Richard Henry Addison v London European Securities Limited

This is an appeal against the 9 February 2021 order of District Judge Smart (the “Order”). By the Order the Judge dismissed the application (the “Application”) of the Appellant (“Mr Addison”) to set aside a statutory demand (the “Statutory Demand”) served on him by the Respondent (“LES”) and authorised LES to present a bankruptcy petition after 23 February 2021. Permission to appeal was granted by Zacaroli J on 29 July 2021.

There are three issues on the appeal:

Issues (2) and (3) form the basis of the two grounds of appeal (the “First Ground of Appeal” and “Second Ground of Appeal” respectively).

I dismiss the appeal. While I consider that Mr Addison does have standing to pursue the appeal, in my judgment the First and Second Grounds of Appeal should be rejected.

The appeal has been ably argued on both sides, and I am grateful for the assistance offered by Counsel.

Under section 267(2) of the Insolvency Act 1986 (the “1986 Act”), subject to three exceptions that are immaterial for present purposes,

Section 268(1)(a) explains that one of the two situations in which a debtor will for the purposes of section 267(2)(c) appear to be unable to pay a debt, is if the debt is payable immediately and

Under rules 10.5(5)(a), (b) and (d) of the Insolvency Rules 2016, three of the grounds on which the Court may set aside on application a statutory demand are where

The District Judge dealt with the factual background at paragraphs 20 to 40 of his 9 February 2021 judgment (the “Judgment”). I summarise the main points below.

By loan and guarantee dated 27 September 2017 (the “Loan Agreement” and the “Guarantee” respectively), Mr Addison guaranteed repayment of a loan of £275,000 (the “Loan”) made by LES to Lodge Inns (Pendle) Limited (“Pendle”). Mr Addison was a director and shareholder of Pendle. By clause 2.1 of the Guarantee, Mr Addison agreed to pay to LES on demand the “Guaranteed Obligations”. These obligations were defined in clause 1.1 of the Guarantee as “all present and future payments obligations and liabilities of the borrower due owing or incurred under the Loan Agreement”. It is common ground that the Loan was a Guaranteed Obligation.

The Loan was originally due for repayment by 27 September 2018 but time was extended to 26 January 2019. The sum lent was not repaid by 29 January 2019.

On 25 April 2019, Pendle and LES entered into a written option agreement to offer additional security (the “Option Agreement”). In outline, the Option Agreement gave LES the right (the “Option”) to buy land from Pendle at an agreed price of £1.4m. The land in question was known as Pendle View Fisheries, Clitheroe By Pass, Barrow, Clitheroe BB7 9DH (the “Property”). I shall return to the terms of the Option Agreement below in more detail, because it is central to the First Ground of Appeal. The Option Agreement was registered as a unilateral notice on 21 May 2019.

LES gave notice of default to Pendle in respect of the Loan by letters dated 24 May 2019 and 2 July 2019.

LES applied to the Land Registry for entry of a restriction in Form N against the Property pursuant to clause 12.1 of the Option Agreement. Pendle resisted this, arguing that the Option Agreement was unenforceable, and applied for cancellation of the unilateral notice.

On 8 November 2019, a LPA receiver was appointed over Pendle by another creditor, Saving Stream Security Holding Limited (“SSSH”), who held two registered charges over the Property dating from before the Option Agreement.

By 11 December 2019 letter, LES wrote to the LPA receiver’s property consultants, making an offer outside the terms of the Option Agreement to purchase the Property for £1.55m. The offer was not accepted and expired a week later. In the witness evidence placed before the District Judge by LES, it was suggested that the LPA receiver had contended that the Option did not bind the receiver, and that LES was concerned that the LPA receiver or SSSH might try to sell the Property to a third party notwithstanding the Option.

As a result of e-mail correspondence from Mr Addison, LES came to know that the LPA receiver had invited best and final offers for the Property by 7 February 2020 from certain bidders, but not from LES.

LES’s solicitors, Memery Crystal, wrote to the LPA receiver’s solicitor, notifying them of LES’s concerns that the LPA receiver was trying to exclude LES from the sale of the Property, and indicating that LES intended to exercise the Option.

By notice dated 10 February 2020, LES exercised the Option, triggering an obligation to complete the purchase of the Property on 10 March 2020.

By letter dated 11 February 2020, LES demanded payment from Mr Addison of the Guaranteed Obligations.

In Pendle’s response to LES’s statement of case before the First-tier Tribunal, signed by Mr Addison’s co-director, Mr Canning, and dated 14 February 2020, Pendle asserted, among other things, that there was no consideration for the Option Agreement or alternatively that the Option Agreement was frustrated. The basis of this assertion was the appointment of the LPA receiver meant that Pendle was unable to sell the Property to LES.

