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Insolvency Law

Expert guidance on all aspects of corporate and personal insolvency

17 OCT 2013

Creditors ain’t what they used to be – The landscape after Nortel

Paul French

Guildhall Chambers, Bristol


1.         The headline news in respect of the decision of the Supreme Court in In the matter of the Nortel Companies, In the matter of the Lehman Companies [2013] UKSC 52 related to the priority of a liability under a financial support direction from the Pensions Regulator requiring financial support for a deficient pension scheme from group companies in the administration of those group companies. There has been much commentary, balancing the public policy concepts of restoring the rescue culture with ensuring adequate pension provision for employees. However, on a more minor level, in determining the issue, the Supreme Court expressly considered (and recast) the meaning of what was a contingent liability, and therefore what was a provable debt, in particular in relation to prospective costs orders in litigation pending at the time of the insolvency event.

2.         The decision has practical consequences for debtors, trustees in bankruptcy and supervisors of individual voluntary arrangements. Further, it may well be that the decision has a rather wider impact than originally thought, as it could render consent orders made in pre-bankruptcy ancillary relief proceedings within the scope of preference claims under s 340 of the Insolvency Act 1986 when, on the authorities as they previously stood, they were previously immune from such claims.

Historic position

3.         Where the debtor has been involved in litigation and has had an order made against him for costs, then this will not present any undue difficulty. If the costs have been assessed, then quantum is known. If there has merely been an order for costs but quantum not fixed, then clearly the Chairman of a creditors' meeting, Supervisor of an Individual Voluntary Arrangement (IVA) or trustee in bankruptcy can seek information that will enable him to arrive at a realistic figure for voting or dividend purposes. The problem that has arisen in the past is where there have been proceedings that have not been determined insofar as orders for costs are concerned. In other words, there is no liability on the debtor, but only the possibility of a liability if an order is made against him. The effect of the decision in Re Wisepark Ltd [1994] BCC 221 was that such a situation gave rise to a contingent liability, which fell outside the ambit of contingent liabilities for the purposes of a voluntary arrangement. This decision had to be read in the light of the decision of the Court of Appeal in Glenister v Rowe [1999] BPIR 674 where it was held that when proceedings were commenced against a debtor prior to bankruptcy and an order for costs made after discharge, the debtor was not released from liability to pay. The claim for costs was not a contingent liability in the bankruptcy. This would appear to suggest that such a claim cannot be regarded as a contingent liability and therefore could not be included in an IVA. Similar decisions were reached in Foots v Southern Cross Mine Management Pty Ltd [2007] HCA 56; [2007] BPIR 1498 and Casson and Wales v The Law Society [2009] EWHC 1943 (Admin); [2010] BPIR 49.

4.         Thus, debtors involved as defendants in existing and unresolved litigation at the commencement of the bankruptcy or the IVA faced a twin-track scenario regarding enforcement. Rather bizarrely, the debt or damages claim that formed the basis of the claim would be a bankruptcy debt, save in respect of fraud claims or other claims statutorily preserved, such as arrears of child support (see Child Maintenance & Enforcement Commission v (1) Beesley (2) Whyman [2010] EWCA Civ 1344; [2011] BPIR 608) or some matrimonial claims (see Hayes v Hayes [2012] EWHC 1240 (Ch); [2012] BPIR 739 and McRoberts v McRoberts [2012] EWHC 2966 (Ch); [2013] BPIR 77). Yet, the cost of bringing the claim, continuing to bring it after the bankruptcy, would not be a bankruptcy debt.

5.         In bankruptcy, that would have left the debtor at the further mercy of a bankruptcy creditor, facing the possibility of a second bankruptcy order for the purposes of enforcing the post-bankruptcy costs order. In IVAs, the R3 Standard Conditions were adapted to cater for this scenario, to prevent the possibility of an approved IVA being terminated, or put in jeopardy, by such a creditor bound in to the IVA in respect of his debt, but not his costs.

IVA Standard Conditions

4.         Thus, the R3 Standard Conditions provide for a different scenario and seek contractually to bind into the IVA claims for costs in relation to proceedings outstanding as at the approval of the IVA.

