an asset available for the second bankruptcy and that that was impermissible. Only a new IPO made in respect of the second bankruptcy could have that effect and attach to income arising after the commencement of the second bankruptcy. On the appellant's submission, the IPO in respect of the earlier bankruptcy could only operate in respect of funds attributable to the earlier bankruptcy estate and not in respect of income earned since the date of the later order.

The respondent opposed the appeal essentially for the reasons given by the judge, but submitted that the correct way to formulate the question is whether future amounts payable under an IPO after the commencement of the second bankruptcy amounted to a provable debt because, if they did, then section 285(3) would have the effect claimed by the appellant. If not, then no other provision has that effect.

The respondent submitted that an IPO is a creature of statute, both under the 1986 Act and in different forms under earlier legislation. I was referred to section 90 of the Bankruptcy Act 1869 and section 51 of the Bankruptcy Act 1914. Under the Insolvency Act 1986, section 335(2) provides a clear answer to the question because it assumes that future obligations under an IPO continue to be amounts payable following a later bankruptcy. However, if those future obligations were provable in the second bankruptcy, then they would not be payable as a result of section 285(3). So the trustee submits that Parliament must have intended that future obligations should not be provable, because that is the only way to interpret the legislation in a manner that is consistent with the assumption made in section 335(2).

Counsel for the trustee also submitted that this was supported by some additional reasons based on the specific provisions of section 310, which governs the grant of income payment orders, including the specific three-year time limit, and the fact that there is nothing in section 310 suggesting that it is curtailed on a later bankruptcy but only by the expiration of time or by a later court order. In addition section 310(2) effectively makes it clear that it attaches to surplus income only and there was no good reason why an individual should be relieved from such an order by a later bankruptcy, the court's power to vary the order under section 310(6A) providing an appropriate safeguard. In addition there was an analogy with attachment of earnings orders, where it was clear from CPR 89.14(9) that an attachment of earnings order is intended to survive bankruptcy, subject to the court's right to discharge it.

Counsel also submitted that if his arguments based on statutory construction were not accepted, then at common law the obligations were not provable in any event, relying on Booth v Mond [2010] EWHC 1576 (Ch) and cases referred to in it, on the basis that there was uncertainty and an absence of finality and conclusiveness which meant that future obligations under an IPO were not in the nature of provable debts.

I think it is most helpful to consider the position broadly chronologically, starting with the first bankruptcy and the income payments order. Section 310 of the Insolvency Act allows a court to make an order, known as an income payments order, claiming for the bankrupt's estate "so much of the income of the bankrupt during the period for which the order is in force as may be specified in the order" (section 310(1)). The application for an income payments order must be instituted before the discharge of the bankrupt (that is the effect of subsection (1A)) but it is clear from both subsection (1A) and subsection (6) that the period covered by the income payments order may expire after the discharge of the bankruptcy, subject to a three-year maximum period. Subsection (2) requires the court not to reduce the income of the bankrupt below what appears necessary for his reasonable domestic needs, and subsection (6A) contains power for the court to vary the order at the behest either of the trustee or the bankrupt, and whether before or after the discharge of the bankruptcy. Subsection (5) importantly provides that sums received by the trustee under an income payments order form part of the bankrupt's estate. So, in summary, it is very clear from section 310 that an income payments order may continue in place after the bankruptcy is discharged and in addition that the court has continued power to review it.

I think the next step in the analysis is to look at the effect of the discharge (albeit in this case it occurred before the IPO was made, so this is not quite in chronological order). The discharge is governed by section 281 of the Insolvency Act. Under section 281(1) the basic rule is that discharge releases the bankrupt from all bankruptcy debts, as defined, but has no effect on the functions of the trustee or the operation of the provisions of Part 9 of the Insolvency Act for the purposes of carrying out those functions. It is worth noting that Part 9 includes section 310. Bankruptcy debts are defined in section 382. The definition is wide. It covers debts or liabilities to which the bankrupt was subject at the commencement of the bankruptcy, or to which he may become subject thereafter by reason of any obligation incurred before the bankruptcy commenced. However, it is not in my view apt to cover an IPO made during the bankruptcy, and I note that the same view was taken in Booth v Mond at paragraph [16].

Subsection (6) of section 281 provides that

The next stage to consider is the effect of the later bankruptcy (or second bankruptcy). The relevant statutory provision is section 285(3). This provides that no creditor in respect of a debt provable in the later bankruptcy shall have any remedy or commence any proceedings against the bankrupt. Apart from sections 334 and 335, no other relevant provision was drawn to my attention. On the face of it, therefore, the trustee in the earlier bankruptcy may continue to be able to enforce an IPO made in respect of that bankruptcy provided it is not a debt provable in the later bankruptcy. Rule 14.2 of the Insolvency Rules 2016 provides, in summary, that all claims by creditors are provable, including future and contingent claims, subject to specific exclusions which are not relevant but also subject to any enactment or rule of law under which a particular kind of debt is not provable (Rule 14.2(5)).