According to the witness evidence placed before the District Judge by LES, there were without prejudice discussions between LES and the LPA receiver to explore a sale outside the Option Agreement but there had been no further discussions since around February 2020. LES stated that it had contemplated litigation against the LPA receiver but that there were a number of issues including that SSSH could step in at any time and exercise its own power of sale. LES stated that it had not put in any bid since February 2020 and was no longer interested in acquiring the Property.

On 2 March 2020 LES served the Statutory Demand on Mr Addison for £374,125, stated to be due pursuant to the terms of the Guarantee, and comprising the Loan of £275,000, interest of £96,375 and an exit fee of £2,750.

By 9 March 2020 application notice supported by a witness statement from Mr Addison, Mr Addison applied to set aside the Statutory Demand pursuant to Rules 10.5(5)(b) and (d) of the Insolvency Rules. That Application was made on the four bases set out in [14] of the Judgment, and also on the basis that LES had failed to take all reasonable steps to bring the Statutory Demand to his attention. None of these four bases in [14] are advanced before me, so I do not need to deal with them further.

Completion of the purchase of the Property did not occur on 10 March 2020 or at all.

The matter first came before the District Judge on 22 June 2020 but there was insufficient time to hear the Application given the 45 minute time estimate, and directions were given for a final hearing.

In August 2020, Pendle withdrew its opposition to entry of the restriction over the Property and its application for the cancellation of the notice.

After two adjournments, on 22 June 2020 and 6 October 2020, the Application was heard by the District Judge on 2 December 2020. In the Judgment, the District Judge dismissed the Application, and, by paragraph 2 of his Order of the same day, permitted LES to present a bankruptcy petition against Mr Addison after 23 February 2021. The Judge refused permission to appeal.

Mr Addison appealed and in his appellant’s notice sought a stay of paragraph 2 of the Order. That application was refused by Zacaroli J by order dated 24 February 2021.

LES subsequently presented a bankruptcy petition against Mr Addison and Mr Addison was adjudged bankrupt in the County Court at Kingston-upon-Thames on 2 June 2021 (the “Bankruptcy Order”).

Zacaroli J granted permission to appeal against the Order on 29 July 2021. He does not appear to have been made aware at the time of that grant of permission that Mr Addison had been made bankrupt. He was- according to an e-mail from his clerk- informed the next day after granting permission.

As the District Judge explained in [15] of the Judgment, by the time of the 2 December 2020 hearing before him, the initial grounds of challenge asserted by Mr Addison had mainly fallen away. As the District Judge set out at [16], the main arguments run by Mr Goold before him were that (i) there had been no demand under the Guarantee prior to the Statutory Demand, meaning that there was no debt to be demanded, and (ii) a new point that LES’s exercise of the Option had the effect of repaying Pendle’s liability to LES, meaning that there remained no Guaranteed Obligations under the Guarantee for Mr Addison to guarantee. These arguments were put to him under rules 10.5(5)(b) and (d) of the Insolvency Rules in the alternative.

The District Judge dealt with rule 10.5(5)(b) at [57]-[63] of the Judgment, and rejected the arguments put to him on behalf of Mr Addison. As part of that, he rejected at [61] argument (i) above based on the absence of a prior demand. No challenge is made on the appeal to the conclusion at [61]. Instead, the First Ground of Appeal is based on argument (ii) above.

He dealt with rule 10.5(5)(d) at [64]-[71] and [73]-[83] of the Judgment, and again rejected Mr Goold’s arguments put to him. While it did not form part of the argument put to him at the December 2020 hearing, the District Judge considered the Court of Appeal decision in Remblance v Octagon Assets Limited [2009] EWCA Civ 581, which he had come across in the course of preparing his draft judgment. Following circulation of that draft judgment, he allowed at the request of Mr Goold further written submissions on the application of Remblance. The District Judge refused to set aside the Statutory Demand under rule 10.5(5)(d). By the Second Ground of Appeal, Mr Addison contends that the District Judge was wrong to do so, on the basis that the District Judge erred in his application of Remblance.

Having set out the basic background above, it is convenient to take the First and Second Grounds of Appeal on their merits first, before turning to the question of standing.

The test for whether the debt is disputed on grounds that appear to be substantial is that set out by the Court of Appeal in Collier v P&M.J.Wright (Holdings) Ltd [2007] EWCA Civ 1329 at [21]. It is not sufficient that the dispute is arguable. There has to be something to suggest that the assertion is sustainable. This was common ground on the appeal.

