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||Neutral Citation Number:  EWHC 1203 (Ch)
||Case No: 3009 OF 2014
IN THE HIGH COURT OF JUSTICE
||Royal Courts of Justice
The Rolls Building,
London, WC4A 1NL
B e f o r e :
STEVEN THOMPSON QC (instructed by Memery Crystal) for the Petitioners
SHUVRA DEB (instructed by Mundays) for the Respondent
Hearing dates: 13 April 2015
HTML VERSION OF JUDGMENT
Crown Copyright ©
Mr. Registrar Briggs:
- Before the court is the final hearing of a bankruptcy petition (the "Petition"). The making of a bankruptcy order is resisted by the Respondent on three grounds. In broad terms the Respondent challenges jurisdiction, says that service of the petition was not effective and that the petitioning creditor is secured.
- The majority of the background is not contentious. In September 2007 the Petitioners entered into a share purchase agreement with Mr. Morby for a group of 13 companies known as the Fernley Group. The share purchase price was £12million. The price was made up of £6.6m in cash and shares in the ultimate parent of Gate Gourmet Luxembourg IV Sarl ("GG"). In July 2009 GG issued proceedings against Mr. Morby and Fernley Group for breach of warranty and breach of a tax covenant contained in the sale purchase agreement. Although the proceedings were initially defended a settlement agreement was entered into on 24 June 2011 (the "SA"). The SA provided for Mr. Morby to pay GG £1.1m (the "Payment"). The Payment was to be made in two tranches of £550,000. Mr. Morby paid the first tranche on 24 June 2011. The second tranche was due on 30 March 2012.
- Mr. Morby owns a house in France (the "French Property"). The SA provided that if the French Property was sold before 30 March 2012 the second tranche would be payable within 5 working days of the sale completing. The French Property has not been sold. Nevertheless the second tranche was said to be secured by Mr. Morby by the grant of a second charge dated 20 July 2011. The prior charge is made in favour of Credit Foncier De Monaco.
- The Petition is based upon a statutory demand served on 15 August 2013. Mr Morby applied a month later to set aside in the Kingston County Court, on the bases that the debt was secured and the statutory demand was not properly served. In respect of the security issue, the security was estimated to have a value of £0. Mr. Morby contended that the estimate was incorrect. On 7 February 2014 the County Court gave a direction that there be a single joint expert appointed for the purpose of valuing the French Property in order to ascertain the value of the security. The order provided that Mr. Morby provide the single joint expert with all necessary information and grant full access for the purpose of undertaking the valuation. It was further ordered that "unless the Debtor grants the single joint expert access to the French Property ………the Debtor will be debarred from relying on any valuation evidence …at the hearing and the Creditors will have permission to adduce property valuation evidence from their own property valuation expert notwithstanding that the expert will not have had access to the French Property."
- In breach of that order Mr. Morby refused access to the French Property and the matter came on for final determination before Deputy District Judge McConnell, sitting in the Kingston County Court, on 21 July 2014. I have not seen the judgment of the Deputy District Judge but it is apparent, from the order he made, that he found the onus of proving the security issue lay with Mr. Morby and that there was no ground to support his contention that the security was not properly specified in the demand or that the value of the security equaled or exceeded the debt. I am not aware what happened to the service issue, but the application to set aside the statutory demand was dismissed and permission was given to present a bankruptcy petition on or before 11 August 2014.
- Mr. Morby was present in the Kingston County Court on 21 July 2014. Also present at court that day was Mr. Gary Beecham, a process server. Mr Reynolds, a solicitor acting for GG pointed out Mr. Morby to him. Directly after the hearing a trainee at the solicitors' acting for the Petitioner attended the High Court of Justice at the Rolls Building to file the Petition for bankruptcy. The Petition was accepted and court stamped 21 July 2014. The next part of the background becomes contentious. I therefore quote from the various different parties' evidence. Mr. Reynolds says:
"I understand from enquiries I made with Court staff that it was necessary for a registrar in bankruptcy of the High Court to review the petition because the Statutory Demand in support of the Petition was served by way of substituted service. I understand from Ms Evans that the Court confirmed to her on 28 July 2014 that the Petition was approved by the registrar on 25 July 2014 and the Petition was endorsed by the Court with this date"
- As regards the service of the Petition Mr Reynolds has sworn a witness statement saying that:
"I was in email contact with Mr Morby and we made arrangements for him to meet with a process service for the purpose of effecting personal service of the Petition which he did. I instructed Mr. Beecham to meet with Mr. Morby at 10:00am on 7 August 2014 in Terminal 3 at Heathrow Airport."
- Mr. Beecham provides a witness statement in which he says:
"I confirm that I personally handed the Petition to Mr. Morby. I recognized Mr. Morby because I had seen him previously on 21 July 2014 at Kingston County Court when he was pointed out to me by Mr. Reynolds….Nevertheless it is my practice to ask people to confirm their identity when serving documents, and prior to handing the Petition to Mr. Morby I asked him to confirm that his name was Gary Morby, which he did. Once I handed the Petition to Mr. Morby he immediately passed the Petition to the other gentleman. After taking a couple of minutes to read the Petition the other gentleman said that they were not accepting the Petition because it contained the wrong address and that Mr Morby had never lived at the Surrey address on the Petition. …. I immediately confirmed the above events had taken place in an email to my colleague Ben Mansell timed 10:12 on 7 August 2014."
