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Insolvency Law

Expert guidance on all aspects of corporate and personal insolvency

22 MAY 2013

Bramston v Haut: back door to suspension of automatic discharge firmly shut and bolted

Paul French

Introduction

1. It always seemed an odd decision. In Bramston v Haut [2012] EWHC 1279 (Ch); [2012] BPIR 672, Arnold J held that s 279(3) of the Insolvency Act 1986 allowed an undischarged bankrupt to apply for suspension of his own automatic discharge, in order to comply with the time limits to allow him to put forward a post-bankruptcy IVA that would be binding on his bankruptcy creditors. In allowing the trustee in bankruptcy's appeal, the Court of Appeal [2012] EWCA Civ 1637; [2013] BPIR 25 firmly disagreed.

The facts

2. The case had a tortuous factual and procedural history.

2.1     On 4 April 2011, a bankruptcy order was made against Mr. Haut on a petition presented by HMRC.

2.2     On 9 August 2011 Mr. Haut gave notice to creditors of a meeting on 6 September 2011 to propose an individual voluntary arrangement.

2.3     On 11 August 2011, the Trustee was appointed as Mr. Haut's trustee in bankruptcy at a creditors' meeting.

2.4     On 31 August 2011 the Trustee applied for directions under s 363 of the Insolvency Act 1986 (the Act) requiring Mr. Haut to withdraw the proposal; and preventing him from making any further proposal for an IVA for 3 months, on the basis that the Trustee had a number of concerns as to the accuracy of the information contained in the proposal, in particular that:

2.4.1  Mr. Haut had not provided full and accurate information as to his assets;

2.4.2  some of the creditors' claims had not been properly substantiated; and

2.4.3  the proposal contained inaccurate or misleading information.

2.5     On 2 September 2011, the deputy registrar made the order sought.

2.6     Thereafter, investigations into Mr. Haut's affairs continued, including by a public examination.

2.7     On 22 March 2012, a person who claimed to be a creditor of Mr. Haut in the sum of £561,733 sent a request to the Trustee pursuant to s 298 of the Act for the Trustee to summon a creditors' meeting to consider removing the Trustee as Mr. Haut's trustee.

2.8     On 28 March 2012 Mr. Haut's solicitors sent a draft of a second proposal for an IVA to the Trustee , requesting comments by 4.00 pm the next day since, as that proposal had to be issued within a year of the bankruptcy order, Mr. Haut intended to issue it on 30 March 2012. The Trustee responded that:

2.8.1  there were still concerns, as the proposal was not substantially different from the first;

2.8.2  full details of Mr. Haut's assets and liabilities had still not been provided;

2.8.3  the Trustee 's costs and legal fees had not been provided for; and

2.8.4  an application for the interim suspension of Mr. Haut's discharge would need to be made, as it would not be possible for the meeting of creditors to agree the IVA post-discharge.

2.9     Correspondence then ensued as to whether Mr. Haut could apply under ss 279, 303 or 363 of the Act for such suspension.

2.10   On 3 April 2012, Mr. Haut issued an application for the suspension of his automatic discharge from bankruptcy, with a return date of 17 April 2012.

2.11   On 3 April 2012, without notice, Mr. Haut obtained an order from Arnold J:

2.11.1                 suspending his discharge from bankruptcy until 15 May 2012, or further order in the meantime; and

2.11.2                 giving permission to the Trustee to apply to set aside or vary it on 2 clear days' notice.

2.12   On 10 April 2012, the nominee in relation to the second IVA proposal gave notice of a creditors' meriting to approve the proposal on 1 May 2010 (which was adjourned to 10 May 2012).

2.13   The hearing of Mr. Haut's application took place on 10 May 2012, a few hours before the adjourned creditors' meeting to consider the IVA proposal.

Decision of Arnold J

3. At the hearing, the Trustee sought to set aside the without notice order, and raised issues as regards Mr. Haut's affairs, at least some of which Mr. Haut accepted appeared to warrant further investigation by the Trustee. Arnold J dismissed the application to set aside the without notice order and suspended Mr. Haut's discharge for 6 weeks to allow the proposal to be considered. Further, the Trustee was ordered to pay Mr. Haut's costs.

4. It was held that, having regard to Bagnall v Official Receiver [2003] EWCA Civ 1925; [2004] BPIR 445, s 279(3) of the Act had to be given a purposive interpretation. And that another relevant consideration was the attitude of the bankrupt. Where the bankrupt wanted his discharge to be suspended, it followed that the court would be more easily satisfied that it was appropriate to make such an order than if the bankrupt opposed it, particularly so if a substantial body of creditors supported an application for suspension.

5. Mr. Haut's reason for seeking suspension was simply to enter into an IVA which he could not do once he had been discharged from bankruptcy. The Trustee's reason for opposing suspension, and his objective in making the present application, was to prevent Mr. Haut from proceeding with that proposal. But the Trustee's evidence showed that his position was that Mr. Haut was in default of his obligations under the Act. Thus, it was sufficiently proved that as Mr. Haut had failed or was failing to comply with his obligations the jurisdictional threshold imposed by s 279(4) of the Act was satisfied.