Mr Addison bases this ground of appeal on the construction of clause 11.2 of the Option Agreement. Therefore, to evaluate this ground, it is necessary to set out the main terms of the Option Agreement.

The Option Agreement is dated 25 April 2019 and is stated to be made in consideration of entering into the Loan Agreement dated 27 September 2017. It is evident from, among other things, clause 4 that the purpose of the Option was to provide additional security for the Loan in circumstances where the deadline for repayment of the Loan had passed on 29 January 2019 without such repayment being made. Its key terms for present purposes are as follows:

In [42] of the Judgment, the District Judge stated that the main argument made by Mr Addison in this regard was:

The District Judge’s reasoning on the argument at [42] is set out at [59] and [60] of the Judgment:

Mr Goold repeats this submission on appeal. His argument is that, following the exercise of the Option, the effect of clause 11.2 was to extinguish from the Completion Date Pendle’s debt under the Loan Agreement. He contends that the reason for this is that clause 11.2 is a piece of contractual machinery that calculated a net sum due. If he is correct that Pendle’s debt was extinguished from the Completion Date, then there would be no Guaranteed Obligations left under the Guarantee and no debt due under the Guarantee from Mr Addison.

In my judgment, the District Judge was correct to hold that Mr Addison’s construction of clause 11.2 was not sustainable. My reasons are as follows:

I am clear in my view on the effect of clause 11.2 and do not regard the contrary argument as sustainable. Therefore, in my judgment the District Judge was correct to find that the debt is not one that is disputed on grounds that appear to be substantial.

Mr Goold raised a number of other arguments under the First Ground of Appeal, each of which was linked to the above core submission. In my judgment they are incorrect. They are as follows:

Finally, for completeness, I should mention that Mr Goold suggested in the course of argument that the construction of the definition of the Deposit referred to in [42] of the Judgment (rather than that set out in [29]) was not one he put forward, and Ms Dixon agreed with this. Neither party suggested that I need to reach a conclusion as to the precise meaning of Deposit for the purposes of this appeal, so I say nothing more on it.

Accordingly, I dismiss the First Ground of Appeal.

I shall start with the applicable legal principles, then set out the District Judge’s reasoning and evaluate the Second Ground of Appeal.

Rule 10.5(5)(d) provides a residual discretion to set aside a statutory demand. The circumstances which will normally be required before a Court can be satisfied that the demand ought to be set aside are circumstances which would make it unjust for the statutory demand to have its ordinary consequences: Re A Debtor (No.1 of 1987) [1989] 1 WLR 271 per Nicholls LJ at 276, as quoted by both members of the majority in Remblance at [33] and [57]. Re A Debtor and Remblance concerned rule 6.5(4)(d) of the Insolvency Rules 1986, which is now rule 10.5(5)(d) of the Insolvency Rules.

Where there is an appeal against a refusal to set aside a statutory demand under rule 10.5(5)(d), the issue is whether there was an error of legal principle in the judge’s discretionary decision not to set aside the statutory demand, or whether, for some other reason, his decision was plainly wrong: Remblance at [23], [48] and [56]. The judge will have made an error of legal principle where he took into account irrelevant factors or failed to take into account relevant factors: Remblance at [48].

In Remblance, the Court of Appeal allowed by a 2-1 majority an appeal against Mann J’s refusal in two judgments to set aside the statutory demand against Mr Remblance under rule 6.5(4)(d) of the Insolvency Rules 1986. In that case, Mr Remblance had guaranteed the obligations of the principal debtor, JBR Leisure Limited (“JBR”). JBR owed rent under a lease. However, JBR was in dispute with the landlord about alleged breaches for the covenant of quiet enjoyment. JBR had brought proceedings against the landlord for substantial damages, the landlord’s strike-out application had failed, and the case was due to be heard the following year: [9]. It was common ground in Remblance that JBR would be likely to succeed in resisting insolvency proceedings if a statutory demand was served on it, because it appeared to have a counterclaim or cross claim which equalled or exceeded the amount of the debt specified in the statutory demand: [34], [43]. Therefore, JBR would have been likely to succeed in an application under what was then rule 6.5(4)(a) of the Insolvency Rules 1986, now rule 10.5(5)(a) of the Insolvency Rules.

Dyson LJ, one of the two members of the majority, reasoned that:

Similarly, Ward LJ, the other member of the majority, considered that:

Therefore, the appeal was allowed and the Court exercised its discretion afresh by setting aside the statutory demand.

In the present case the District Judge came across Remblance while preparing his draft judgment and therefore did not receive submissions on it during the December 2020 hearing. Having set out at [66] of his Judgment an extract from Muir Hunter on Personal Insolvency that referred to Remblance, he explained at [67] that he had considered the case, and set out his initial reasoning in his draft judgment as recorded in [70] of the Judgment. He allowed the parties the opportunity to make further written submissions before hand-down, and dealt with those further submissions at [81]-[83] of the Judgment. Therefore, his reasoning is split across two sections in the Judgment.

