Income
Cases
Patel v Jones
[2001] EWCA Civ 779 [2001] BPIR 919,
LORD JUSTICE MUMMERY:
The Issue
The main issue on the appeal is this: does the entitlement of a local government employee under a statutory occupational pension scheme to basic and discretionary pension benefits vest in his trustee in bankruptcy pursuant to the provisions of section 306 of the Insolvency Act 1986 (the 1986 Act)?
The Facts
Mr Subhash Patel, the appellant, began his employment with the London Borough of Brent (the Council) on 1 December 1976. He was a senior community development officer. He became a member of the Council’s superannuation scheme established by statutory instrument pursuant to powers conferred on the Secretary of State by section 7 of the Superannuation Act 1972 (the 1972 Act). The contributory scheme provided for payment of (a) an annual retirement pension amounting to 1/80th of the employee’s final salary, multiplied by the number of years of his membership, and (b) a lump sum equal to 3/80ths of the employee’s final year’s salary, multiplied by the number of years of his membership of the scheme. Provision was also made for the payment of enhanced benefits at discretion.
As well as being a local government employee Mr Patel was a director of a company called Masy Limited. A bankruptcy order was made against him on 9 January 1995. He was then 50 years old. He owed in excess of £700,000. Mr Roderick Jones, the respondent, was appointed trustee of his estate in place of the Official Receiver on 11 June 1997. The bankruptcy was automatically discharged on 9 January 1998 pursuant to section 279 of the 1986 Act, but the discharge did not relieve the trustee of his functions under the 1986 Act. Apart from a few income payments of £150 per month from Mr Patel’s salary pursuant to an order of 22 December 1997 made under section 310 of the 1986 Act, the creditors have received virtually nothing in the bankruptcy.
Mr Patel was made redundant by the Council on 27 March 1998 at the age of 53. Under the regulations governing the scheme he was entitled to a pension not only on reaching retirement age of 65 (29 September 2009 in Mr Patel’s case), but also on ceasing to hold local government employment by reason of redundancy after the age of 50. Soon after he was made redundant Mr Patel received various payments : a basic pension of £6,932.14 pa (index linked) and enhanced discretionary pension benefits; a basic lump sum of £20,796.43 and a discretionary enhanced lump sum; statutory redundancy pay of £12,973.74; and three months pay in lieu of notice amounting to £6,004.38. He had been a member of the scheme for 21… years. As he had been made redundant the income payments under the order of 22 December 1997 were reduced to a nominal 1p per month on 1 July 1998.
The Proceedings
On 29 July 1998 the trustee issued a summons claiming a declaration that he was entitled to all or some of these sums. The summons was heard on 17 May 1999 by Mr Robert Englehart QC, sitting as a deputy High Court judge of the Chancery Division. It was conceded that the statutory redundancy pay and the pay in lieu of notice did not vest in the trustee. The judge rejected the contention that they should be the subject of a variation to the income payments order and be paid to the trustee. There is no appeal by the trustee against that ruling. Mr Patel appeals with the permission of the Court of Appeal.
This appeal by Mr Patel is against the declaration made by the deputy judge on 19 May 1999 that the pension benefits payable to Mr Patel by way of basic pension, pension lump sum and enhanced pension benefits vested in the trustee save for (i) such proportion of the benefits as were attributable to his service after the commencement of his bankruptcy and (ii) that part of the basic annual pension payable after 29 September 2009 which is equivalent in amount to Mr Patel’s guaranteed minimum pension, as defined in section 8(2) of the Pension Schemes Act 1993.
By a respondent’s notice the trustee contends that the deputy judge was wrong in holding that the benefits in paragraph (i) did not vest in him as trustee. The trustee seeks an order declaring that the whole of the pension benefits vested in him pursuant to section 306 of the 1986 Act. The trustee accepts that under section 159(5) of the Pensions Act 1993 the vesting in the trustee does not extend to the “guaranteed minimum pension” receivable when he reaches state pensionable age in 2009.
The Statutory Provisions
The combined effect of sections 278, 283 and 306 of the 1986 Act is that Mr Patel’s estate, which comprised all “property” belonging to or vested in him, became vested by operation of law, first, in the Official Receiver and later in the trustee without any conveyance, assignment or transfer.
Section 436 provides that “property” includes
“money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future, vested or contingent, arising out of, or incidental to, property…”
As Lord Atkinson said in Hollinshead v. Hazleton [1916] 1 AC 428 at 436 the principle of public policy expressed in the insolvency code is that
“….in bankruptcy the entire property of the bankrupt, of whatever kind or nature it be, whether alienable or inalienable, subject to be taken in execution, legal or equitable, or not so subject, shall, with the exception of some compassionate allowances for his maintenance, be appropriated and made available for the payment of his creditors.”