5.         In Version 2 (published in November 2004) the terms provide:-

5 Existing proceedings against Debtor

5(1) [Discontinuance of existing proceedings] Legal proceedings against the Debtor in existence at the commencement of the Arrangement in respect of Debts which are subject to the Arrangement shall, unless they are of a type contemplated by Paragraph 4(4), be discontinued by the Creditor as soon after the commencement of the Arrangement as is practicable.

5(2) [Costs of existing proceedings] Legal costs of a Creditor in proceedings other than bankruptcy referred to in Sub-paragraph (1) shall be a Debt falling within the Arrangement.'

The provisions are slightly varied in Version 3 (published in January 2013), which provides:-

5 Existing proceedings against Debtor

5(1) [Discontinuance of existing proceedings] Legal proceedings against the Debtor in existence at the commencement of the Arrangement in respect of Debts which are subject to the Arrangement shall, unless they are of a type contemplated by Paragraph 4(4) or the Supervisor otherwise directs, be discontinued by the Creditor with no order as to costs as soon after the commencement of the Arrangement as is practicable.

5(2) [Costs of existing proceedings] Legal costs of a Creditor in proceedings other than bankruptcy referred to in Sub-paragraph (1) shall be a Debt falling within the Arrangement.'

(There are no equivalent provisions in the IVA Protocol Standard Conditions because, as is made clear in the Protocol itself, it is aimed at debtors in respect of whom there are no known material disputes in relation to their debts.)

6.         Version 2 came to be considered in Golstein v Bishop [2013] EWHC 1706 (Ch); [2013] BPIR Issue 5. The claimant had been substantially successful in partnership proceedings against the defendant debtor, and was awarded 90% of his costs. The debtor opposed an order for a payment on account of those costs on the basis that over a year earlier, an IVA had been approved and the order for costs was a debt to be included in the IVA for dividend purposes. The claimant argued:-

6.1. it was established by a series of cases, notably in Glenister v Rowe, that a liability to pay costs under a costs order made after the commencement of a bankruptcy was not provable in the bankruptcy as a bankruptcy debt, and the same should apply to an IVA;

6.2. Paragraph 5(2) of the Standard Conditions was to be interpreted as applying only to those legal proceedings which were to be discontinued under paragraph 5(1), and that since Paragraph 47 of the Proposal contemplated the litigation continuing Paragraph 5(2) of the Standard Conditions did not apply to it; and

6.3. the Supervisor's view was that the costs of the proceedings fell outside the scope of the IVA and weight should be given to his view.

The debtor submitted that both the Glenister v Rowe line of authority could be distinguished so that the costs would be a provable debt in any event, and that whether or not Glenister v Rowe would apply to the costs, the question was one of construction of the IVA which provided that the costs of existing proceedings were a debt.

7.         Christopher Nugee QC (as he then was, sitting as a deputy judge of the High Court) ruled that as a matter of construction, the debtor's liability for the costs of the litigation was a debt within the meaning of his IVA. The claimant's proceedings were ‘Legal proceedings against the Debtor in existence at the commencement of the Arrangement' under Clause 5.1. Clause 5.2 provided that the costs of proceedings within Clause 5.1 should be a debt within the IVA, irrespective of whether the proceedings were discontinued. The express terms of the proposal which expressly referred to the claimant's proceedings, and the likelihood of their continuing, did not affect that conclusion. Further, the views of the Supervisor, which were in line with the claimant's view and were contrary to the debtor's assertions, were of no relevance, and were not admissible as background facts. In view of what was to follow shortly thereafter in the Supreme Court, it is worthwhile setting out in full some of the deputy judge's prescient comments:-

‘9. Glenister v Rowe itself concerned liability under an order for costs which was made against the debtor after he had become bankrupt. This was held not to be a bankruptcy debt. Other cases to which I was referred include the decisions of the Court of Appeal in (i) R (Steele) v Birmingham City Council [2006] 1 WLR 2380 (liability to repay overpaid jobseeker's allowance held not to be a bankruptcy debt); (ii) Haine v Day [2008] EWCA Civ 626 (liability of a company to pay protective awards to employees for failure to consult them held to be a provable debt); and (iii) Bloom v The Pensions Regulator [2011] EWCA Civ 1124, reported sub nom re Nortel Gmbh at [2012] 1 All ER 1455 (potential liability of an employer to comply with contribution notices issued by the Pensions Regulator held not to be a provable debt). I was also referred to the decision of the High Court of Australia in Foots v Southern Cross Mine Management Pty Ltd [2007] HCA 56 which again concerned a costs order made after the commencement of bankruptcy (held by the majority not to be a provable debt) and which contains both an illuminating and erudite discussion of the 19th century English authorities by the majority, and a powerfully expressed dissent by Kirby J.