Turning to the District Judge’s reasoning, at [81] of the Judgment, the District Judge stated that he remained of the view set out in [70] and that he accepted Ms Dixon’s submissions summarised in [80]. His summary of those submissions was as follows:

The core of the District Judge’s reasoning at [70] was as follows:

Having referred at [81] to his view in [70] and accepted Ms Dixon’s submissions summarised at [80], the District Judge went on to state at [81]-[83] that:

He concluded that “I cannot see that it would be unjust in all the circumstances of this case to permit [LES] to rely upon its statutory demand and I decline to set it aside”: [83].

Mr Goold submits that the District Judge applied the decision in Remblance the wrong way round. What the District Judge did, Mr Goold submits, was to look at the prospects of Mr Addison prevailing on Pendle to bring proceedings against LES, of Pendle bringing those proceedings, and of Pendle’s prospects of success in those proceedings, whether in a claim for specific performance or damages. Mr Goold submits that the correct approach based on Remblance would have been to look at the position of Pendle defensively. The District Judge should have asked what defences would Pendle have had if LES had gone down the insolvency route against Pendle. Those defences would have included a cross-claim for specific performance of the Option Agreement and/or damages, which would have included at least the equivalent amount due under the Loan.

Specifically, Mr Goold submitted in his skeleton that (i) if LES had brought insolvency proceedings against Pendle, it should (Mr Goold’s emphasis) have been met with a response by way of counterclaim, set-off or cross demand that Pendle had a specific performance and/or damages claim against LES for failure to complete under the Option Agreement, (ii) LES appeared to have treated the Option Agreement as valid, (iii) now that Pendle no longer sought to challenge the validity of the Option Agreement, there was nothing to stop the performance of that agreement subject to the LPA receiver, (iv) Pendle’s counterclaim, set-off or cross demand made it unjust for LES to be able to pursue Mr Addison as guarantor in respect of the same debt, (v) while it was true that Mr Addison acting alone could not have compelled Pendle to bring proceedings against LES for specific performance, (a) the directors of Pendle wished the LPA receiver to take steps to sell the land to LES, (b) whether steps were taken by the LPA receiver to enforce the Option Agreement was out of Mr Addison’s and indeed Pendle’s hands, and (c) point (b) made it all the more unjust that LES should be able to proceed against Mr Addison by way of bankruptcy, and (vi) the issue was not whether there was an immediate prospect of Pendle taking proceedings to enforce the Option Agreement but whether, if LES attempted to bring insolvency proceedings against Pendle, it should (again, Mr Goold’s emphasis) have been met with a counterclaim, set-off or cross demand under the Option Agreement.

Ms Dixon submits that (i) Remblance did not establish any general principle that it is unjust for a creditor to proceed with a statutory demand served on a guarantor whenever it is asserted that the principal debtor would have a cross-claim against the creditor, (ii) Mr Addison must show that there was an error of principle in the District Judge’s discretionary decision not to set aside the Statutory Demand, or that for some other reason his decision was plainly wrong, (iii) the District Judge did not make any error of principle and his decision was not plainly wrong, (iv) on the contrary, the District Judge understood Mr Addison’s case that Pendle’s purported counterclaim against LES for breach of the contract which arose upon exercise of the Option made it unjust for LES to pursue bankruptcy proceedings against Mr Addison where insolvency proceedings against the Company would- on Mr Addison’s case- not have succeeded, and he correctly considered whether those circumstances would give rise to injustice on the facts of this case, holding that it would not for the reasons set out in [80]-[83] of the Judgment, which rendered the case distinguishable from Remblance, and (v) if, contrary to the foregoing, the District Judge did err, then I should exercise the discretion afresh to refuse to set aside the Statutory Demand under rule 10.5(5)(d).

Starting with Remblance itself, the key finding in the case was that it would be unjust to allow the creditor to proceed against the guarantor by the insolvency route if the creditor could not proceed against the principal debtor by that route, as pithily summarised in the extract from Muir Hunter on Personal Insolvency set out by the District Judge at [66] of the Judgment.

The reason for this is that the guarantor should not be placed in a worse position than the principal debtor. If insolvency proceedings against the latter would fail, so should they against the former. That was how the Court applied the co-extensiveness principle that a guarantor should only be liable to the same extent that the principal debtor is.