- Mr. Beecham has signed a certificate of personal service. Mr Morby says:
"I was accompanied to Heathrow by a witness, Mr. Bezhad Malik, so that he could check the Petition was correct before I accepted service. I wanted to ensure that I was not accepting service of incorrect court proceedings. The agent arrived at Terminal 3 and handed the Petition to Mr. Malik……As the information contained within the Petition is incorrect, Mr. Malik requested that this information be amended by the agent so that I could accept service The agent telephoned Memory Crystal and, I assume, was instructed not to amend the Petition as the agent confirmed to Mr. Malik that he could not do so. Consequently, Mr. Malik attempted to hand the Petition back to the agent, who refused to accept it, despite repeated requests to do so from Mr. Malk. As the agent would not accept the incorrect Petition back, Mr Malik put the Petition in the bin."
- The property address on the Petition was Brook Place, Bagshot Road, Cobham Surrey (the "Property"). The complaint at the airport was that Mr. Morby had 'never lived at the Property' and in any event Chobham was misspelt. Mr. Morby accepts that the Petition was also e-mailed to him by Mr. Reynolds on 8 August 2014 and that he received the e-mail with the Petition attached. Nevertheless Mr. Morby argues that he has not been served with the Petition.
- Mr Morby says that the Property identified on the Petition is owned not by him but his wife. He says it has not been occupied by them since 2007 and is uninhabitable. His evidence is that he took a job in Belgium in 2001. At the beginning his wife remained in England with their children. When the children went to boarding school his wife joined him. He initially rented property but then purchased a residence in Belgium. He says that he continued to reside there until July 2013:
"I moved to Dubai from Belgium in July 2013 to take up permanent consultancy roles which was a good opportunity for me to utilize the vast experience I have gained over the years…..I work as a consultant on a permanent basis for YQ Meet and Assist….YQ Meet and Assist provide permanent accommodation….for me and my family in Dubai….We intend to permanently reside in Dubai and have done so for the last 14 months. Dubai is my domicile of choice."
- In his third witness statement Mr. Morby says that he previously put forward arguments regarding security, and an appeal of a different case (but having a related issue) will impact on his position. In fact that appeal had been dismissed by the time of this hearing. Accordingly this element of his defence does not assist him.
- The notice of intention to oppose the bankruptcy petition dated 26 September 2014 may now been seen in context of the facts set out above.
- Section 265 of the Insolvency Act 1986 ("IA 1986") provides that a bankruptcy petition shall not be presented unless the debtor is:
i) Domiciled in England and Wales;
ii) Personally present in England and Wales on the date on which the petition is presented; or
iii) At any time in the period of 3 years ending with the day of presentation of the petition:
b) Has carried on business in England and Wales.
- It is argued by GG that although these are alternatives all headings are satisfied in this case. First I consider whether or not Mr. Morby was present in England and Wales on the date on which the Petition was presented. The argument against his presence is that the Petition was presented on 25 July 2014 and not 21 July 2014. In respect of the latter date he accepts that he flew into Heathrow, attended the Kingston County Court, and stayed in England. He says that he departed the shores of England on 24th July 2014 and headed to the French Property.
- The Petition is stamped at the top of the first page "HMCTS RECEIVED 21 JULY 2014 ROLLS BUILDING". This ties-in with the evidence given by Mr. Reynold's evidence, which is in any event not disputed.
- To present a petition means to file it in court: Rule 6.10(1) Insolvency Rules 1986 ("IR 1986"). The issue then, is was the Petition filed in court in accordance with Rule 6.10 of the IR 1986 between 21 July and 24 July 2014?
- Rule 6.10(4) provides that:
The date and time of filing the petition shall be endorsed on the petition and on any copy issued under paragraph 3.
- Rule 13.13(3) defines "filed in Court" as "delivered to the Court for filing". There is no argument that the Petition was delivered to the Court for filing on 21 July 2014. The Petition is dated 21 July 2014, the court has stamped it with that date and Mr. Reynolds, a solicitor of the Supreme Court, has provided sworn evidence that it was filed on that date. The unchallenged evidence means that the only issue is whether the endorsement on the back of the Petition should be viewed as being the date it was presented. To make such a finding would contradict the IR 1986, the undisputed facts and common sense. Furthermore such a finding would be inconsistent with the finding of Norris J in Re Blights Builders Ltd  EWHC 3549 (Ch),  3 All ER 776 where he held that a winding up petition was 'presented' when it was delivered to the court, and not when it was later sealed and issued.
- As a result I find that the Petition was presented on 21 July 2014 when Mr. Morby was present in England and as a result the court has jurisdiction pursuant to section 265 of the IA 1986.
- Due to this finding it is strictly unnecessary for me to consider the other limbs of section 265 IA 1986. As they were argued before me, I do so in brief. I find that Mr. Morby was domiciled in England. I accept the submissions of Mr. Thomson QC that a person cannot be without a domicile and will retain his domicile of origin unless and until he acquires a different domicile by exercise of his choice: Henwood v Barlow Clowes International Limited  BPIR 778. The burden of proof rests with the person asserting that the domicile has changed. The issue is fact sensitive. Accepting, for the sake of argument, that Mr. Morby changed his domicile by choice in or around 2001 I have to determine what happened when he says he changed his domicile for the second time in July 2013, the date he moved from Belgium.