10. I have read all these authorities, and the others to which I was referred, with interest but I do not think it is necessary for me to analyse them or refer to them at length. In Bloom v The Pensions Regulator Lloyd LJ (who gave the only reasoned judgment) summarised the current state of the law as follows (at [71]):

"Thus, a costs order in ordinary civil proceedings made after the onset of insolvency proceedings in relation to the paying party under the order is not provable in those proceedings, because it is not a contingent liability within section 382(1)(b) or rule 13.12(1)(b). The fact that the person in question is a party to proceedings and may, therefore, come to be ordered to pay costs is not sufficient to establish that the liability under the eventual order arises because of a legal obligation incurred before the insolvency. The party is in a situation in which an adverse order for costs may be made, which may or may not be of his own choosing. But the making of such an order is a matter depending not only on future events but also on the exercise of a judicial discretion. That is not enough."

This is part of the reasoning which led Lloyd J to the conclusion which he expressed at [73] as follows:-

"Briggs J held that the effect of the Court of Appeal decisions was that, without a pre-existing legal obligation such as is referred to in rule 13.12(1)(b) or section 382(1)(b), a liability cannot qualify as a contingent liability so as to be provable under those provisions. I agree with him as to that."

See also at [76]:

"I agree, too, with the judge's telling comments at his paragraph 103 on the unsatisfactory nature of some of the distinctions that have been drawn in the cases. However it seems to me that he was right to decide that he was bound by decisions of the Court of Appeal to the effect that a prior legal obligation is essential to establish that a liability which has matured after the commencement of an insolvency process was, at the outset of that process, already a contingent liability, so that it is provable in the relevant process, whether bankruptcy, administration or liquidation. We too are so bound."

These statements are part of the ratio and binding on me. It seems to me therefore that despite the interesting arguments that have been addressed to me I must proceed on the basis that the current law is that a liability to pay costs in ordinary civil litigation under an order made after the commencement of insolvency is not a provable debt.

11. I have deliberately referred to the "current" state of the law. The decision in Bloom v The Pensions Regulator has been appealed to the Supreme Court, which has recently heard the appeal but not yet handed down judgment. Since the question in that case was whether the potential liability under the statutory provisions in the Pensions Act 2004 of certain Nortel companies which were in administration (and certain Lehman companies where a similar point arose) was (i) a provable debt in the insolvency of those companies (and hence qualifying for dividend): (ii) an expense of the administration (and hence payable in full); or (iii) neither (and hence payable only in the unlikely event that all the provable debts and expenses had been fully paid), it seems inevitable that the Supreme Court will have to consider in detail what the test is for determining whether a liability is a contingent liability so as to qualify as a provable debt. This will no doubt require close scrutiny of the Glenister v Rowe line of authority and it is perhaps unlikely that that line of authority will emerge unscathed, especially given what Lloyd J refers to as the unsatisfactory nature of some of the distinctions that have been drawn, and the actual result in Bloom v The Pensions Regulator which both Briggs J and the Court of Appeal felt compelled to come to with evident reluctance. It is not appropriate for me to speculate as to what the Supreme Court will decide, but I can I think conclude that there is at the lowest a reasonable prospect that the line will not be drawn in quite the same place as it is at the moment.

12. However for present purposes I will proceed on the basis that the law is as laid down in Glenister v Rowe, and summarised in the passages I have cited from Bloom v The Pensions Regulator. On this basis it must follow that [the debtor's] liability for costs under my order is not a provable debt within s 382 of the Act (or to be more precise, would not have been a provable debt if [the debtor] had become bankrupt before the order was made). ...

29. For the reasons I have given I find that [the debtor's] liability for costs under my order of 2 May 2013 is a Debt within the scope of the IVA. It does not seem to be disputed (and in any event I would decide) that it is inappropriate to order [the debtor] to make an interim payment in respect of a liability that is within the scope of the IVA. I will therefore dismiss the application for an interim payment.