In Remblance, it was inevitable that the principal debtor would have resisted insolvency by pointing to its cross-claim, and the principal debtor was already well on the way to litigating the cross-claim to a final conclusion. Here in contrast there was a very serious issue as to whether, to use the language of Ms Dixon’s submissions recorded at [80] of the Judgment, the cross-claim, was more than “hypothetical” and there was any evidence that “Pendle was willing or able to pursue it”. Therefore, the District Judge was right to examine these questions, particularly in relation to a cross-claim based on specific performance in circumstances where its existence had not been relied on by Mr Addison previously.

I do not take the District Judge in doing so to have been ignoring the basic submission made to him by Mr Goold, and reflected in the extract from Muir Hunter quoted by the District Judge, that if insolvency proceedings could be successfully resisted by the principal debtor by reason of a cross-claim, it would be unjust for the guarantor to be in a worse position.

To deal with Mr Goold’s submission that the Judge did in fact approach the matter the wrong way round by simply asking whether Pendle would proactively have brought a cross-claim, it is necessary to consider the factors that the District Judge did take into account.

Dealing first with the District Judge’s treatment of whether Pendle would have a cross-claim in damages, the District Judge did not consider that a viable damages claim had been articulated: [82]. In my judgment he was referring in [82] to the question of whether Pendle could raise such a claim in response to a statutory demand, as can be seen by his reference to “if sued” in [82] and the fact that he is dealing in [82] with the point made by Ms Dixon recorded in [79], which is dealing with resisting a winding-up petition.

In my judgment, he was entitled to conclude that there was no damages claim that would allow Pendle to resist a winding-up petition. The evidence put forward by Mr Addison was that the Property was worth more than £1.4m: see the material referred to by the District Judge in [70] of his Judgment and the other material from Mr Addison referred to at [49] above. Moreover, there was no evidence that, even if the value was lower than £1.4m, the value would be so much lower as to reduce the debt below the bankruptcy threshold of £750.

Turning next to the District Judge’s evaluation of whether Pendle could claim specific performance, the cross-claim he was evaluating was one to seek an order for completion of the purchase of the Property by LES on Pendle taking the relevant steps to transfer title. If LES duly completed, then that would- under clause 11.2 of the Option Agreement- discharge Pendle’s debt to LES under the Loan. The District Judge dealt at [81] with the argument of Ms Dixon recorded in detail at [78]. He rejected her reliance on Pendle’s argument before the First-tier Tribunal that the appointment of the LPA receiver meant that Pendle no longer owned the Property. While the District Judge thought that there would undoubtedly be defences pleaded to a specific performance claim and that it would be a “startling exercise of judicial discretion” to order specific performance after a considerable delay and with an LPA receiver in place, he doubted that the specific performance claim would be struck out. I do not read him as just evaluating whether Pendle would take proactive steps to bring a specific performance claim outside insolvency proceedings against it. Rather he was evaluating the argument of Ms Dixon recorded at [78], having recorded at [74] the fact that Mr Goold pointed out that the creditor in Remblance would not have been able to successfully utilise insolvency proceedings against the principal debtor, and having set out in [66] an extract from Muir Hunter on Personal Insolvency that made a similar point.

Tied to this, it is also clear from the penultimate line of [80], and from [70] and [83], that he considered that at the lowest the Property may well be sold before long by the LPA receiver. While he put the position slightly lower at [70], he accepted at [81] the submissions at [80] that “[t]he reality was that the Property would be sold by the LPA receiver”. More broadly, he accepted at [81] the submission in [80] that “the cross-claim was hypothetical, and there was no evidence that Pendle was willing or able to bring it”, and he stated at [83] that “[t]he evidence suggests that the LPA receiver is marketing the Property and may well sell it before long”. As he had recorded earlier in his Judgment at [39]-[40], the evidence before him was- among other things- that final bids had been asked for by 12 November 2020.

Therefore, in my judgment, while the District Judge did not conclude that a specific performance claim brought by Pendle in response to insolvency proceedings would if brought be unsustainable, he considered that such a claim would face real difficulties (which Mr Goold frankly accepted before me would be the case). Importantly, the District Judge also considered that there was no evidence that Pendle was willing or able to bring such a claim and that the cross-claim was therefore effectively a hypothetical one. Accordingly, he considered, as set out in the submissions in [80] accepted by him at [81], that the situation was some distance from that in Remblance where there was a substantial cross-claim which had survived a strike-out application, and therefore where there was a real prospect that the principal debt would be reduced or extinguished. Tied to this, the Judge took into account the conduct of Mr Addison by accepting at [81] the submission that his conduct as co-director of Pendle bore the hallmarks of an evasive debtor. I do not read this as being his primary reason, but that it fed into his assessment of the credibility of the assertion that Pendle would bring a specific performance cross-claim.

