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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Addison v London European Securities Ltd [2022] EWHC 1077 (Ch) (03 May 2022) URL: https://www.bailii.org/ew/cases/EWHC/Ch/2022/1077.html Cite as: [2022] EWHC 1077 (Ch) |
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BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST (ChD)
ON APPEAL FROM THE COUNTY COURT
AT KINGSTON-UPON-THAMES
IN BANKRUPTCY
District Judge Smart
11 February 2021
Fetter Lane, London, EC4A 1NL |
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B e f o r e :
sitting as a Deputy Judge of the High Court
____________________
Richard Henry Addison |
Appellant |
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- and - |
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London European Securities Limited |
Respondent |
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Madeline Dixon (instructed by Rosenblatt) for the Respondent
Hearing date: 28 January 2022
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Crown Copyright ©
JONATHAN HILLIARD QC:
Introduction
(1) whether Mr Addison has standing to pursue the appeal given that he was adjudged bankrupt on 2 June 2021;
(2) whether (if Mr Addison does have standing) the District Judge was wrong to refuse to set aside the Statutory Demand under rule 10.5(5)(b) of the Insolvency (England and Wales) Rules 2016 (the "Insolvency Rules");
(3) whether (if Addison does have standing) the District Judge was wrong to refuse to set aside the Statutory Demand under rule 10.5(5)(d) of the Insolvency Rules.
The core legislative provisions
"a creditor's petition may be presented to the court in respect of a debt or debts only if, at the time the petition is presented-
(a) the amount of the debt, or the aggregate amount of the debts, is equal to or exceeds the bankruptcy level,
(b) the debt, or each of the debts, is for a liquidated sum payable to the petitioning creditor, or one or more of the petitioning creditors, either immediately or at some certain, future time, and is unsecured,
(c) the debt, or each of the debts, is a debt which the debtor appears either to be unable to pay or to have no reasonable prospect of being able to pay, and
(d) there is no outstanding application to set aside a statutory demand served (under section 268 below) in respect of the debt or any of the debts."
"the petitioning creditor to whom the debt is owed has served on the debtor a demand (known as "the statutory demand") in the prescribed form requiring him to pay the debt or to secure or compound for it to the satisfaction of the creditor, at least 3 weeks have elapsed since the demand was served and the demand has been neither complied with nor set aside in accordance with the rules…".
"(a) the debtor appears to have a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt specified in the statutory demand;
(b) the debt is disputed on grounds which appear to the court to be substantial; [or]
…
(d) the court is satisfied, on other grounds, that the demand ought to be set aside."
Relevant background
The Judgment
The First Ground of Appeal: whether the District Judge was wrong to refuse to set aside the Statutory Demand under rule 10.5(5)(b) of the Insolvency Rules
(1) On the date of the Option Agreement, LES will pay the Option Sum to Pendle, which is stated to be £1 (clause 2.1).
(2) Pendle grants LES an Option during the Option Period (which is a year from 25 April 2019) to buy the Property at the Purchase Price of £1.4m (clause 2.2).
(3) The Option Agreement shall automatically terminate upon Pendle discharging all sums under the Loan Agreement (clause 4).
(4) LES may exercise the Option at any time during the Option Period where Pendle is in default under the Loan Agreement which are not remedied within 21 days by serving an Option Notice on Pendle (clause 6.1).
(5) On the date of exercise of the Option, LES will pay the Deposit to Pendle's conveyancer as agent for Pendle on terms that on completion the Deposit and accrued interest is paid to Pendle (clause 6.2). The Deposit is defined as "10% of the Purchase Price less the Loan Amount being the sum of £375,000 plus any sums owning [sic] under the Loan Agreement (exclusive of VAT)" (clause 1.1).
(6) If the Option is exercised in accordance with the terms of the Option Agreement, Pendle will sell the Property to LES for the Purchase Price of £1.4m (clause 7.1).
(7) Completion will take place on the Completion Date, which is one month after the date of service of the Option Notice (clause 11.1).
(8) "On completion [LES] will pay the Purchase Price less the Deposit, any sums outstanding under the Loan Agreement and the Option Sum to [Pendle]" (clause 11.2).
(9) Pendle consented to the entry of a restriction against the Property in terms that LES's consent would be required to any disposition of the Property (clause 12.1).