30. I should add for the sake of completeness that if I had reached the view that [the debtor's] liability for costs fell outside the scope of the IVA on the grounds that it was governed by the Glenister v Rowe line of authority, I would have acceded to [Counsel for the debtor's] submission that this application should be adjourned to await the outcome of the appeal in Bloom v The Pensions Regulator. It seems inevitable for reasons already given that the Supreme Court will clarify the law on what counts as a provable debt, and although as far as I know no date has yet been set for the judgment, it is bound to be within a reasonably short period. In these circumstances it would have been more in accordance with the overriding objective to have a relatively short delay in the hearing of the application rather than make an order on the basis of a view of the law which might very well be about to be changed.'

The decision in Nortel

8.         Among other things, the Glenister v Rowe line of authorities was overruled by the Supreme Court in Nortel. As stated, the principal issue was to the priority of a liability under a financial support direction from the Pensions Regulator requiring financial support for a deficient pension scheme from group companies in the administration of those group companies. In determining the issue, the Supreme Court expressly considered (and recast) the meaning of what was a contingent liability, and therefore what was a provable debt. Lord Neuberger (with whom Lords Mance, Clarke and Toulson agreed) stated as follows:-

‘88. In a number of cases, it has been held that, where an order for costs was made against a person after an insolvency process had been instituted against him, his liability for costs did not arise from an obligation which had arisen before issue of the bankruptcy proceedings, even though the costs order was made in proceedings which had been started before that insolvency process had begun - see for instance In re Bluck, Ex p Bluck (1887) 57 LT 419, In re British Gold Fields of West Africa [1899] 2 Ch 7, In re A Debtor (No 68 of 1911) [1911] 2 KB 652, and In re Pitchford [1924] 2 Ch 260.

89. In my view, by becoming a party to legal proceedings in this jurisdiction, a person is brought within a system governed by rules of court, which carry with them the potential for being rendered legally liable for costs, subject of course to the discretion of the court. An order for costs made against a company in liquidation, made in proceedings begun before it went into liquidation, is therefore provable as a contingent liability under rule 13.12(1)(b), as the liability for those costs will have arisen by reason of the obligation which the company incurred when it became party to the proceedings.

90. I have little concern about overruling those earlier decisions, although they are long-standing. First, the judgments are very short of any reasoning, and consist of little but assertion. Secondly, they were decided at a time when the legislature and the courts were less anxious than currently for an insolvency to clear all the liabilities of a bankrupt (as they were all concerned with individual insolvencies). Although most of the provisions of rule 13.12 and section 382 can be found in section 30(3), (4) and (8) of the Bankruptcy Act 1914, over the past three hundred years, "the legislature has progressively widened the definition of provable debts and narrowed the class of non-provable liabilities" to quote from the written case of Mr Phillips QC who relied on those cases. Thirdly, those cases are impossible to reconcile logically with the earlier case of In re Smith, Ex p Edwards (1886) 3 Morrell 179, where, on identical facts (save that it was an arbitration rather than litigation) it was held that an order for costs did give rise to a provable debt. Fourthly, the unsatisfactory nature of those decisions can be seen from the way in which the Court of Appeal sought to evade their consequence in Day v Haine [2008] ICR 1102, a case which I consider to have been rightly decided.

91. For the same reasons, I consider that the decisions of the Court of Appeal in Glenister v Rowe [2000] Ch 76 and Steele [2006] 1 WLR 2380 were wrongly decided, although I can see how it might be said that they were justified on the basis of stare decisis. The reasoning of Arden LJ in the latter case at paras 21-23 is instructive, because, as she says, the previous authorities in relation to provable debts suggested a "narrower meaning of contingent liability" than was adopted by the majority in Sutherland. That observation neatly illustrates why they were wrongly decided.

92. The Report of the Review Committee on Insolvency Law and Practice ("the Cork Report", 1982, Cmnd 8558), para 1289, described it as a "basic principle of the law of insolvency" that "every debt or liability capable of being expressed in money terms should be eligible for proof" so that "the insolvency administration should deal comprehensively with, and in one way or another discharge, all such debts and liabilities".