In my judgment, the District Judge was entitled to reach the conclusion in relation to specific performance that the cross-claim was hypothetical and that there was no evidence that Pendle was willing or able to bring it. He was entitled, and correct, to take into account whether there was a specific performance claim that would actually be brought in practice. Whether a vendor brings a claim in specific performance to complete a property purchase is a commercial decision requiring consideration of whether the vendor is able and willing to transfer the property in question in return for the agreed sum. Here:

Returning to the more general submission made by Mr Goold, in my judgment the District Judge was not losing sight here of the need to examine what if any defences Pendle might have if faced with a statutory demand. He was evaluating the likelihood of a cross-claim for specific performance, having recorded Mr Goold’s submission on Remblance and Ms Dixon’s submissions about these cross-claims.

There was focus in [70], and the first sentence of [83], on the absence of any sign of Pendle bringing a specific performance claim now to compel LES to complete the purchase of the Property, or of Mr Addison taking any steps as director and 47.5% shareholder, with a solicitor who had a 25% shareholding, to procure that Pendle do so. In isolation, this could be read as suggesting, as Mr Goold argued, that the District Judge was focusing on whether Pendle would bring such a claim outside the context of insolvency proceedings against it, and determining the application of rule 10.5(5)(d) by answering that question. However, in my judgment, that is not the case. As explained above, he recorded correctly in [74] the submission put to him about whether insolvency proceedings against Pendle would have succeeded, set out Ms Dixon’s arguments on those at [78]-[80] and then discussed these at [81]-[83].

Accordingly, in my judgment there was no error of legal principle in the District Judge’s discretionary decision, and there is no other reason that renders his decision plainly wrong.

Had I decided that the District Judge had made one of the errors referred to in the last paragraph, I would have exercised the discretion afresh and reached the same conclusion as the District Judge. Ms Dixon sought to put before the Court an updated extract from the title register showing that the Property was sold for £1.47m, a sum higher than the Purchase Price, on 3 February 2021, after the December 2020 hearing and just under a week before the final version of the Judgment was handed down. She submitted that if I was exercising my discretion afresh, I should have regard to this because of its relevance to whether specific performance would be available to Pendle, and that it demonstrated clearly that it would not have been because Pendle could not convey the Property to LES. Mr Goold did not resist, either in his supplemental skeleton or orally, the admission of this updating evidence, and dealt in his submissions with what I should make of this evidence if I was exercising the discretion afresh. I consider he was correct to do so and that I should- if exercising the discretion afresh- have regard to this evidence on Ladd v Marshall [1954] 1 WLR 1489 principles, given that it post-dates the December 2020 hearing and therefore could not have been obtained before the hearing, it is important because of its relevance to whether specific performance could be sought, and it is accepted that what the title register shows is correct. Moreover, it is also evidence of the position at the time of the Judgment because the sale occurred before the Judgment was handed down. If I had exercised my discretion afresh, I would have concluded that Pendle had no viable damages or specific performance claim that would allow it to resist insolvency proceedings. In reaching this conclusion, I would take into account that the Property had actually been sold on 3 February 2021.

Much of the oral submission before me concerned this final issue. Ms Dixon’s argument was succinct and clear. The core of it is as follows:

In bare outline, Mr Goold’s response to this is two-fold:

The Official Receiver’s position is that any right to appeal vests in the Official Receiver, but that the Official Receiver leaves it to the Court to decide.

To deal with these submissions, it is necessary to examine more broadly the circumstances in which a person has a sufficient interest to continue to litigate a matter he was involved in prior to his bankruptcy. Having evaluated what the test is for when a person can do so, one can then apply it to the present situation. Both Counsel agreed that there was no case that directly decides the specific point before me.

There is a substantial body of case-law on when claims of the bankrupt vest in his trustee in bankruptcy and when they do not. A bankrupt may often wish to continue to litigate for his own benefit a claim that he had at the point of the bankruptcy order if he views it as of value to him. I shall therefore start with claims by the bankrupt, before going on to deal with situations where the bankrupt is a defendant and when a claim or application can continue against a defendant who is made bankrupt and therefore continue to be defended by the bankrupt. This reflects the division drawn between Hoffmann LJ in Heath v Tang [1993] 1 WLR 1421, which I shall come onto in a moment.