"that the time for completion had expired- the 'Completion Date' being a month after the service of the option notice. It was submitted that Pendle's debt to [LES] had been extinguished as from that date. Alternatively the issues of: (i) whether the Option Agreement was valid and binding, as between [LES] and Pendle and its LPA receiver; and (2) whether the exercise of the option has had the effect of extinguishing Pendle's debt; and hence (iii) whether there is anything on which the guarantee bites, gave rise to a dispute on substantial grounds."
Mr Addison's position on point (i) before me was that the Option Agreement was valid.
"59. I can state my conclusions on the application of Rule 10.5(5)(b) quite shortly. Firstly, the indebtedness of the principal debtor, Pendle has not been discharged in circumstances where, although the Option under the Option Agreement has been exercised, no payment has been made by the Respondent. The maxim "Equity looks as done that which ought to be done" (See Snell's Equity, 34th Edition, paragraph 5-015) may well be the basis for the existence of an equitable interest arising under a contract for the sale of land, but as the authors state,
"Whilst the principle may be justifiable, it gains little real support from the maxim. First, where, for example A is under a duty to grant B a lease, or to assign a right to B by way of security, it seems odd that equity could somehow pretend the duty had been immediately performed. This leads to the absurdity that, for example, the court, having found that an assignment has not been made, then immediately says that it can, by putting on an equitable hat, regard that assignment as having occurred".
60. I regard it as plainly incorrect, or no more than fanciful to contend that the debt has been discharged. It would in reality require a decree of specific performance to be made before this would be the case. Specific performance is, of course, an equitable remedy and it is not a foregone conclusion that it would be granted."
(1) The exercise of an option creates a binding contract for the sale of land: Emmett & Farrand on Title at 2.084. The relevant terms are set out in clauses 7 to 11 together with those provisions for Part 1 of the Standard Commercial Property Conditions (Second Edition) incorporated by clause 8.1.
(2) Clause 11.1 provides what is to happen on the Completion Date, namely completion. The clause therefore distinguishes the occurrence of completion from reaching the Completion Date. Clause 11.1 does not provide that completion happens automatically on the Completion Date. Completion is, at its most basic, the payment of the purchase price in return for the handing over of the documents of title and the giving of vacant possession, rather the reaching of the date set for completion.
(3) Clause 11.2 provides specifically what LES must do on completion. What clause 11.2 requires of LES on completion is that LES pays a particular sum to Pendle (the "Remaining Sum"). That sum is calculated in a way that deducts from the £1.4m Purchase Price a number of items, namely the sum outstanding under the Loan, the Deposit and the Option Sum. Clause 11.2 does not state that automatically on the Completion Date, the outstanding sums under the Loan will be written off.
(4) In my judgment, that necessarily carries with it the implication that on paying the Remaining Sum to Pendle, the sum outstanding under the Loan will be given up. Therefore, as the District Judge concluded, such payment was necessary to discharge Pendle's loan debt.
(5) Were it otherwise, LES would have the Loan written off automatically on the Completion Date even if Pendle wrongly refused to complete on that date, which one would not expect to be the intention.
(6) This tallies with clause 6.2, which provides that "on completion" the Deposit together with accrued interest will be paid to Pendle. Again, one would not expect this to bite if Pendle wrongly refused to complete on the Completion Date.
(7) Therefore, on completion, LES pays the Remaining Sum, the outstanding sum under the Loan is put towards the Purchase Price and the Deposit (if any) is paid to Pendle. Putting to one side the Option Sum of £1, which is meant to be paid on entering into the Option, the full Purchase Price is paid on completion.
(8) Here, completion has not taken place, either on the Completion Date or at all.
(9) Therefore, Pendle's debt under the Loan Agreement and the Appellant's debt under the Guarantee have not been extinguished.
(1) The Appellant criticises the District Judge for- the Appellant contends- having in [59] decided the issue rather than whether the debt was disputed on substantial grounds. In my judgment, there is nothing in this point. The District Judge was explaining in [59] and [60] why he regarded the contention that the debt had been discharged as fanciful, and that necessarily involved explaining what he thought the right answer was. It is plain from [58] of the Judgment that by concluding that the contrary argument was fanciful, the District Judge considered that the debt was not disputed on substantial grounds. He used the word "fanciful" because it was the word used in [31] of the extract from Bryce Ashworth v Newnote Limited [2007] EWCA Civ 793, a case that the District Judge noted was referred to in Collier itself.