93. The notion that all possible liabilities within reason should be provable helps achieve equal justice to all creditors and potential creditors in any insolvency, and, in bankruptcy proceedings, helps ensure that the former bankrupt can in due course start afresh. Indeed, that seems to have been the approach of the courts in the 19th century before the somewhat aberrant decisions referred to in para 88 above. Thus, in Ex p Llynvi Coal and Iron Co; In re Hide (1871) LR 7 Ch App 28, 32, James LJ described one of the main aims of the bankruptcy regime as to enable the bankrupt to be "a freed man - freed not only from debts, but from contracts, liabilities, engagements and contingencies of every kind". If that was true in 1871, it is all the more true following the passing of the 1986 and 2002 Acts, and as illustrated by the amendment to rule 13.12(2) effected following the decision in In re T & N Ltd [2006] 1 WLR 1728, so as to extend the rights of potential tort claimants to prove.

94. It was suggested that para (m) was included in rule 4.218(3) on the assumption that cases such as those mentioned in para 88 above were rightly decided. That may be so. But, even if it is, the fact that a rule has been drafted on the basis that a decision of the Court of Appeal was right does not mean that this court should uphold the decision if satisfied that it was wrong.'

Lord Sumption stated as follows:-

‘136. In the present case, the Court of Appeal considered itself to be bound by a line of cases in which it was held that a liability for costs arising from a judgment given after the commencement of the insolvency was not provable as a contingent debt, even if the litigation was in progress when the company went into liquidation. The case-law begins with In re Bluck Ex p Bluck (1887) 57 LT 419, and continues with In re British Gold Fields of West Africa [1899] 2 Ch 7, In re A Debtor (No 68 of 1911) [1911] 2 KB 652, In re Pitchford [1924] 2 Ch 260, Glenister v Rowe [2000] Ch 76. The reasoning of these cases has recently been applied to other claims said to represent contingent liabilities: see R (Steele) v Birmingham City Council [2006] 1 WLR 2380. There are a number of problems about these cases. One of them, as it seems to me, is the absence of any real attempt to analyse the effect of the statutory scheme in creating an obligation to meet a liability contingently on some specified event. In the earlier cases, this can perhaps be regarded as the legacy of the older principle which admitted only contractual debts to proof. But that consideration cannot explain the more recent decisions. In my view they were wrongly decided. In the costs cases, I consider that those who engage in litigation whether as claimant or defendant, submit themselves to a statutory scheme which gives rise to a relationship between them governed by rules of court. They are liable under those rules to be made to pay costs contingently on the outcome and on the exercise of the court's discretion. An order for costs made in proceedings which were begun before the judgment debtor went into liquidation is in my view provable as a contingent liability, as indeed it has been held to be in the case of arbitration proceedings: In re Smith, Ex p Edwards (1886) 3 Morrell 179. In both cases, the order for costs is made against someone who is subject to a scheme of rules under which that is a contingent outcome. The fact that in one case the submission is contractual while in the other it is not, cannot make any difference under the modern scheme of insolvency law under which all liabilities arising from the state of affairs which obtains at the time when the company went into liquidation are in principle provable. Of course, an order for costs like many other contingencies to which a debt or liability may arise, depends on the exercise of a discretion and may never be made. But that does not make it special. It is not a condition of the right to prove for a debt or liability which is contingent at the date when the company went into liquidation that the contingency should be bound to occur or that its occurrence should be determined by absolute rather than discretionary factors.'

The immediate impact of Nortel

9.         Accordingly, the position as regards as yet unimposed costs orders on the basis of the construction of the Rules is that a possible future costs order in extant proceedings as at the date of the insolvency event is a contingent liability, and therefore provable in the insolvency, rather than enforceable as a debt outside the insolvency. This brings the general law into line with that which is sought to be applied contractually within an IVA by the operation of the R3 Standard Conditions.