- In order to change his domicile by choice Mr. Morby needs to show that he has established a residence in a different territory with the intention to reside there permanently. To discharge the burden of proof Mr. Morby says that he is a consultant in Dubai, he rents a property there, his wife lives with him and his adult daughter lives in Dubai as well. The evidence supports a conclusion that Mr. Morby's adult daughter is not dependent upon him. The fact that she lives in Dubai therefore carries little weight regarding his intention to reside in Dubai permanently. I accept that if a person's family live in a country on a permanent basis then the ties may be a factor that could lead to a conclusion, that it is more likely than not, that the person has an intention to remain in a country on a permanent basis. But this is not always the case. There is no evidence from his daughter and no evidence from his wife regarding their intention to reside in Dubai permanently. There is no evidence from either of these parties that they no longer consider themselves domiciled in England. The other factor is the consultancy. The evidence regarding the consultancy is thin. There is a letter dated 17 September 2014 which states that Mr. Morby "works for our organization….on the project basis' and that 'it is also confirmed that the company pays a monthly retainer fee and all travel costs.' In a later letter dated 24 September 2014 YQ Meet and Assist wrote a letter 'To Whom It May Concern' stating that Mr Morby with a British passport 'works for our company as a Consultant on a permanent basis'. He exhibits an identity card and 'resident' card.
- Arden LJ said in Henwood v Barlow Clowes International Limited, the intention of residence must be fixed and must be for the indefinite future. A person's domicile of choice must be his ultimate home or, as it has been put, the place where he would wish to spend his last days. It is not sufficient to reside in a country for a particular period of time, 2, 3, 5, 10 years and claim that this is sufficient to support the claim of a change of domicile. The employment and time in Dubai are the main planks of Mr. Morby's argument. By themselves they are not sufficient.
- I take into account that there is a failure to properly explain the retention of the Property in England, a failure to explain satisfactorily why important contractual and court based documents (including the charge, the contact address for the valuation for the French Property to take place and the application to set aside the statutory demand) were sent to the Property which he says he used as a post box, and a failure to explain, other than on the grounds of employment, that he intended his domicile first to be Belgium and then Dubai. The question is, does the evidence support the contention that Dubai will be his ultimate home? Mr. Morby tends to purchase property in different places, England, France and Belgium are examples. He has not purchased a property in Dubai even though he has been living in Dubai for two years. Mr. and Mrs. Morby have not given up the Property. As Mr. Morby has failed to discharge the burden of proof his domicile of origin revived in July 2013 when he left Belgium. I have not dealt with whether his domicile was in Belgium at all as it is unnecessary for me to do so given the acceptance by him that he changed domicile when he left in 2013.
- Lastly in connection with jurisdiction, I find that Mr. Morby was carrying on business in England and Wales at the relevant time. In Masters v Barclays Bank Plc  BPIR 1058 the High Court Chancery Division had to decide (expressing it simply) whether by entering into a guarantee in England the court had jurisdiction under section 265 IA 1986 even though the guarantor lived in Monaco and then Miami. The guarantor's evidence was that he had not carried on business in England at any time in the three years preceding the presentation of the petition. The petitioner relied on the guarantee itself which declared that the guarantor's residency was in England and provided that the guarantor would continue to reside in the jurisdiction. Relying on Re Brauch  1 Ch 316, the petitioner argued that the guarantor was carrying on business as he was a director of several companies registered in England and Wales. Norris J found that the circumstances may indicate that a single transaction is sufficient to demonstrate the carrying on of a business.
- There was no doubt that Mr. Morby was a shareholder in a group of companies that operated in England and Wales. There is no doubt that he sold by way of a share purchase agreement his interest in those companies. Consistent with Re Brauch, and Masters v Barclays Bank Plc the clear evidence is that Mr. Morby was carrying on business distinct from the group of companies by selling his shareholding in the group.
- In Re A Debtor (No 784 of 1991)  Ch 554 Hoffmann J held that for the purposes of s.265(1)(c)(ii) a person does not cease to carry on business until their business debts are settled. Mr. Morby has not settled his business debts. In that case the debtor carried on the business of running a nursing home, sold the business and went to live in the Canary Islands. A tax liability of £500,000 remained outstanding. The Court ruled that, given the outstanding tax liability, the debtor had continued to carry on business in England and Wales within the period of 3 years ending with the presentation of the petition for the purpose of s.265(1)(c)(ii) IA 1986.
- In my judgment it would be a strange result if Mr. Morby was able to claim that even though there has not been finality in relation to his dealings with the group of companies via the share purchase agreement he was not carrying on business. In my view a claim for a breach of warranty or a claim for tax would keep alive the business connection which is carrying on. Here the warranty claim led to a settlement agreement and that settlement agreement remains unperformed in part.
- In my Judgment he continues to carry on business as a result of the share purchase agreement and the litigation arising out of it.