(2) Mr Goold submitted orally that the District Judge's discussion of Collier at [47] of his Judgment raised a question-mark over whether the District Judge understood the relevant test correctly. The District Judge commented that the decision had been based on the previous Insolvency Practice Direction, which referred to a genuine triable issue, and that [11.4.5] of the current version simply required the Court to determine the application in accordance with Rule 10.5. Again, I do not consider that Mr Goold's submission is correct. It is clear from [58] and [60] that the District Judge understood the relevant test, as it is from the last two sentences of [47] itself, where the Judge stated that "Mr Goold appeared to accept that the prospects of disputing the debt should be real, and not frivolous. It is not enough that a dispute is arguable, there has to be something to suggest that the assertion is sustainable."
(3) Mr Goold argued that the District Judge reached his decision by reference to the equitable maxim "equity looks as done that which ought to be done" and that it is not entirely clear why he was referring to this. In my judgment, the District Judge, having stated that the Loan debt had not been discharged without LES making a payment under clause 11, was then going on to explain that one could not treat LES through application of the equitable maxim as having already made such a payment and therefore treat the debt as already having been discharged. I agree with the District Judge that the equitable maxim does not have such an effect. Mr Addison did not contend that it did. I do not consider that it is necessary to go into the precise limits of the maxim and the correctness of the comments in the extract from Snell's Equity (34th edition, 2019) cited in [59] of the Judgment to reach this conclusion.
(4) Mr Goold argues that the District Judge erred in [60] of the Judgment in suggesting that a decree of specific performance would be required before the Loan debt was discharged, because Pendle's claim would have been for damages for non-completion. However, in my judgment that misses the point being made by the District Judge. His point was that to reach a stage at which the Loan debt was discharged and therefore at which no debt was due under the Guarantee, LES would need to have performed its payment obligations under clause 11, and that would- absent LES doing so voluntarily- require a decree of specific performance to cause LES to decide to make such payment. As for any claim for damages for non-completion, I consider that, and the District Judge's treatment of it, below under the Second Ground of Appeal.
The Second Ground of Appeal: whether the District Judge was wrong to refuse to set aside the Statutory Demand under rule 10.5(5)(d) of the Insolvency Rules
(1) "it is material to the application of sub-paragraph (d) [of rule 6.5(4)] in relation to a statutory demand served on a guarantor to consider whether a statutory demand in respect of the principal debt would be set aside as against the principal debtor under sub-paragraph (a)" and "[t]he judge rightly recognised this": [42];
(2) "[p]rima facie, it is unjust to require the principal debtor to face the consequences of bankruptcy where he appears to have a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt specified in the statutory demand. Having regard to the principle of co-extensiveness, it is equally unjust in such circumstances to require the guarantor to face the consequences of bankruptcy": [46];
(3) the appeal involved a challenge to the judge's exercise of discretion and such a challenge could only succeed if the judge's decision was plainly wrong or he took into account irrelevant factors or failed to take into account relevant factors: [48]; and
(4) reading the judge's two judgments together, the judge considered that the fact that the guarantor had the means to pay the debt was an important factor which militated against setting aside the statutory demand, and the judge was wrong to do so, because it was difficult to conceive of circumstances where ability to pay could be the sole or principal reason for refusing to set aside a statutory demand: [48].
(1) the reason why the judge did not accede to the debtor's arguments in his first judgment was that he was satisfied that the debtor could pay the debt and that this swung the balance of fairness against making the creditor wait until the issues had been decided: [61];
(2) the reasons for the judge's decision in his second judgment were that (i) as in his first judgment, it was not unjust if it was the choice of the debtor not to pay, and (ii) more importantly, Mr Remblance would not be able to resist enforcement if judgment were to be given against him: [63];
(3) the judge was in error in relying on reasons (i) and (ii): [65] and [72]-[73]; and
(4) given that JBR had a counterclaim and was likely to be able to set a statutory demand aside, justice demanded similar treatment for Mr Remblance: [72]-[73]. His failure to pay should not be held against him in that regard, because his reason for not paying was that he felt strongly that his company had suffered great damage by the breach of the landlord's covenant of quiet enjoyment.