Turning to section 335, that applies where a bankruptcy order is made in respect of an undischarged bankrupt. That is clear from section 334(1). It has no application where a bankruptcy order is made in respect of a discharged bankrupt. Two provisions are of particular relevance. First, section 335(2) provides that sums payable under an IPO after the commencement of a later bankruptcy form part of the estate for the purposes of the later bankruptcy. Secondly, section 335(5) provides that creditors in the earlier bankruptcy are not creditors in the later one, but the trustee in respect of the earlier bankruptcy can prove for the unsatisfied balance of debts, expenses and interest in respect of the first bankruptcy. However, these liabilities rank after debts payable in the later bankruptcy; see subsection (6). It is also worth noting section 335(4), which provides that property comprised in the estate for the purposes of the earlier bankruptcy shall not be comprised in the estate for the purposes of the later bankruptcy.

I agree with the respondent that the starting point of (or underlying assumption behind) section 335(2) is that amounts payable under an IPO do continue to be “payable” to the existing trustee after the commencement of the second bankruptcy. The operative effect of subsection (2), which does apply only to undischarged bankruptcies, is to make the amounts payable under the IPO form part of the estate for the purposes of the later bankruptcy. To my mind this is a strong indication that that operative effect does not apply in the case of a discharged bankrupt. In other words, in the absence of an equivalent provision to section 335(2) for discharged bankruptcies, such amounts do not form part of the estate for the purposes of a later bankruptcy.

Turning to section 335(5), because the bankruptcy is undischarged, debts to creditors in the earlier bankruptcy have not been released in that scenario under section 281. So provision was needed and is made by the legislation in subsections (5) and (6), which make clear that rather than creditors in the first bankruptcy being able to claim in the second, only the existing trustee from the first bankruptcy can do so and indeed that creditors in the later bankruptcy take priority. Section 335(2) is consistent with this, because if it did not provide for amounts payable under the IPO to form part of the estate for the purpose of the later bankruptcy, then the intended effect of subsections (5) and (6) could in my view be frustrated by the IPO.

So that is the position for an undischarged bankruptcy, but what is the position for a discharged bankruptcy? As already indicated, section 335(2) clearly indicates or at least assumes that amounts under an IPO continue to be payable after a later bankruptcy order. The only statutory provision that might prevent this can be section 285(3). The fact that section 335 does not apply to a discharged bankruptcy cannot itself override the continued existence and operation of the IPO. Section 285(3) draws no distinction between situations where the bankrupt has not been bankrupt before, or has been and the bankruptcy has either been discharged or has not been discharged. If a trustee in respect of an IPO in an earlier discharged bankruptcy is a creditor in respect of a debt provable in the bankruptcy, then the same must apply to an undischarged bankrupt, but importantly section 335(2) assumes otherwise.

I will come back to section 285(3), but it is convenient at this stage to address the implications of counsel for the respondent's argument, namely that that effect is that where the earlier bankruptcy has been discharged, an IPO from that earlier bankruptcy effectively trumps the later bankruptcy, and the creditors from the first bankruptcy continue to benefit from the IPO subject to the court's power to vary it. In contrast, where a bankruptcy is undischarged then the creditors in the second bankruptcy take priority. In my view this is a result of the clear policy behind section 335 and is the effect of applying that section. The fact that specific provision is made for undischarged bankruptcies does not mean that Parliament must have intended an IPO to just fall away in other situations, and section 335(2) assumes that that is not the case. As counsel for the respondent pointed out, the solution lies in the power to vary the IPO, and the power of the trustee in the second bankruptcy not only to request such a variation but also to seek another IPO in respect of that second bankruptcy, if that is appropriate.

I do not agree with the appellant's argument that an IPO in respect of an earlier bankruptcy can only operate in respect of funds available to the earlier bankruptcy estate, by which I understand him to mean funds arising before the commencement of the second bankruptcy. This seems to me to be contrary to the clear effect of section 310, namely that an IPO is intended to be capable of surviving discharge and specifically contrary to section 310(5), which provides that sums received under an income payments order form part of the bankrupt's estate, namely the first estate. There is no qualification to that rule. I see no statutory basis for saying that income arising after the date of the second bankruptcy is only available to be claimed by an IPO in respect of that bankruptcy. As already discussed, section 335(2) assumes otherwise.

The appellant referred to a passage in Muir Hunter on Personal Insolvency at section 2-2178 in support of his case, but that simply says that the earlier set of creditors from a first bankruptcy may not claim in the later bankruptcy if the first bankruptcy has been discharged. It says nothing about an IPO. Similarly, the Insolvency Service guidance relied on by the appellant and entitled "Second and subsequent bankruptcies" (the appellant referred me to paragraph 6 of that) refers to a trustee in an earlier bankruptcy not being able to claim in a later bankruptcy where the earlier bankruptcy has been discharged. However, there is no reference to the position of an income payments order.