Service of the Petition
- It is accepted that if the Petition were handed to Mr. Morby in Terminal 3 at Heathrow airport on 21 July 2014, personal service would have been effected. It is accepted, if the Petition would have been placed on his lap (if he were sitting) that would be sufficient. The evidence of GG is that the Petition was handed to Mr. Morby. Mr. Morby contends that the process server gave the Petition to Mr Malik, a friend, who attended Terminal 3 for the purpose of receiving the Petition on his behalf. There is an obvious conflict of evidence. Although the parties did not seek an order for cross-examination, I say straight away that it is regrettable that an order for cross-examination was not made by the Deputy Registrar who gave directions for the hearing and final disposal of the Petition. I am able to say this as I was the Deputy Registrar.
- I have been invited by counsel to reach a decision based on the witness statements. Regardless of the merits of preferring the sworn evidence of the process server who has no interest in the outcome, who had previously seen Mr. Morby and was unlikely to confuse him with another, I do not accept the invitation. If facts are in dispute, absent special situations, it would be unsafe to reach a conclusion on witness statements of fact alone: Wilkinson v Commissioners of Inland Revenue  BPIR 418. As it happened the process server attended court and was prepared to be cross- examined on the evidence he had provided, however the invitation to cross-examine was declined. Even if the process server had been cross-examined I would not have had the benefit of hearing Mr. Morby.
- No doubt prepared for the situation, GG argue that the circumstances are unusual and as a result I may find that the Petition was served personally. If not the court could order retrospective substituted service based on Mr. Morby's evidence. There would be no prejudice to Mr. Morby as he accepts that he has received the Petition by e- mail, and has come to court through solicitors and counsel to argue the case. Further there no dispute that he owes the sums said to be due on the face of the Petition. Failing that GG rely on the powers provided under rule 7.55 IR 1986 to waive any defect or irregularity by serving a friend at the request of Mr. Morby. I shall deal with these arguments in turn.
- Dealing with personal service, I find that the following matters material (1) Mr. Morby flew into Heathrow for the purpose of receiving the petition (2) he knew that he would be met at Terminal 3 by a process server (3) he knew that the process server would serve the Petition (4) he directed, on his own evidence that the Petition be handed to his friend (5) Mr Morby was present when the Petition was handed to his friend (6) his friend received and read the petition and spoke to Mr. Morby about its contents which were seemingly read out to him or partly read out to him enabling him to comment on it and (7) the process server engaged Mr. Morby about its content.
- The issue between the parties is, if I may term it this way, one of touch. If Mr. Morby had been touched by the Petition he would have been personally served. These are unusual circumstances. Mr. Morby had knowledge: knowledge that what was contained in the sealed envelope was the Petition. He could hear from the process server and from Mr. Malik that it was the Petition. He could see that it was the Petition. His mind engaged with the process of service and the detail of the Petition. He had notice of the Petition. He was given the opportunity to deal with the subject of the Petition. The distinction, in my view, of the Petition touching his lap or arm followed by a refusal to grasp the Petition, or followed by the debtor throwing it in the bin himself, and the circumstances of this case is a thin one, in reality. I find in these unusual circumstances where a Petition is handed to a specified agent at the request of the debtor, in the presence of the debtor in the manner described, personal service was effected. I recognise that there may be more than one view regarding my finding and therefore go on to consider substituted service and the cure provision contained within the IR 1986.
- In Abela v Baadarani  1 WLR 2043 the Supreme Court was asked whether there had been good service of a claim form on a respondent. The Supreme Court determined that a court may make an order declaring that steps taken by a claimant to bring a claim form to the attention of a defendant should be treated as good service. CPR 6.15(2) can be used retrospectively to validate steps taken to serve a claim form even if the defendant is not within the jurisdiction. But orders under CPR 6.15(1) and (2) could only be made only if there was "good reason" to do so.
- I accept that there are some similarities with the provisions relating to the service of a claim form by alternative method and substituted service under the Insolvency Practice Direction. However the IR 1986 does have a specific service provision
- Rule 6.14 IR 1986 provides:
"(1) Subject as follows, the petition shall be served personally on the debtor by an officer of the court, or by the petitioning creditor or his solicitor, or by a person instructed by the creditor or his solicitor for that purpose; and service shall be effected by delivering to him a sealed copy of the petition.
(2) If the court is satisfied by affidavit or other evidence on oath that prompt personal service cannot be effected because the debtor is keeping out of the way to avoid service of the petition or other legal process, or for any other cause, it may order substituted service to be effected in such manner as it thinks fit."
- By contrast Civil Procedure Rule 6.15(1) and (2) provides:
"(1) Where it appears to the court that there is a good reason to authorise service by a method or at a place not otherwise permitted by this Part, the court may make an order permitting service by an alternative method or at an alternative place.
(2) On an application under this rule, the court may order that steps already taken to bring the claim form to the attention of the defendant by an alternative method or at an alternative place is good service."
- It is submitted that the power provided under CPR 6.15(2) is as applicable to insolvency proceedings as it is to any other proceedings. There are three basis for this, two framed in the negative and the third in the positive. First there is nothing in the IR 1986 that precludes the court from retrospectively accepting that the actions of the parties constituted good service. Secondly there is nothing in the Insolvency Practice Direction that precludes a retrospective sanction. Thirdly the CPR applies to insolvency proceedings.