"…In Remblance there was a substantial undisputed cross-claim which had survived a strike out application- the creditor was being sued by the principal debtor in the county court. There was a real prospect that the principal debt would be reduced or extinguished. In the present case the cross-claim was hypothetical, and there was no evidence that Pendle was willing or able to pursue it; and its existence had not been relied on by [the Appellant]. Pendle had maintained that the Option was unenforceable until August 2020, five months after the statutory demand was served. The reality was that the Property would be sold by the LPA receiver. The Applicant's conduct as a co-director of Pendle bore the hallmarks of an evasive debtor."
"Is it unfair and unjust to allow [LES] to go down the statutory demand route in circumstances where the principal debtor, Pendle, is not taking proceedings against the Respondent to compel it to complete the sale of the Property under the Option Agreement, the Option having been exercised? The Applicant's case was not put in this manner. The evidence shows that Pendle has challenged the enforceability of the Option, and indeed there may be something to be said for the view that it repudiated it and that by its conduct the Respondent accepted the repudiation. But assuming for present purposes that there is a real, as opposed to a fanciful prospect that a court would grant specific performance against the Respondent, I note that this is not a case where [the Appellant] has said that for some reason [he] has been unable to procure that Pendle commences such proceedings for specific performance. He is a director and has a 47.5% shareholding and his solicitor has a 25% shareholding. There is no evidence of disagreements between the directors or with the other shareholders. Plainly it suited Pendle to do all it could to resist the consequence that the Property worth, perhaps, (at least at one point) up to £3 million, or at any rate worth more than the option price got sold for the sum due under the Option Agreement, until a late stage. With the possibility that the Property may end up being sold by a receiver, and one might imagine, the uncertainties over whether a suit seeking specific performance would succeed, I see no immediate prospect of Pendle taking such proceedings. I see no injustice in this case in permitting the insolvency route to be taken by [LES]."
The reference to the £3m figure is to a valuation given in 2018. As the Judge explained in [38] of the Judgment, Mr Addison had suggested in the last of his witness statements, dated 10 November 2020, that it would be in LES's interests to complete the purchase of the Property for £1.4m, noting that this was much less than the £3m valuation given in 2018 or LES's own offer of £1.55m in December 2019. I should also mention that the Judge explained in [29] of the Judgment that Mr Addison had stated in his 15 June 2020 witness statement that he understood that the Property was worth £2-2.5m. He also set out in [39]-[40] of his Judgment that LES's solicitor Mr Coles had stated in his 24 November 2020 witness statement that he believed the value of the Property to be lower than £1.4m, final bids over £1.25m having been asked for by the LPA receiver by 12 November 2020. That witness statement went on to say that the Property was marked as under offer on the LPA receiver's website.
(1) While there would undoubtedly be defences pleaded to a specific performance cross-claim by Pendle, he doubted that it would be struck out. "It might well be a startling exercise of judicial discretion to make a decree of specific performance [in Pendle's favour] after a considerable delay, and with a LPA receiver having been appointed, but the prejudice to the purchaser and receiver would be a relevant consideration, and mere delay may well be insufficient to bar specific performance": [81].
(2) "I do not consider that a viable damages claim has been articulated so far which would avail the principal debtor if sued, for the reasons given by Ms Dixon": [82]. These reasons were that Pendle would fail to show that it was able and willing to give good title, and in any event there was no evidence that the damages awarded would equal or exceed the debt or reduce it below the threshold for presentation of a bankruptcy petition, because there was evidence that the Property exceeded the Purchase Price: the LPA receiver had previously rejected an offer by LES to purchase it for £1.55m and there was evidence of a previous valuation at £3m: [79].
(3) "There was no evidence before me that the directors of Pendle, including the Applicant have any present intention to procure that Pendle litigates to compel [LES] to complete the purchase of the Property under the Option Agreement. The evidence suggests that the LPA receiver is marketing the Property and may well sell it before long": [83].