6. In those circumstances, the Trustee had no reason to object to the suspension of Mr. Haut's discharge from bankruptcy and, indeed, had good reason to support such a suspension. His real objection was to the proposal. While the Trustee was correct to put the interests of creditors first, on the surface it was for the creditors to decide whether or not it was in their interests to accept the proposal, and the evidence suggested that 94% by value of the claimed creditors did support it. They had concluded that it was better to take a chance of getting a very small recovery than to accept the certainty of getting nothing.

7. Accordingly, the Trustee was acting Wednesbury unreasonably in refusing to agree to Mr. Haut making a s 279(3) application on his behalf, because the Trustee exercised his discretion not for the proper purpose of exercising control over Mr. Haut's compliance with his obligations, which would have required him to support the application, but for the collateral and improper purpose of blocking the proposal, which was properly to be achieved by an application under s 363 of the Act.

The appeal

8. The Trustee appealed, contending, among other things:

8.1     ss 279 and 303 of the Act did not provide a proper jurisdictional basis for an order suspending Mr Haut's discharge for the purpose of allowing him to put before his creditors an IVA proposal and that the proper source of jurisdiction, if any, for suspending discharge for that purpose were the provisions of ss 253 and 255 of the Act;

8.2     the judge did not in any event have before him any evidence on which he could properly be satisfied that Mr Haut was in default; and

8.3     the judge erred in concluding that the Trustee was Wednesbury unreasonable in refusing to allow Mr Haut to make an application under s 279(3) on his behalf, having applied the wrong test and erred in his approach to the Trustee's functions.

Decision of the Court of Appeal

9. The Court of Appeal (Rix, Arden and Kitchin LJJ) firmly disagreed, holding that the judge erred in concluding that the Trustee was Wednesbury unreasonable in refusing to allow Mr. Haut to make an application under s 279(3) on his behalf, having applied the wrong test and erred in his approach to the Trustee's functions. The purpose of a suspension under s 279(3) of the Act was plainly connected to a failure by a bankrupt to comply with his obligations under Part IX of the Act. The subsection contemplated an application being made by the trustee or the official receiver, not by the bankrupt. A purpose of the power conferred by s 279 of the Act was to extend the period of the bankruptcy and to ensure that the bankrupt continued to suffer the disabilities arising from his undischarged bankruptcy until he complied with his obligations.

10. It was plain that the judge's order of 3 April 2012 was not linked to the failure by Mr Haut to comply with his obligations, was not made to ensure that Mr Haut continued to suffer from the disabilities of being an undischarged bankrupt until he had fully complied with those obligations and was not made for any other purpose that might be within s 279(3) of the Act. It was purely related to Mr Haut's desire to propose an IVA binding upon his bankruptcy creditors, and thereafter to secure an annulment of the bankruptcy order. That was impermissible and outside the scope of the jurisdiction conferred by s 279(3) of the Act. In analysing the position, the judge had wrongly conflated the separate and distinct issues of jurisdiction and discretion and wrongly failed adequately to address the former.

11. The proper gateway for Mr. Haut to have made an application for the suspension of his bankruptcy lay in the provisions of ss 252-256 of the Act. In an appropriate case the court could make an order under s 252 of the Act suspending the automatic discharge of the bankrupt for a specified period. However, while Mr. Haut's nominee did in fact submit a report purportedly in compliance with s 256 of the Act, the report did not comply with it, so that if Mr. Haut had made an application for an interim order under s 253, it would inevitably have foundered.

12. Therefore, the judge fell into error in concluding that the court had jurisdiction under s 279(3) of the Act to make an order suspending Mr. Haut's discharge from bankruptcy for a period of 6 weeks in order to give him time to place the second proposal before his creditors.

13. The Court of Appeal also gave observations and explanations as regards the court's reluctance to interfere with the day-to-day administration by a trustee in bankruptcy of the bankruptcy estate. Considering the decision in Re Edennote Ltd; Tottenham Hotspur plc and Others v Ryman and Another [1996] 2 BCLC 389 and applying the practical guidance set out by Chief Registrar Baister in Osborn v Cole [1999] BPIR 251, it would only be right for the court to interfere with the decision the trustee in bankruptcy had taken if it could be shown he had acted in bad faith or so perversely that no trustee in bankruptcy properly advised or properly instructing himself could so have acted, alternatively if he had acted fraudulently or in a manner so unreasonable and absurd that no reasonable person would have acted in that way.

14. On that basis, it was wholly impossible to say that the Trustee acted perversely in refusing to allow Mr. Haut to make an application on his behalf under s 279(3) of the Act for the purpose of putting the second proposal before his creditors when that provided no jurisdictional basis for such an application. The functions of the Trustee were to get in, realise and distribute the bankrupt's estate in accordance with the provisions of Chapter IV of Part IX of the Act and to exercise his discretion in carrying out those activities and in administering the estate. It was not one of the duties of a trustee to respond affirmatively to a bankrupt's request that he co-operate in the promotion of a proposal for an IVA.