10.       As far as IVAs are concerned, this means that the Chairman of the creditors' meeting has the task of assessing both the chances of the costs order being made in favour of the creditor (which inevitably will include an assessment of the merits of the creditor's claim) as well as the amount of those potential costs. It may well be that the most prudent course is to allow the creditor to vote in the full amount of the possible costs order, and mark it as objected to, rather than embark on a prolonged assessment of the creditor's chances of success. To say that such a situation is fraught with difficulty is an understatement, especially where the value of the potential future costs order (perhaps increased by the impact of terms of conditional fee agreements) is sufficient to tip the balance of the creditor profile one way or another, either by increasing that creditor's claim to beyond 25%, thereby enabling the IVA proposal to be blocked, or by tipping the approving creditors beyond the 75% approval required to bind in a dissentient minority. In the latter circumstance, the Chairman will have to be increasingly vigilant as to whether the creditor is an associate of the debtor, for the purposes of ensuring that the 50% approval hurdle by unconnected creditors is achieved. It is easy to imagine debtors (whose proposals are not approved) or dissentient creditors (faced with the prospect of being bound in the IVAs which they did not approve) casting a detailed eye over the projected costs figures or arguing that conditional fee agreements are unenforceable for one reason or another, with a view to launching appeals against the votes or asserting material irregularities.

11.       As far as Supervisors are concerned, the position is equally tricky. Aside from any difficulties that there might be as regards agreeing creditors' claims that are disputed by debtors, there is the increased prospect of debtors (or other creditors) being unwilling to accept the Supervisor's decision as regards the extent to which the potential costs claim might be admitted for dividend purposes. The likelihood is that there may well be more continued litigation in order to determine the value of claims bound into the IVA not just because the debt is disputed, but because there can be no agreement in respect of the value of the claimed costs. The finality achieved for the debtor who is free from enforcement by those with claims existing against him at the approval of the IVA will be achieved at the risk of greater administration time and cost, which is likely to mean a reduced return for the general body of creditors.

12.       As far as bankruptcies are concerned, the position is not, on the whole, that different from before. The trustee in bankruptcy will simply have an additional proof to assess which, on the whole, will make little difference to the bankrupt. The circumstances where there are likely to be issues are where there is a surplus, or where the potential value of the costs claim makes a difference between there being a surplus or not; the bankrupt will not be happy for the trustee in bankruptcy to admit a contested claim that has the effect of eating into his surplus. Similarly, there will be issues where the bankrupt seeks an annulment on the payment in full ground under s 282(1)(b) of the Insolvency Act 1986. The bankrupt will have to find a greater sum to pay the bankruptcy debts in full or, most likely, secure for pending the determination of the creditor's claim, either in respect of the debt itself or the costs.

Further implications of Nortel

13.       There are other contingent-type litigation claims that similarly depend upon the exercise of the Court's discretion on any given day. The classic example of this is a pending ancillary relief claim (although similar principles might apply where the bankrupt is the beneficiary under a deceased's estate in respect of which a claimant is maintaining a claim under the Inheritance (Provision for Family and Dependents) Act 1975).

14.       In Re Jones (A Bankrupt); Ball v Jones [2008] BPIR 1051, the trustee in bankruptcy sought to avoid an consent order in ancillary relief proceedings that appeared to be rather generous to the debtor's spouse not only as a transaction at an undervalue, but also as a preference. Chief Registrar Baister dismissed that aspect of the application on the basis that, at the time that the consent order took place, the spouse was not a creditor of the debtor. The mere fact that the ancillary relief claim might have had a monetary value, or the fact that there was a pre-existing underlying agreement between the parties which could not be resiled from did not render the spouse a creditor of the debtor. Particular reliance was placed on Glenister v Rowe and Steele, both of which were held by the Supreme Court in Nortel to be wrongly decided.

15.       The Chief Registrar stated as follows:-

‘[73] As to [the spouse's] status as a creditor [Counsel for the trustee] relies on the fact that an ancillary relief claim has a monetary value so that the person with the right to bring the claim has a potential valuable asset. This again follows from Haines v Hill [2007] EWCA Civ 1284; [2007] BPIR 1280 (see para [29]). As the ancillary relief right can be measured in money or money's worth, the person with the ancillary relief claim is a creditor within the meaning of s 340 (cf Jackson v Bell [2001] EWCA Civ 387, [2001] BPIR 612 where permission to appeal to the Court of Appeal was given to consider the issue of whether an ancillary relief order could be challenged under s 340; the case was, however, compromised before the hearing).