- The amended insolvency practice direction came into force on 29 July 2014 which under paragraph 2 stated that it "shall replace all previous Practice Directions, Practice Statements and Practice Notes relating to insolvency proceedings." Paragraph6.3 of the 2014 practice direction now provides that the provisions of CPR Part 6 do not apply to the service of a bankruptcy petition. The change in the practice direction merely reflects Rule 12A.16 (2) which dis-applies Rule 12A.17 to 12A.19 of the IR 1986 in relation to the service of winding up and bankruptcy petitions. As a result I do not have jurisdiction to grant retrospective substituted service of the petition.
- The ability of a court to grant a retrospective substituted service order has potential to prevent abuse of the service provisions reducing court time and expense. The Insolvency Rules Committee may wish to consider making an amendment to the IR 1986 permitting the application of CPR 6.15(2) and thereby incorporate the existing jurisprudence in respect of the rule, or otherwise provide the court with a tailored power to grant retrospective substituted service.
Rule 7.55 IR 1986
- Turning to the curative provision of Rule 7.55 of the IR 1986, this provides:
"No insolvency proceedings shall be invalidated by any formal defect or any irregularity, unless the court before which objection is made considers that substantial injustice has been caused by the defect or irregularity, and that the injustice cannot be remedied by any order of the court".
- By virtue of rule 13.7 of the IR 1986, 'insolvency proceedings' means any proceedings under the Insolvency Act 1986 or the Insolvency Rules 1986.
- In re Anderson Owen Ltd; Merrygold v Bates  EWHC 2837 (Ch),  BPIR 37 Norris J was concerned with a challenge to the service of proceedings brought bya liquidator of an insolvent company against the directors pursuant to section 212 of the IA 1986. Chief Registrar Baister gave permission to effect service by posting notice of the proceedings to one of the directors' address in Germany. The English solicitors informed the liquidator that they did not consider that they were still acting for the director. The director indicated that a German firm had authority to accept service but the firm denied it had authority to act for her in relation to English proceedings. Just before the first hearing of the application the English solicitors disputed service because the direction by the Chief Registrar did not comply with EC regulations on service. The liquidator decided not to challenge defective service but to ask the court to cure any defect pursuant to Rule 7.55 of the IR 1986. Norris J said (at paragraph 24):
"The essential purpose of rules as to service is to ensure that a party has proper notice of proceedings brought and a fair opportunity to deal with them".
- He then addressed the scope of Rule 7.55 IR 1986 and concluded that 'defective service is within the scope of this rule'. The Judge considered whether the guidance provided in CPR 3.10 relating to compliance with CPR rules would offer an insight as to the exercise of the discretion under the IR 1986. He thought that there was "nothing in [CPR 3.10] to indicate that the curative power conferred by IR 7.55 is not capable of being exercised so as to treat as valid service [that] which was technically defective."
- Norris J weighed the facts and found that as there had been no injustice on the facts of the case. The court could retrospectively validate pursuant to Rule 7.55 IR 1986.
- Against this decision there is a run of cases dealing with defective appointment of administrators. In Re G-Tech Construction Ltd  BPIR 1275 Hart J reluctantly found that Rule 7.55 IR 1986 did not assist because there was no insolvency process to cure at the time of the defect. Re Blights Builders Ltd  EWHC 3549 (Ch)  BCC 712 the defect arose because the out of court appointment was made at a time when, unknown to the appointor, a creditor's petition for the winding up of the company had already been presented. The Judge (HHJ Norris QC) found that failure to satisfy the statutory criteria for the exercise of the power to appoint represented a fundamental flaw which could not be remedied and referred a judgment in the Luton County Court: Re Awan  BPIR 241. It appears from the report that the Judge was not referred to the earlier decision of G-Tech Construction Limited (which was probably not reported at that time).
- In Re Awan  BPIR 241 a bankruptcy petition against Mr. Awan was adjourned on the basis that he denied he had received the petition. There was some difficulty serving Mr. Awan but the petition came before a district judge and, in the absence of Mr Awan, the bankruptcy order was made. On becoming aware of the bankruptcy order Mr Awan appealed and the petitioning creditor did not dispute that the bankruptcy order ought to be annulled as the debt had by that time been paid. The appellant court annulled the bankruptcy indicating that it wanted to have details of how service had been effected and left open the issue of costs. Having recited the procedural history of the case HHJ Boggis QC said:
"In my judgment, bankruptcy is one of the most serious forms of execution that can be brought against a debtor. Bankruptcy proceedings brought against a solicitor are even more serious. In any bankruptcy proceedings it is, in my view, absolutely clear that the provisions as to service must be followed exactly. The rules provide in terms that the petition must be supported by an affidavit of service showing how the petition was served, and express reference is made to substituted service and the way in which that then is to be proved, which involves the affidavit of service having with it a sealed copy of the order.