15. Furthermore, in the circumstances of this case, the Trustee believed that Mr. Haut was in continuing default of his obligations and that the second proposal was defective, prejudicial to the interests of the creditors who had no personal connection to Mr. Haut and appeared to be designed to thwart his efforts to carry out a proper investigation into Mr. Haut's affairs. This was far from a case where he had acted perversely or as no other reasonable trustee would have acted.

Analysis

16. The case is notable for the two particular areas with which it deals: first, the circumstances in which a debtor can seek a suspension of his own discharge from bankruptcy and, secondly, confirmation of the test to be applied when seeking to interfere with the trustee in bankruptcy's administration of the estate. On the facts of the case, on the latter, Mr. Haut could not interfere with the Trustee's refusal to allow, or bring, an application to suspend discharge because, on the former, there was no jurisdiction in the court to do what Mr. Haut was seeking.

17. A debtor must effectively obtain the approval of his proposal for an IVA prior to his discharge from bankruptcy, whether automatic or otherwise, in order for it to be binding upon his bankruptcy creditors. The creditors' meeting to approve the proposal must be held before discharge; see Re Johnson [2006] BPIR 987.

18. But, that is not to say that a debtor can never bring an application that has the effect of suspending his own discharge; it is just that he has to be careful as to how to go about it. If there is insufficient time to obtain an interim order and hold the creditors' meeting before the date of discharge, it is possible to invoke the provisions of s 255(4), (5) of the Act so as to suspend the automatic discharge of the debtor under s 279(1) of the Act, so that it does not take effect until after the creditors' meeting has been held. These provide as follows:

‘(4) Subject as follows, the provisions contained in an interim order by virtue of sub-section (3) may include provisions staying proceedings in the bankruptcy or modifying any provision in this Group of Parts and any provision of the Rules in their application to the debtors' bankruptcy.

(5) An interim order shall not, in relation to a bankrupt, make provision relaxing or removing any of the requirements and provisions in this Group of Parts, or of the Rules, unless the Court is satisfied that the provision is unlikely to result in any significant diminution in, or in the value of, the debtor's estate for the purposes of the bankruptcy.'

19. Thus, the Court of Appeal stated that whilst the terms of s 279 of the Act did not permit the debtor to make such an application, s 255(4), (5) of the Act did, stating in para 57 of the judgment of Kitchin LJ:

‘I believe the proper gateway for Mr Haut to have made an application for the suspension of his bankruptcy lay in the provisions of ss 252-256 of the IA 1986. Section 252 confers jurisdiction upon the court to make an order which has the effect that, during the period for which it is in force, no bankruptcy petition relating to the debtor may be proceeded with. The orders which the court may make include (by s 255(4)) a provision staying proceedings in the bankruptcy or modifying any provision in the Second Group of Parts (dealing with the insolvency of individuals and bankruptcy) and any provision of the rules in their application to the debtor's bankruptcy. In my judgment such a modification could therefore include a modification of s 278(b) which provides that the bankruptcy of an individual against whom a bankruptcy order has been made continues until the individual is discharged under the provisions of Chapter I which follow, including s 279. Thus I believe that in an appropriate case the court can make an order under s 252 suspending the automatic discharge of the bankrupt for a specified period.'

20. Accordingly, if a debtor is in the position of seeking to propose a post-bankruptcy IVA, and that there is a likelihood that, timing-wise it will not be approved prior to the automatic discharge, the route is to apply for an interim order and, at the same time, seek a direction suspending the discharge until a date after the creditors' meeting or any possible/likely adjournment of it. The same result will be achieved, albeit by a rather different route.

21. Had Mr. Haut obtained a nominee's report in proper form, the likelihood is that, given the apparent support of 94% of his creditors, an interim order together with a direction for suspension would have been ordered.

22. The Court of Appeal emphatically adopted the Osborn v Cole test for challenging the acts of a trustee in bankruptcy, where Chief Registrar Baister stated at p.255:

‘It follows that it can only be right for the court to interfere with the decision the official receiver has taken if it can be shown he has acted in bad faith or so perversely that no trustee properly advised or properly instructing himself could so have acted, alternatively if he has acted fraudulently or in a manner so unreasonable and absurd that no reasonable person would have acted in that way.'

Echoing the decision in Edennote, it was unnecessary, and possibly confusing, to introduce into the courts control of the acts and decisions of office-holders the language of its control of administrative action. In the latter case the court was usually concerned with supervision of public servants performing statutory functions; in the former with the supervision of persons who must, in most of what they did, act as prudent businessmen. In general there was something unrealistic in judging the propriety of acts and decisions of a businessman by asking whether he took into account something he ought not to have taken into account or failed to take into account something he ought to have taken into account.

 

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