(1) by the time of the December 2020 hearing, nearly 10 months had elapsed since exercise of the Option and no such claim had been brought;
(2) there was no direct evidence that such a claim would be brought in any circumstances;
(3) rather, for a significant number of months- until around August 2020- Pendle had denied the validity and enforceability of the Option, and done so formally in proceedings before the First-tier Tribunal;
(4) the possibility of a specific performance cross-claim had not been raised before;
(5) it would be, as Mr Goold accepted, a very difficult cross-claim to bring;
(6) one would in turn expect the point in (5) to factor in to whether the cross-claim was brought;
(7) far from any steps to bring about performance of the Option, what was happening on the ground was the LPA receiver being well advanced in the process of seeking to sell the Property;
(8) the Property, on the evidence before the District Judge, might well have been sold shortly, in which case specific performance would be impossible;
(9) Mr Addison was contending (and contended before this Court) that whether steps were taken by the LPA receiver to enforce the Option Agreement was out of his and Pendle's hands;
(10) consistent with that, Mr Goold put his argument in his skeleton below and before me on the basis that if insolvency proceedings were brought against Pendle, Pendle should have met them with cross-claims for specific performance and damages, rather than necessarily that it would have (although the oral submission before me appeared to me to be put on the latter basis or in terms consistent with it); and
(11) the District Judge appears to me to have considered that Mr Addison was blowing hot and cold by seeking to challenge or support the challenging of the Option Agreement initially (prior to August 2020), then to resist the Statutory Demand by relying on the validity of the Option Agreement, and then- on Remblance being raised- going further by suggesting that Pendle should or even would mount a specific performance claim to enforce the Option Agreement, and the Judge appears to me to have been taking this change of stance into account when deciding on the credibility of whether a specific performance cross-claim would actually have been brought by Pendle or was merely "hypothetical".
Whether Mr Addison has standing to pursue the appeal against the refusal to set aside the Statutory Demand given that he was adjudged bankrupt on 2 June 2021
(1) A bankrupt's estate vests in his trustee in bankruptcy immediately on his appointment or, in the case of the Official Receiver, on his becoming trustee: section 306(1) of the 1986 Act.
(2) A bankrupt's property includes things in action: section 436(1) of the 1986 Act.
(3) A bankrupt therefore does not have the right to appeal against a judgment against him, even where the judgment founds the petition debt: Heath v Tang [1993] 1 WLR 1421. That is because a bankruptcy order divests the bankrupt of any further interest in what debts he owes because it provides that he shall no longer be under any personal liability: Royal Bank of Scotland v Farley [1996] BPIR 638.
(4) While Heath v Tang makes clear that there is a residual category of case where the bankrupt retains the right to appeal, the nature of the action needs to be one that relates solely to the bankrupt's mind, body and character: Agba v Luton Borough Council [2020] EWHC 1160 (Admin). Only then can it be said to be a cause of action personal to the bankrupt that does not vest in the trustee.
(5) A statutory demand which is not set aside creates a presumption that a debtor is insolvent: Shalson v DF Keane Ltd [2003] 2 WLUK 704. That is a presumption about his assets and liabilities which does not relate solely to his body, mind or character. Therefore, the debtor has no standing to appeal against the Order here.
(6) He would have standing to appeal against the bankruptcy order as a matter of common sense and fairness, since his status has been fundamentally changed: Sands v Layne [2017] 1 WLR 1782. However, he has not sought permission to do so and is now well out of time. The reasoning in Sands v Layne does not apply to an appeal against the Order, since the service of the Statutory Demand did not fundamentally change Mr Addison's status.
Arguments (4) and (5) were put orally in the alternative on a broader basis, namely that whether or not the cause of action had to relate solely to the bankrupt's mind, body and character in order to be personal to the bankrupt, a right to set aside a statutory demand related to his assets and liabilities, and his ability to meet his debts, so it was not something personal to the bankrupt.
(1) if Mr Addison's right to apply to set aside a statutory demand, and hence to appeal the court's refusal to do so was a thing in action at all for the purpose of the 1986 Act, it was a purely personal claim;
(2) if necessary to put his case higher, such a right is not a thing in action at all and therefore cannot vest in the Official Receiver.
Mr Goold rightly did not object to the admission of the evidence of the fact of the subsequent bankruptcy of Mr Addison. This was evidence not available at the time of the hearing before the District Judge, of importance to the disposition of the appeal and the fact of the bankruptcy was not in dispute.
The treatment of rights of appeal on bankruptcy
The bankrupt as claimant
"there are certain causes of action personal to the bankrupt which do not vest in his trustee. These include cases in which "the damages are to be estimated by immediate reference to pain felt by the bankrupt in respect of his body, mind or character, and without immediate reference to his rights of property." See Beckham v. Dale (1849) 2 H.L.Cas.579, 604, per Erle J. and Wilson v. United Counties Bank Ltd. [1920] A.C. 102." (1423A-B; underlining added)
"the wide language used in successive statutes to describe the bankrupt's estate was from an early stage interpreted by the court as excluding rights of action which are classified as personal to the bankrupt, rather than relating to his property." ([22])
"[t]he Court of Appeal (in a judgment of the court delivered by Sedley LJ) observed (at para 14) that there is "no bright line" between personal rights of action and those which form part of a bankrupt's estate, but (para 24) that all the reasoning in the authorities tends to place on the non-vesting side of the line a claim which is primarily directed at the restoration of a contractual relationship in which the claimant's skill and labour are the essential commodity".