[74] In support of that he relies on a decision of His Honour Judge Weeks QC (sitting in the Bristol County Court) who considered an application by a trustee in bankruptcy to set aside a transaction under s 339 and/or s 340 in Re Christopher Leonard Rich (In Bankruptcy) [2008] BPIR 485. In that case, in 1999 a deed had been executed dealing with a division of properties between a married couple who were to divorce. It provided for the properties to be held on trust for the wife absolutely. In 2000 Customs & Excise presented petitions against Mr Rich and the firm in which he and Mrs Rich were partners. Mr Rich was adjudged bankrupt and the partnership was wound up. Paragraph 2 of the deed provided:

"Having regard to the possible dissolution of their marriage the parties hereto have agreed in part resolution of the financial matters to be dealt with between them to execute this Deed in the terms hereafter appearing."

By reference to that paragraph of the deed and the prospective financial relief which Mrs Rich could claim as ancillary relief the judge held (at para [16]):

"I think Mrs Rich could properly be described as a prospective creditor of her husband at the time although not one with a debt which could be proved and I would therefore if necessary hold that section 340 is applicable."

[75] In Re T&N Ltd and Others (No 2) [2005] EWHC 2870 (Ch), [2006] 1 WLR 1728, [2006] BPIR 532 David Richards J distinguished Glenister v Rowe [2000] Ch 76, [1999] 3 WLR 716, [1999] BPIR 674 which found that a party to litigation does not have a provable debt in the bankruptcy of another party in respect of pre-bankruptcy costs unless the order for costs in its favour was made before the commencement of the bankruptcy. The grounds for his decision were that the existence of a liability for costs depends on the exercise of the court's discretion. Until the discretion is exercised there is no liability. He held that a claim triggered by a statutory provision which creates an entitlement may render the claimant a creditor.

[76] In Haines v Hill the Court of Appeal held that although a claim for ancillary relief does not constitute a cause of action for the purposes of s 1(1) of the Law Reform (Miscellaneous Provisions) Act 1934 it does provide a statutory right for a money claim or claim for other relief: ‘If one considers the economic realities, the order of the court quantifies the value of the applicant spouse's statutory right' (para [35]).

[77] [Counsel for the trustee] concludes that ancillary relief applications are different in form and substance to a claim for costs in ordinary proceedings. On the bases set out above he submits that [the spouse] was a creditor or prospective creditor of [the bankrupt] at the time of the agreement ...

[80] ... [Counsel for the spouse] poses the question whether an applicant in ancillary relief proceedings can be a contingent creditor as defined and invites, as a matter of construction and by reference to authority, an answer in the negative. Again, I can set out the thrust of her analysis of the authorities by taking her propositions from paragraphs 29-40 of her skeleton argument in which she draws on Re Wisepark Ltd [1994] BCC 221, Glenister v Rowe [1999] BPIR 674, R (Steele) v Birmingham City Council and the Secretary of State for Work and Pensions [2005] EWCA Civ 1824, [2006] 1 WLR 2380, [2006] BPIR 856 and Foots v Southern Cross Mine Management Pty Limited and Others [2007] HCA 56, [2007] BPIR 1498 (which follows Glenister v Rowe).

[84] [Counsel for the spouse] submits that the ... approval of a consent order in ancillary relief proceedings also involves the exercise of a discretion: see for example, the dicta of the Chancellor at para [39], those of Thorpe LJ at paras [42] and [53] and Rix LJ at para [63] in Haines v Hill and McMinn v McMinn [2002] EWHC 1194 (Fam), [2003] 2 FLR 823 (an ancillary relief claim is not a cause of action until an order has been made and the discretion has been exercised).

[85] As to Jackson v Bell and Re Christopher Rich she says that the scope of ss 382 and 383 was not fully explored and the court did not have the benefit of argument based on Glenister v Rowe and R (Steele) so those cases are of little if any significance for present purposes.

[86] Re T&N Ltd, she submits, although of interest, takes the matter no further. It addresses the meaning of ‘creditor' for the purposes of Part I of the Insolvency Act (which contains no definition of the term) and under s 425 of the Companies Act 1985 rather than in the context of individual insolvency (where there is a definition). In giving judgment David Richards J was at pains to stress the different policy considerations governing the two régimes (see, for example, paras [76] and [140] of his judgment).