Returning to section 285(3), I agree with the respondent that it is inapt to cover future payments under an IPO. The actual creditors in respect of the first bankruptcy would of course have been released when that bankruptcy was discharged. If the reference to provable debts did include future payments under an IPO in respect of an earlier bankruptcy, then the same applies to undischarged bankruptcies, but that is contrary, as I said, to the assumption made in section 335(2). I agree that the IPO is a statutory mechanism that Parliament did not contemplate would be affected by section 285(3), and I also agree that it would be a strange result if a discharged bankrupt but not an undischarged bankrupt could avoid an IPO by making himself bankrupt again. The appropriate protection is there with the court's power to vary the IPO.

Turning to the respondent's arguments under the common law, I also agree that future payments under an IPO are inherently uncertain due to the court's power to vary them, and they are not provable on that basis. This is the approach taken in Muir Hunter at section 7-1245.10A, and I agree with it. Muir Hunter refers to Booth v Mond [2010] EWHC 1576 (Ch), which related to arrears under an income payments agreement and which also considered two earlier cases, In Re Bradley-Hole (A Bankrupt) [1995] 1 WLR 1097 and Cartwright v Cartwright [2002] EWCA Civ 931. In In Re Bradley-Hole one of the issues that arose was the effect of a voluntary arrangement on an obligation to pay maintenance to a bankrupt's former wife. Rimer J referred at page 1117 to a number of earlier cases which determined that periodical payments ordered in family proceedings could not be proved in bankruptcy and stated that the reasoning underlying those decisions was that neither the arrears nor the future periodical payments were capable of valuation or estimation, since it was within the discretion of the court as to how far arrears might be enforced and the court could also vary its order as to any future payments. Rimer J went on to note that the statutory regime introduced in 1986 took a different approach with a wide definition of bankruptcy debts in section 382, which he thought could include a periodical payments order subject to a specific carve-out in relation to orders made in family proceedings, which is not relevant here.

The question in Cartwright v Cartwright was whether a bankruptcy petition could be based on sums due under the terms of a Hong Kong order which provided for periodic payments. The Court of Appeal considered what is now Rule 14.2 of the Insolvency Rules and concluded that the order did not fall within the exclusion for family proceedings in what is now Rule 14.2(c) but, on the assumption that the order was variable by the Hong Kong court, held that what is now Rule 14.2(5) applied on the basis that the debt was unenforceable by virtue of the rule of law and was not provable in bankruptcy, referring to an earlier case of Harrop v Harrop [1920] 3 KB 386 (see paragraph [28] of Cartwright).

Both Cartwright and In Re Bradley-Hole were considered in Booth v Mond. That case related to an individual voluntary arrangement (IVA) entered into in respect of a Mr Hargreaves in 2009. Mr Hargreaves had been made bankrupt in 2005, and that bankruptcy, like the first bankruptcy in this case, had been discharged automatically in 2006. During that bankruptcy, an income payments agreement had been entered into under section 310A of the Insolvency Act, which is for these purposes essentially equivalent to an IPO under section 310. By the time the IVA was entered into, Mr Hargreaves was in arrears under the income payments agreement, but he did not disclose this and the trustee in the earlier bankruptcy was not listed as a creditor in the IVA. The trustee's subsequent claim for arrears was rejected by the supervisor of the IVA, and the supervisor sought directions from the court. The issues considered by HHJ Hodge QC were whether the trustee was a creditor for the purposes of the IVA and whether the arrears under the income payments agreement amounted to a provable bankruptcy debt. It was common ground that the arrears were not a bankruptcy debt for the purposes of the earlier bankruptcy because they post-dated its commencement.

Counsel for the supervisor submitted that the arrears were not a provable debt within what is now Rule 14.2(5), but this was rejected after considering In Re Bradley-Hole and Cartwright v Cartwright, and the arrears were held to be a provable debt. Cartwright was distinguished in Booth v Mond on the basis that it would be an unwarranted extension of the cases concerning non-provability of foreign maintenance and similar orders to extend them to arrears which have already accrued under either an income payments agreement or an income payments order: see paragraph [22] of the judgment. However, that decision was specific to arrears. In my view the judge accepted that the key point in Cartwright was that the debts were not provable in that case because they were subject to variation or review and were therefore not final and conclusive: see paragraphs [19] and [22]. That does not apply to arrears under an income payments agreement or an IPO, but it does apply to future payments. I would therefore hold on that basis as well that the future payments under an IPO are not provable.

I should refer to two other cases relied on by the appellant. They are Pike v Cork Gully [1997] BPIR 723 and Official Receiver v Baker [2013] EWHC 4594 (Ch). Those cases were relied on by the appellant to support his submission that an IPO attaches to income arising after a bankruptcy order and that the IPO in relation to the first bankruptcy order could not apply following the second order being made. Whilst I agree that the Baker case does make it clear that IPOs can be made in respect of any income arising after a bankruptcy order is made, I do not see that either the Baker case or Cork Gully assist the appellant's argument that it is only possible to have an IPO outstanding following a bankruptcy order if it is made in connection with that bankruptcy.

I therefore conclude that the appeal must be dismissed. I do want to emphasise that the IPO made in the first bankruptcy is still capable of being varied and, as indicated earlier, I believe that that is the appropriate manner in which to address the relationship between the first and the second bankruptcies.