In Grady, Sedley LJ treated at [11] Hoffmann LJ in Heath as having explained that among the causes of action personal to the bankrupt which do not vest in the trustee were body, mind and character cases.
"Following the Morgan Grenfell case and the Simms case, the bankrupt can only be deprived of privilege if IA 1986 expressly so provides or it is a necessary implication of the express language of its provisions. The only provisions relied upon by the Trustees in the present case on this aspect are the definition of "property" in section 436(1) and the treatment of a "power over or in respect of property" in section 382(4), in conjunction with the general provisions in sections 283 and 306 for the automatic vesting in the trustee of the bankrupt's property comprised in his estate. All those provisions are in general terms. They do not expressly treat privilege as property of the bankrupt which automatically transfers from the bankrupt to the trustee. Nor is that a necessary implication of the provisions."
"Even if it could be regarded as something personal to the appellant, it is clear from the authorities referred to above that the nature of the action needs to be one that relates "solely to his body, mind and character" (my emphasis), and that any damages seeking to recover compensation must be for damage to his body, mind and character as opposed to other causes of action which might be considered in respect of a right to property."
(1) Most claims that a bankrupt had at the time of bankruptcy vest in his trustee in bankruptcy, because they are "things in action" and therefore form part of the bankrupt's estate;
(2) There are circumstances in which a claim may be found to be personal to the bankrupt such that it does not vest in the trustee in bankruptcy or Official Receiver;
(3) There is no simple bright line test for determining what falls on one side of the line and the other: e.g. Mulkerrins at [25];
(4) One important category of cases that fall on the personal side of the line are cases in which "the damages are to be estimated by immediate reference to pain felt by the bankrupt in respect of his body, mind or character, and without immediate reference to his rights of property": Heath, but that does not exhaust the field of personal claims.
The bankrupt as defendant
"In cases where the bankrupt is defendant, there is of course usually no question of the cause of action having vested in the trustee. Unless the defence is set-off (a situation to which we shall return later) the bankrupt will not be asserting by way of defence any cause of action of his own." (1424E-F)
"But in cases in which the plaintiff is claiming an interest in some property of the bankrupt, that property will have vested in the trustee. And in cases for debt or damages, the only assets out of which the claim can be satisfied will have likewise vested. It will therefore be equally true to say that the bankrupt has no interest in the proceedings. As we have seen, section 285(3) deprives the plaintiff of any remedy against the bankrupt's person or property and confines him to his right to prove.
On the other hand, there are actions seeking relief such as injunctions against the bankrupt personally which do not directly concern his estate. They can still be maintained against the bankrupt himself and he is entitled to defend them and, if the judgment is adverse, to appeal. This distinction was the basis of the decision in Dence v. Mason [1879] W.N. 177 in which a bankrupt wished to appeal against an order made before the bankruptcy granting an injunction to restrain passing off and ordering him to pay costs. His trustee declined to appeal but the court said, at p.177, that the bankrupt himself could appeal against the injunction
"which was a personal order against him, notwithstanding the bankruptcy, though he had no interest in the order as to costs, his estate being now vested in the trustee."