While this is a convenient way of dealing with the case-law, I do not consider that Hoffmann LJ was seeking in Heath to suggest the distinction between cases where the bankrupt was a claimant and where the bankrupt was a defendant was a rigid one or an exhaustive classification of all cases. On the contrary, for example he expressly referred to a bankrupt bringing a cross-claim with respect to a claim against him as being a case that straddled both categories. Some cases concerning whether the bankrupt can continue litigation or a certain aspect of litigation cannot neatly be fitted into the category of bankrupt as claimant or bankrupt as defendant. However, pigeonholing such situations into bankrupt as claimant or defendant is unnecessary because the essential question is in my judgment the same in both situations, namely whether the litigation or aspect of it can be regarded as something personal to the bankrupt.

On the making of a bankruptcy order, the official receiver becomes trustee of the bankrupt’s estate, unless the court appoints another person: section 291A(1) of the 1986 Act.

A bankrupt’s estate vests in his trustee in bankruptcy immediately on his appointment, or in the case of the official receiver, on his becoming trustee: section 306(1). The function of the bankruptcy trustee is to get in, realise and distribute the bankrupt’s estate: section 305(2).

Subject to what follows later in section 283, a bankrupt’s estate comprises “(a) all property belonging to or vested in the bankrupt at the commencement of the bankruptcy, and (b) any property which by virtue of any of the following provisions of this Part is comprised in that estate or is treated as falling within the preceding paragraph”: section 283(1).

Property is intended to be a broad concept for these purposes, it being in the public interest that trustees of a bankrupt are able to get in, realise and distribute the bankrupt’s estate in accordance with the statutory scheme amongst the bankrupt’s creditors: Avonwick Holdings Limited v Sayers [2016] EWCA Civ 1138 at [40]-[41]. It includes “money, goods, things in action, land and every description of property wherever situated and also obligations and every description of property whether present or future or vested or contingent, arising out of, or incidental to property” (section 436(1)), and property includes, with certain exceptions, powers over property (section 283(4)).

Given that a bankrupt’s property includes things in action, it is capable of including causes of action, and rights of appeal against the rejection by a Court of such causes of action. There can be no distinction in this regard between the claim and the appeal: the appeal is a continuation of the claim once it had failed at first instance.

However, as Hoffmann LJ explained in Heath, that does not mean that all of the bankrupt’s causes of action vest in the trustee, because

Hoffmann LJ does not purport to define exhaustively what causes of action will be personal to the bankrupt for these purposes. Rather he states that they will include cases in which damages are to be estimated by immediate reference to the pain felt by the bankrupt in respect of his body, mind or character, and without immediate reference to his rights of property (“body, mind and character cases”).

Just over a decade after Heath v Tang, Lord Walker explained in his judgment in Mulkerrins v PricewaterhouseCoopers (a firm) [2003] UKHL 41 that

He then went on at [25] to set out the then most recent authority, the Court of Appeal decision in Grady v HM Prison Service [2003] EWCA Civ 527, explaining that

In Mulkerrins itself, the appellant alleged that her former professional advisers, PricewaterhouseCoopers, had negligently failed to protect her from bankruptcy. While not deciding the point ([18]), Lord Millett expressed scepticism about whether the claim vested in the trustee in bankruptcy, stating that “it would be very surprising if a claim of this character could be made available to the creditors. They would be claiming damages for the making of the very bankruptcy order under which their claim arose.” ([17]).

Mr Goold relied on the Court of Appeal decision in Avonwick Holdings Limited v Sayers [2016] EWCA Civ 1138 as an example of rights relating to litigation not being property. In that case, it was held that privilege was not property of a bankrupt which automatically vests in the trustee in bankruptcy. The core reasoning is at [63]:

I accept that Avonwick is an example of rights relating to litigation not constituting property. Moreover, in a general sense, privilege is something personal to the bankrupt and therefore the case is in that respect a demonstration of rights personal to the bankrupt not vesting in the trustee in bankruptcy. However, as the first sentence of the extract above makes clear, the starting point in that case turned on a point based on the specific characteristics of privilege, which is that the bankrupt could only be deprived of privilege by express provision in a statute or necessary implication. Therefore, the judgment does not, and did not need to, seek to provide a general touchstone for determining which rights relating to litigation do vest in the trustee in bankruptcy.

Reliance was placed by Ms Dixon on Agba v Luton Borough Council [2020] EWHC 1160 (Admin). In Agba, Choudhury J held that a bankrupt could not commence proceedings to challenge to a liability order made against her in respect of unpaid council tax. He rejected the argument that the cause of action on the facts before him was personal to the bankrupt, because “the liability as to Council tax is clearly connected to the property. Indeed, absent the appellant’s interest in the property there would be no such liability. It is difficult to see how this could reasonably be construed as a right or a cause of action personal to the bankrupt.” ([27]). He went on to state, in the sentence relied on by Ms Dixon:

This sentence is technically obiter, as the Judge had held that the cause of action was not personal to the bankrupt. In my judgment, for the reasons above, Heath and Grady in particular do not bear out the proposition that causes of action personal to the bankrupt are limited to those relating solely to his body, mind and character.