Those provisions were not followed here, and it follows that this is a bankruptcy order that should never have been made. The only matter which needs to be brought into account in coming to that conclusion is the provision in r 7.55 which says……
I am not prepared to apply that rule to waive a defect in proof of service of a bankruptcy petition, and certainly not one brought against a solicitor"
- I comment that the Judge appears not to have ruled out the application of Rule 7.55 IR 1986 in all service of petition cases and was addressing a defect in a proof of service. He also seems to have taken the identity of the debtor into account. Re Frontsouth (Witham) Ltd  EWHC 1668 (Ch),  BCC 635 Henderson J found that an initial extension of an administration by consent was invalid, with the result that the court had no jurisdiction to extend the appointment by order. In considering the scope of Rule 7.55 IR 1986 he thought it could not be used to remedy a fundamental flaw such as a failure to satisfy one of the statutory prerequisites for appointment. He said (at paragraph 23):
"Such a defect cannot be characterised as purely 'formal', nor is it a mere 'irregularity'. On the contrary, it goes to the very essence of the appointment, and if it could be circumvented by reliance on a rule such as r 7.55 the effect would be tantamount to replacing a mandatory requirement with an optional one. The second reason is that the language of r 7.55 itself shows that it was never intended to apply to fundamental defects of the type with which I am now concerned. It does not make much sense to talk of an invalid appointment causing 'injustice', or of any such injustice being 'remedied' by an order retrospectively validating the appointment."
- On the facts of the case there were no existing insolvency proceedings. On this basis it is hard imagine how Rule 7.55 IR 1986 could have rescued the day.
- There followed a series of other defective administration cases but for the purpose of Rule 7.55 IR 1986 the tide began to turn in respect of the jurisprudence when, in Re Euromaster Ltd  EWHC 2356 (Ch),  BCC 754 Norris J found that a defect in an administration appointment could be cured pursuant to the curative rule. HHJ Purle QC giving judgment in Re Care People Limited  BPIR 959, thought that Norris J retreated in Euromaster Limited from his position in Re Blights Builders Limited. Having considered the authorities and recited the procedural history he found that as the company had suffered no substantial injustice, the appointment should be declared valid, notwithstanding the defect, and he waived any defects under Rule 7.55 1986.
- The authorities are not at one as to the application of Rule 7.55 IR 1986, and it could be said, with reasonable certainty, that there is an element of conflict. One matter that can also be said with some certainty is that Rule 7.55 IR 1986 does not apply if there are no insolvency proceedings to cure. This is often the first question in the authorities. Depending on the answer to that question the court will then decide whether a cure can be made. Some cases simply look at the justice of the matter, balancing any injustice before reaching a decision to cure or not to cure the relevant defect or irregularity. In other cases the court has considered the nature of the defect determining whether it is fundamental in nature: if it is not fundamental it may be cured.
- In my judgment the reasoning in Re Awan, influencing the decision of HHJ Norris QC in Re Blights Builders Ltd, is not a strong basis for arguing that service can never be cured by Rule 7.55 IR 1986. My reasons are (taking note that the decision in Re Awan was based on the facts of that particular case and on the submissions before the court) there was little analysis of the rule, its purpose or application. It is apparent from the judgment that the Judge was heavily influenced by the facts and in particular that the debtor was a solicitor. Secondly the case was only argued by one party and no authorities or commentary were provided to the court in relation to the rule. Thirdly, the judge based his decision in part on his view that 'bankruptcy is one of the most serious forms of execution that can be brought against a debtor'. I agree with the learned judge that the background of bankruptcy and its effects are proper matters to take into account. I acknowledge bankruptcy is serious in that it effects status and restricts the freedoms of an individual for a period of time. However there is another equally important side to bankruptcy as explained by the Chief Bankruptcy Registrar in Re Kekhman  BPIR 959 at paragraph 113 (not overruled on appeal):
"The law of bankruptcy has developed over the years to relieve debtors as well as to give an orderly remedy to creditors. Deeds of arrangement were introduced in 1825 to provide one form of relief. We have seen references to the legislation for the relief of debtors in one of the earlier authorities. We have seen in Re Painter something of the controversy that surrounded the introduction of debtors' petitions in the nineteenth century. The last century saw considerable further liberalisation of the bankruptcy regime with the introduction by the Insolvency Act 1986 of individual voluntary arrangements and automatic discharge from bankruptcy after 3 years. In the late 1990s the Department of Trade and Industry became interested in American liberal approaches to bankruptcy and published Bankruptcy – A Fresh Start (2000) and a white paper, Productivity and Enterprise: Insolvency – A Second Chance (2001). The 3-year discharge period was reduced under the Enterprise Act 2002 to one year or less in certain cases. Emphasis was given to debtor rehabilitation in a way never seen before, so that benefit to the debtor of the various procedures introduced assumed an importance it had not thitherto enjoyed….. Rehabilitation of the debtor is, in my view, now a firmly established purpose of our bankruptcy law"
- In my view the words 'substantial injustice' in rule 7.55 IR 1986 should be read in the context of bankruptcy proceedings taking into account the effect on the bankrupt's estate as the learned Judge did in Re Awan, but also the legislative aims of rehabilitation. Fourthly, and in the same vein, bankruptcy is not a form of execution. It is a class remedy. Fifthly, HHJ Boggis QC thought it important that service by affidavit expressed in mandatory terms rendered Rule 7.55 IR 1986 inapplicable. In Oben v Blackman  BPIR 302 the issue before the court was whether a defective petition could be cured. The petition was defective in two respects first as to service of the statutory demand and second there was a failure to state the consideration for the debt or the date it became due. In relation to the last issue, Rule 6.8 of the IR 1986 provides that "There shall be stated in the petition….….the amount of the debt……"(my emphasis). The language is mandatory. Nevertheless on appeal the court taking into account the particular facts of the case said:
"I accept the submission of the creditors that their failure (or rather, that of their solicitors) to comply with r 6.8 was an insufficient basis of itself to justify the dismissal of the petition. To dismiss a petition on the ground of a formal defect such as that in this case, in circumstances where it is clear that the debtor has not been misled or confused as to the identity or nature of the debt or its amount or the consideration for it, is to reintroduce the excessive respect for formalities which the 1986 Rules were intended to avoid."