This implies that the bankrupt would not have been entitled to appeal against an order which was enforceable against his estate. This appears clearly from the decision of the House of Lords in Rochfort v. Battersby (1849) 2 H.L.Cas. 388…" (1424F-1425A)
"These authorities in my judgment demonstrate that in principle a bankrupt cannot in his own name appeal from a judgment against him which is enforceable only against the estate vested in his trustee." (1425H)
"Is there anything different about the judgment upon which the bankruptcy petition was founded? It is submitted that the difference is that in such a case the bankrupt does have an interest, because if he can get rid of the judgment, he may be able to have the bankruptcy order annulled on the ground that it should never have been made. Whether it is set aside or not will depend upon whether apart from the judgment the bankrupt would have been solvent or whether an order would in any event have been made on the application of supporting creditors: see In re Noble (A Bankrupt) [1965] Ch. 129 . On the other hand, it may equally be said that if only the bankrupt could pursue a claim for a large sum which he claims to be owing to him, he would be able to pay all his creditors and have the bankruptcy annulled on that ground. It is clear, however, that this is not a ground upon which he may bring proceedings. Furthermore, an exception for the petitioner's judgment would give rise to anomalies in cases in which the defence was a claim of set-off, such as the applicant Mr. Heath asserts in this case. The contractual claim relied upon as a set-off would undoubtedly have vested in the trustee and therefore no longer be available to the bankrupt as a common law set-off to challenge the petitioner's claim. It would fall to be set off for the purposes of proof under section 323 of the Insolvency Act 1986 : see New Quebrada Co. Ltd. v. Carr (1869) L.R. 4 C.P. 651 , In re A Debtor; Ex parte Peak Hill Goldfield Ltd. [1909] 1 KB 430 This right of set-off can be asserted only by the trustee. So in my view there is nothing sufficiently special about the petitioner's judgment to take it out of the general principle.
It must be borne in mind that rule 6.25(2) of the Insolvency Rules 1986 (S.I. 1986 No. 1925) says:
"If the petition is brought in respect of a judgment debt, or a sum ordered by any court to be paid, the court may stay or dismiss the petition on the ground that an appeal is pending from the judgment or order, or that execution of the judgment has been stayed."
Although this provision confers upon the court a discretion (see In re Flatau; Ex parte Scotch Whisky Distillers Ltd. (1888) 22 QBD 83 ) it has been said more than once that if the appeal appears to be bona fide, the court should adjourn the petition until it has been heard: Ex parte Yeatman; In re Yeatman (1880) 16 ChD 283 , In re Noble (A Bankrupt) [1965] Ch. 129 . In the ordinary case, therefore, a bankrupt will not have to seek directions under section 303(1) for an appeal against the petitioner's judgment unless he failed either to lodge an appeal before the hearing of the bankruptcy petition or to satisfy the registrar or judge that the appeal was bona fide. In both classes of case it would not be unreasonable for the bankrupt to have to obtain the authority of the bankruptcy court before he could pursue an appeal.
The main respect in which the bankrupt may be disadvantaged by not being allowed to appeal in his own name is that in that capacity he would almost certainly (subject to consideration of the merits of his appeal) qualify for legal aid. On the other hand, the trustee would not. If therefore the bankrupt is merely allowed to use the trustee's name in an appeal, legal aid will probably not be available. On the contrary, since the trustee is personally liable for costs awarded against him in proceedings brought in his name, the bankrupt will have to find the money to indemnify the trustee against such costs. Even in advance of the appeal, the trustee will probably be ordered to give security for the respondent's costs and this would have to be provided by the bankrupt. These are formidable obstacles but, as we have said, they will exist only in cases where the bankrupt has failed to persuade the court to exercise its discretion under rule 6.25(2) . It does not seem to me that there will be many such cases which also qualify upon their merits for legal aid. Neither of the applicants before us has legal aid. In those circumstances, we do not think that they justify us in departing from the general principle that the bankrupt has not locus standi to appeal.
The insolvency law has of course changed a great deal since the time of Lord Eldon and In re Smith (A Bankrupt), Ex parte Braintree District Council [1990] 2 A.C. 215 is authority for taking a fresh look at the construction of the Insolvency Act 1986 in modern conditions. Nevertheless, the principle that the bankrupt is divested of an interest in his property and liability for his debts remains fundamental in the new code. The consequences for the bankrupt's right to litigate do not seem to us inconvenient or productive of injustice. The bankruptcy court acts as a screen which both prevents the bankrupt's substance from being wasted in hopeless appeals and protects creditors from vexatious challenges to their claims."