[87] Haines v Hill addresses not the issue of whether a spouse with an ancillary relief claim qualifies as a creditor but the issue whether such a spouse may be said to have given consideration for any benefits received under an ancillary relief order for the purposes of s 339. A litigant with an arguable claim for costs has something which he can bargain with, but it is clear from Glenister v Rowe that this does not make him a contingent creditor. The same applies to a claimant for ancillary relief.

[88] [Counsel for the spouse] points out that a fundamental premise of all three judgments given in the Court of Appeal in Haines v Hill is that a spouse seeking ancillary relief is not a creditor. No sense can otherwise be made of the many occasions during the course of the three judgments when creditors are contrasted with applicant spouses.

[89] She concludes by contending that it would drive a coach and four through the policy considerations addressed in Haines v Hill if a spouse with an ancillary relief claim did qualify as a creditor for the purposes of s 340. The effect of such a ruling would be that, subject only to proof of insolvency, any ancillary relief order made up to 2 years before the bankruptcy of one of the spouses would be vulnerable to attack as a preference, the onus being on the respondent spouse in each case to rebut the presumption of a desire to prefer. This would entirely undermine the Court of Appeal's insistence on positive proof of fraud, collusion and so on as a precondition to a challenge under s 339 to an order made in ancillary relief proceedings. No one would go to the trouble of proving collusion in an undervalue claim when they could simply plead preference instead and rely on the presumption to prefer.

[90] There is some force in [Counsel for the trustee's] submission that there is a difference between an order for ancillary relief and a prospective claim for costs. However, it seems to me that the analogy between the two is sufficiently close to be sustainable: a major common feature is that neither a claim for costs nor an ancillary relief consent order can be enforced without the court first exercising its discretion to render them enforceable. The analogy gains greater weight for its applicability to a determination of the kind considered in R (Steele). The weight of the authority on which [Counsel for the spouse] relies plainly supports her propositions which will acquire no further weight for being repeated here. ...

[97] For the foregoing reasons I find that [the spouse] was not a creditor of [the bankrupt] on the basis advanced by the applicant.'

16.       Re Jones was followed and approved by Norris J sitting in the Family Division in Arif v Anwar [2013] EWHC 624 (Fam); [2013] BPIR 389. In that case, the wife sought to challenge the effect of a number of transactions entered into by her husband prior to his bankruptcy, with a view to establishing a surplus in his estate as, unless there was a clear surplus of assets over liabilities in the bankruptcy, it would not be possible for an award to be made in her favour in ancillary relief proceedings. In that context, in ordering certain preliminary issues as regards those transactions within the framework of the ancillary relief proceedings, his Lordship stated:-

‘[13] If there had been any question of [the husband] entering into a transaction at an undervalue with the intention of putting assets beyond the reach of [the wife] (which is not alleged in this case) then she would have had standing as ‘a victim' to apply to restore the position: Ram v Ram, Ram, Ram and Russell [2004] EWCA Civ 1452, [2005] BPIR 616. But the fact that she has a claim for unpaid maintenance pending suit does not give her standing as a creditor because such a debt is not provable in the bankruptcy: Insolvency Rules 1986, r 12.3(2)(a). Nor does her current claim for a lump sum payment give her standing as a contingent creditor: she is not a creditor at all within s 382 of the Insolvency Act 1986 until the ancillary relief order is made in her favour: Re Jones (A Bankrupt); Ball v Jones [2008] BPIR 1051, the reasoning in which is consistent with the decisions of the Court of Appeal in Glenister v Rowe [2000] (Ch) 76, [1999] BPIR 674, Steele v Birmingham City Council [2005] EWCA Civ 1824, [2006] BPIR 856 and Casson v Law Society [2009] EWHC 1043, [2010] BPIR 49.'


17.       Thus, the conclusion that a spouse with an extant ancillary relief claim at the time of bankruptcy is not a creditor of the bankrupt has been fundamentally based upon an application of the principles in Glenister v Rowe and Steele. Principles that are no longer good law. It seems that the scope of the decision in Nortel could well go beyond cases involving costs orders. By extending the scope of those who are contingent creditors as at the date of the insolvency event, the Supreme Court may well have extended the reach of trustees in bankruptcy to avoid the effect of pre-bankruptcy consent orders entered into by bankrupt spouses. Like Glenister v Rowe and Steele, Re Jones may well no longer be good law. 

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