Drawing the above cases together:

Hoffmann LJ explained in Heath that the analysis where the bankrupt was a defendant was different:

He went on to explain that:

He concluded his review of the authorities as follows:

In Heath itself, the question for the Court was whether a bankrupt could bring an appeal against a judgment on which the bankruptcy petition was founded. Hoffmann LJ considered that he could not. Given its potential importance to the present question, I set out his reasoning in full:

In Royal Bank of Scotland v Farley [1996] BPIR 638, another of the cases relied on by LES, Hoffmann LJ explained that:

Therefore, his analysis ultimately turns on whether the bankrupt has an interest in relation to the claim in question. The bankrupt has been divested of any further interest in the debts that he owed and in the property that he held, so he no longer has an interest in claims relating to them.

Nonetheless, there are still cases where the claim or application brought against the defendant is sufficiently personal to the bankrupt defendant that he has standing to continue to litigate in respect of them, such as by appealing the order made against him. The example given by Hoffmann LJ in Heath of an appeal against an injunction granted before bankruptcy against the bankrupt personally is one. Appealing against a bankruptcy order is another. In Sands v Layne [2017] 1 WLR 1782, the Court of Appeal held that a right to appeal against a bankruptcy order did not vest in the trustee in bankruptcy. The reasoning for this is set out by Arden LJ, giving the leading judgment, at [47], as follows:

Finally, I was taken by both Counsel to the decision of HHJ Pelling QC sitting as a Judge of the High Court in In the Matter of GP Aviation Group International Limited [2013] EWHC 1447 (Ch). The Judge had to decide whether a company’s statutory right of appeal against a tax assessment constituted property for the purposes of s.436 of the Insolvency Act, as part of considering whether this right of appeal could be assigned to the respondents in that case. The Judge concluded, at [26] to [31], that it was not.

The Judge stated at [14] that “[t]here is an interesting debate within the authorities as to whether in personal bankruptcies the reason why the bankrupt loses standing to prosecute an appeal is because the right to appeal is a property right that has vested in the trustee or whether it is simply an incident of the fact of bankruptcy”. He went on, having received detailed submission from the parties, to set out the authorities that he considered bore on the point.

As part of his reasoning, he concluded at [30] that Hoffmann LJ in Heath was not deciding that the right to appeal was a property right that vested in the trustee as part of the bankrupt’s estate, and concluded at [31] that:

In GP Aviation, the situation before the Judge was one where the company had been seeking to dispute through its appeal that it owed a tax liability. I consider that it is important to read the judgment in that context, because as Ms Dixon pointed out, in many cases rights of appeal have been treated as property forming part of the bankrupt’s estate.

The Judge concludes in [31], referring to what the situation would have been had the case concerned an individual rather than a company, that the reason the trustee in bankruptcy is the party that must bring such an appeal is because the assets out of which the tax liability can be met are now vested in the trustee in bankruptcy, so the bankrupt no longer has locus to bring the appeal.

In GP Aviation, it was necessary for the Judge to form a view on the precise reason why, and process through which, a bankrupt lost on bankruptcy the standing to exercise a “bare” right of appeal of the type before the Judge, and therefore whether it was “property” was the purposes of the 1986 Act that was capable of assignment. The Judge was not concerned with the question of the circumstances in which the trustee in bankruptcy did and did not have a right to appeal. Our case is concerned with this latter issue. Therefore, in my judgment, the case does not assist in relation to the issue before me.

I draw from the case-law in this section on the bankrupt as defendant the following points:

For the reasons above, I consider that the correct question to ask is whether the right to apply to set aside the statutory demand and to appeal against the refusal to set aside the Statutory Demand was something personal to the bankrupt, rather than to ask whether it is a body, mind and character case.

In my judgment, Mr Addison does have standing to bring the appeal, for the following reasons:

I have taken into account Ms Dixon’s persuasive submissions, including that Mr Addison should have appealed the Bankruptcy Order. It is true that Mr Addison would have had standing to appeal and also that- as Zacaroli J explained in his 24 February 2021 reasons for refusing a stay- Mr Addison had the right to ask the Court hearing the bankruptcy petition to grant a stay pending appeal of the refusal to set aside the Stautory Demand. However, in my judgment the fact that Mr Addison could have appealed the Bankruptcy Order is outweighed by the above points and it is in any event unattractive for the bankrupt to have to prosecute a new appeal against the Bankruptcy Order rather than continuing the appeal against the refusal to set aside the Statutory Demand.