"[t]he essence of [the decision in Heath] is that a bankruptcy order divests the bankrupt of any further interest in what debts he owes because it provides that he shall no longer be under any personal liability. An appeal from the judgment against him or an application to set aside the judgment against him is therefore a matter for his trustee, but does not concern the bankrupt." (640-1)
"Normally, any cause of action which may lead to the recovery of money or other assets which form part of the estate in bankruptcy will form a part of the estate held on statutory trusts following the making of the bankruptcy order (Heath v Tang [1993] 1 WLR 1421). However the right to appeal against a bankruptcy order itself is of a different order as common sense and fairness dictate that the right of appeal against the bankruptcy order should remain with the bankrupt whose status has been fundamentally changed. Moreover, if Mr Couser were right on this point, the Trustee who decided to appeal against the bankruptcy order would be challenging the very order under which he acquired title to the bankrupt's assets…"
"All this leads me to conclude that a bare right to appeal is not property within the meaning of s.436 of the IA. A right of appeal available to a bankrupt is one that the bankrupt loses locus to bring or maintain once he or she is adjudicated bankrupt because the only assets out of which the underlying liability can be met have vested in the trustee and not because the right is a chose that vests in the trustee. The trustee has a statutory right (but not the obligation) to exercise any right of appeal that the bankrupt might have had as and from the moment at which the bankrupt is made the subject of a bankruptcy order. Similarly a right to appeal available to a company in liquidation can only be exercised by the office holder once appointed because he she or they then become the only agents of the company entitled to do so. Again however that is not the result of the right to appeal being treated as a property interest."
(1) A bankrupt who is a defendant will normally not have standing to bring an appeal.
(2) However, there are cases where the bankrupt can appeal an order against him.
(3) The latter group of cases is not limited to cases concerned solely with his body, mind or character.
(4) One way of characterising the latter group of cases is as those concerning something personal to the bankrupt. Sands, for example, was a case concerning the status of the bankrupt.
(5) However, as in cases where the bankrupt is claimant, there is no more specific bright-line rule than that for determining in marginal cases whether the matter should be regarded as personal to the bankrupt or not.
(6) Some of the factors relied on in the cases to determine whether the matter should be regarded as personal to the bankrupt are:
(a) whether the bankrupt's status is at issue: Sands;
(b) what common sense and fairness dictates: Sands;
(c) whether it is natural to regard the action as vesting in the trustee in bankruptcy and for the trustee rather than the bankrupt to continue the litigation: Sands;
(d) whether the judgment in the litigation is or would be enforceable against the estate of the bankrupt (as where it will result in a provable debt or a proprietary claim against assets held by the trustee in bankruptcy) or not (as in the case of an injunction to restrain the bankrupt from taking particular steps): Heath;
(e) tied to that, whether there are other routes by which the litigation can or could have been dealt with, such as (i) the bankrupt seeking to invoke section 303 of the 1986 Act or (ii) the bankrupt persuading the Court not to make a bankruptcy order in the first place and therefore the defendant continuing the substantive litigation in the ordinary way: Heath;
(f) the breadth of the concept of the bankrupt's estate, and the public interest that lies behind this: Heath.
Application of the principles above to the present case
(1) The making of a statutory demand is an important part of the process towards making a person bankrupt and therefore changing his status in the manner set out in Sands. Therefore, similarly, the question of whether a statutory demand can be set aside is intimately tied up with the question of whether a person should be made bankrupt and his status. It is part of that process, not something independent of it, like whether a judgment debt is owed.
(2) The right to appeal against the Court's refusal to set aside a statutory demand is not something that can enure for the benefit of the estate by its nature. It cannot be turned to account for the estate's benefit.
(3) Similarly, the case is very far away from the situations considered in Heath where the claims against the bankrupt were enforceable only against the estate vested in the trustee.
(4) Rather a statutory demand creates via statute an evidential presumption that the recipient appears to be unable to pay his debts.
(5) Setting aside a statutory demand may lead to annulment of the bankruptcy order under section 282(1)(a) of the 1986 Act on the basis that the bankruptcy order ought not have been made. As Ms Dixon points out, annulment is not inevitable, for example if there are other creditors. However, as in Sands, being able to appeal against dismissal of the statutory demand allows the bankrupt to seek to challenge the change in his status brought about by the bankruptcy order.
(6) As in Sands, by the nature of the right of action to set aside a statutory demand, a trustee in bankruptcy would have little interest in pursuing an appeal against a refusal to set aside such a demand, because it would not be in the interests of the bankrupt estate to expend funds doing so.
(7) Therefore, were it to vest in the trustee in bankruptcy, such a right of appeal would become illusory in practice or close to it if- as here- a bankruptcy order was then granted off the back of the statutory demand. The appeal would become a dead letter, or close to it, from the moment of bankruptcy. Unlike in Heath, the ability of the bankrupt to apply to the Court under 303(1) of the 1986 Act to have the trustee given directions therefore offers little protection.