- Accordingly the appellant court was prepared to cure a defect or irregularity arising from a breach of a Rule expressed in mandatory language. From this I draw the conclusion that the mandatory language of a rule in the IR 1986 does not by itself preclude the application of Rule 7.55 IR 1986. This leads to the last (and connected reason). It appears from the report in Re Awan that the court was not referred to Re a Debtor (No 1 of 1987)  1 WLR 271 where Nicholls L.J emphasized the need to consider issues on a case by case basis and then made a distinction between defects and irregularities, and deficiencies which "deprive the document altogether of its character of a statutory demand." Such a document could confuse a debtor (as was argued in Re A Debtor No 1 of 1987) which may lead to a 'substantial injustice'. The term fundamental, used in some of the cases, may have been used to express 'substantial injustice'. It may have been used to express the view that insolvency proceedings were not on foot and therefore Rule 7.55 IR 1986 could not apply. The term 'fundamental' does not, in my judgment, mean that some rules in the IR 1986are incapable of cure while others are capable of cure simply as a result of the language used.
- After this draft judgment was handed down my attention has been drawn to the decision of Andrews v Bohm  EWHC 3520 where Mr. Justice Mann found that the petitioning creditor could not rely, in bankruptcy proceedings, on an order for substituted service obtained in different proceedings. The court found that the IR 1986 contained specific provisions allowing for substituted service, and such provisions referred to applications made within the set of proceedings to which the application related. Mann J said (paragraph 58):
Insolvency Rule 6.14 is quite clear. The primary obligation on a creditor is to serve a bankruptcy petition personally, and that appears in terms from paragraph 6.14(1)….. [in this case] personal service was not effected; nor was there an application (much less an order) for substituted service. In almost every case that is likely, in my view, to be fatal to the petition. The service of a bankruptcy petition is obviously a very important step, and it is right and proper for the integrity of the system and for achieving fairness to debtors that those provisions be properly adhered to so that there can be no doubt that proper service has been established" (my emphasis)
- Considering Rule 7.55 IR 1986 he said:
"I confess I am not wholly satisfied that a complete failure to abide by the normal service provisions in the Bankruptcy Rules is a formal defect or irregularity. It seems to me to be a pretty fundamental defect. If I had jurisdiction under that provision to waive the defect, then (for reasons I will come to in a different context) I would exercise it, but I choose not to consider that at this stage because I am not satisfied that the defect does actually fall within that Rule." (my emphasis)
- The learned Judge was clearly considering the defect under consideration and on the facts of that case. Miss Deb, for Mr. Morby, rightly identifies that I am bound by the decision of Mr. Justice Mann. In my judgment he was not ruling that Rule 7.55 IR 1986 does not apply in any circumstance to Rule 6.14(1) IR 1986. He expressly left open the possibility that there would be cases where failure to follow Rule 6.14(1) precisely would not be fatal to the petition; those cases may be rare. On the facts of the case before him and based on the submissions he heard he was not 'wholly satisfied' that Rule 7.55 1986 could cure a defect or irregularity where there was a 'complete failure to abide by the normal service provisions' he chose not to consider it at that stage. He in fact waived service of the petition under consideration using CPR 6.9. I agree that if a debtor is simply not served at all an injustice will arise that will be substantial in nature and fatal to the process.
- For my own part the wording of Rule 7.55 IR 1986 is deliberately broad and I do not think it desirable or necessary to read into the rule something that is absent. The heading of the Rule does not form part of its construction. An example of a misleading heading in the insolvency legislation is Section 423 of the Insolvency Act 1986 which is headed "Transactions defrauding creditors". In fact that section does not mention fraud, and fraud does not have to be proved in order for the section to be engaged. Returning to Rule 7.55 IR 1986, it is very nearly a carbon copy of section 147(1) of the Bankruptcy Act 1914 and therefore Parliament and the Rule makers have had plenty of time to consider cutting down its reach. In my Judgment if the Rule makers intended Rule 7.55 IR 1986 not to apply to the service of a petition, the Rule would be expressly limited. An example of cutting down the service provisions can be seen in Rule 12A.16 which makes clear that CPR 6 does not apply to service of bankruptcy petitions.
- Accordingly the Rule provides the court with discretion so that it has the power to deal with defects and irregularities on a case-by-case basis. In my judgment a three- staged test or approach can be identified from the plain language of the Rule. First the court has to ask whether or not there is an insolvency proceeding on foot. Second, on the facts of the case, the court needs to be satisfied that if it were to cure a defect or irregularity there would be no injustice which can be described as substantial in nature. An example of an injustice which is substantial in nature is a statutory demand that cannot be recognised as such and as a result is likely to confuse the recipient. The words 'substantial injustice' need to be read in the context of the particular insolvency proceeding in which they are engaged. Thirdly, if the court identifies an injustice it has to consider whether 'the injustice cannot be remedied by any order of the court'. In my view this approach is consistent with the language of the Rule, lends itself to simplicity and provides a principled approach to its application.
- I have found that the Petition had been presented and accordingly there were live insolvency proceedings in this matter. I find that the irregularity of serving a nominated person personally in the presence of and at the direction of the debtor has caused no injustice substantial or otherwise. Mr. Morby knew he was being served with the Petition; he knew from attending and fighting the statutory demand, where permission to present the Petition was given, that the Petition was for a bankruptcy order; and he knew that the purpose of attending Terminal 3 was to collect the Petition. The fact that he rejected the Petition is not sufficient to cause substantial injustice.
- As regards prejudice I also refer to the chronology which speaks for itself. Mr Morby agreed to the share purchase sale in September 2007 which led to the claim. He agreed to settlement in June 2001 and failed to pay the sums due within the agreed time table. A statutory demand was served in August 2013 and he vigorously fought that application on the basis of security which led to directions for a professional valuation. He then refused access to the relevant property and in July 2014 the application to set aside was dismissed. I infer from this that Mr. Morby never intended a valuer to attend the property and the application to set aside was made as a device to delay the inevitable. All the time he was failing to comply with an agreement he had freely entered. On the same day as the application was dismissed the Petition was presented and Mr. Morby left England shortly after, making personal service difficult. Later, as he accepts, he received the Petition by e-mail. As Norris J observed in Re Anderson Owen, the aim of service had been accomplished.
- The debtor knew of the petition, knew its content and has attended this hearing through solicitors and counsel.
- As I have found that there is no substantial injustice by reason of waiving the irregularity there is no need to consider whether the court may remedy the injustice by court order.
- Accepting as I do, that the application of Rule 7.55 IR 1986 to Rule 6.14(1) may not be common, but finding that there is nothing in principle that prevents the application of Rule 7.55 IR 1986 as no other Rule or statutory provision cuts down its application, I have answered the first two parts of the three staged approach in the affirmative. The last question is not relevant to the facts of this case. I exercise my discretion and waive any defect or irregularity of service.
- Quite rightly, having in mind the background, the issue of security was not fought with vigour. Section 269 of the IA 1986 provides the grounds on which a creditor may present a bankruptcy petition in respect of a secured debt:
[Where debt not unsecured] A debt which is the debt, or one of the debts, in respect of which a creditor's petition is presented need not be unsecured if either-
i) the petition contains a statement by the person having the right to enforce the security that he is willing, in the event of a bankruptcy order being made, to give up his security for the benefit of all the bankrupt's creditors, or
ii) the petition is expressed not to be made in respect of the secured part of the debt and contains a statement by that person of the estimated value at the date of the petition of the security for the secured part of the debt.
iii) In a case falling within subsection (1)(b) the secured and unsecured parts of the debt are to be treated for the purposes of sections 267 to 270 as separate debts.
- The purpose behind the section has been explained by the Court of Appeal in White v Davenham Trust Ltd  EWCA Civ 747,  1 BCLC 123 at paragraph 8:
"The prohibition on a secured creditor presenting a petition is subject to two exceptions, under s.269. The first is if the creditor states that, if a bankruptcy order is made, he is willing to give up his security for the benefit of all creditors. In that case, therefore, the creditor is secured but if the bankruptcy process follows he will be treated as unsecured and the asset over which the security exists will form part of the bankruptcy estate available for distribution as between all the creditors. The second case is where the petition is expressed not to be made for the secured part of the debt and the estimated value of the security is stated. In that case there are deemed to be two separate debts, one secured (to the amount of the value of the security) and the other unsecured (for the balance) and the bankruptcy petition is only for the unsecured balance. By virtue of s.383 of the 1986 Act the only security which is relevant for this purpose is security over an asset or assets of the particular debtor in question."
- I accept Mr. Thompson QC's submission that the security held by the Second Petitioner does not preclude a bankruptcy order being made. An independent and unchallenged valuation of the French Property (dated 22 May 14) was obtained for the purposes of Mr Morby's application to set aside the statutory demand and valued the property at €3m, which is less than the debt owed to the first charge holder (€3.5m). The Second Petitioner is the holder of a second charge which is valued at nil. Mr Morby has already been afforded an opportunity to contest this issue and is now precluded from doing so: Raymond Adams v Mason Bullock  EWHC 2910,  BPIR 241. Accordingly I am satisfied that the petition contains a statement of estimated value of the security and is expressed not to be made in respect of the secured part of the debt and so satisfies s.269(1)(b).
- I find that the court has jurisdiction to make a bankruptcy order as Mr. Morby was in the jurisdiction on the day that the Petition was presented. In any event I find that the court has jurisdiction pursuant to Section 265 IA 1986. In my judgment personal service was effected. If I am wrong about that I waive any defect or irregularity of service by exercising my discretion under Rule 7.55 IR 1986. The petition is true, the debt has not been paid, secured or compounded for. I shall make a bankruptcy order at the date of handing down.
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