In Bristol Airport Plc v. Powdrill [1990] Ch 744 at 759D Sir Nicolas Browne-Wilkinson V.-C observed a propos section 436 that
“It is hard to think of a wider definition of property.”
As Aldous LJ pointed out in Ord v. Upton [2000]Ch 352 at 360
“Section 436 is not in truth a definition of the word “property.” It only sets out what is included.”
The Judgment
The relevant passages in the judgment of the deputy judge, which was delivered on 19 May 1999 and is reported at [1999] BPIR 509, may be summarised as follows:-
At the time he was made bankrupt Mr Patel was entitled to pension rights under the scheme operated by the Council under the Local Government Superannuation Regulations 1986 then in force (SI 1986/24 – the 1986 Regulations). The 1986 Regulations were replaced by the Local Government Pension Scheme Regulations 1995 (SI 1995/1019).
The entitlement to the basic pension and the basic lump sum vested in the trustee under section 306 of the 1986 Act. The deputy judge followed the decision of Ferris J in Re Landau [1998] Ch 223, in which it was held that the bundle of rights under a non-assignable revenue approved pension policy was a chose in action. The chose in action was “property” within section 436, even though nothing was immediately payable under it at the commencement of the bankruptcy. The rights under the policy automatically vested in the trustee on his appointment.
He rejected the contentions on behalf of Mr Patel that the pension benefits did not vest in the trustee on the grounds that they were expressed in the 1986 Regulations to be unassignable; that they were part of the remuneration package under an employment contract for personal services; and that they had no value at the date of the bankruptcy.
The discretionary enhanced pension benefits passed to the trustee in the same way as the basic pension benefits.
The trustee was not, however, entitled to that part of the pension benefits attributable to Mr Patel’s service and the contributions made by him during his service after the bankruptcy order.
Submissions of Mr Patel
Mr Nigel Ley, on behalf of Mr Patel, contended that neither the basic pension nor the lump sum benefits vested in the trustee. He made two main points.
Inalienability of Pension Rights
His principal submission was that, even if, contrary to his alternative case, the pension benefits were “property” within section 436 of the 1986 Act, those benefits were made non-assignable by virtue of an express provision in the 1986 Regulations. Accordingly they could not vest in the trustee.
He relied on regulation E32 of the 1986 Regulations (“Benefits not assignable”) –
“Every benefit –
a) is payable to, or in trust for, the person who is entitled to it under these regulations, and
b) is not assignable and is not chargeable with that person’s debts or other liabilities.”
That provision was included in the 1986 Regulations pursuant to the regulation making power in section 7 of the 1972 Act. Section 7 (2) (a) provided that, without prejudice to the generality of the power to make regulations under section 7(1), the regulations may include all or any of the provisions referred to in Schedule 3 to the 1972 Act. Paragraph 9 of Schedule 3 refers to the following provisions which were not in fact included in the 1986 Regulations
“Provision rendering void any assignment or charge on…any benefit under the regulations, and provision that on the bankruptcy of a person entitled to such a benefit no part thereof shall pass to any trustee..acting on behalf of the creditors…..”
Mr Ley contended that, as a matter of construction, regulation E 32 prevented the pension benefits from vesting in the trustee. On the clear wording of the regulation the benefits were only payable to, or held in trust for, Mr Patel. They were not, and could not be, payable to or held in trust for his trustee in bankruptcy or his creditors. The pension benefits were protected from the claims of creditors. They could not be assigned or charged with his debts.
Mr Ley cited the judgment of Chadwick LJ in a recent case on retirement annuity contracts and personal pension schemes, in which the relevant restrictions were contractual prohibitions against assignment, Krasner v. Dennison [2001] Ch 76 at 99, 108 –
” 47. It is, to my mind, unarguable that a mere restriction against alienation in an annuity contract, or in a pensions scheme, can prevent the benefits under that contract or under that scheme, from vesting in a trustee in bankruptcy.
48. The need to protect certain classes of pension benefits from the claims of creditors has been recognised by Parliament for at least 130 years. Where it has thought it right to provide such protection, Parliament has enacted that an assignment of pension rights shall be void. Examples are found in the Naval and Marine Pay and Pensions Act 1865…, in the Army Act 1955 and, now, in the Superannuation Act 1972. Section 5(1) of the last named Act provides an illustration of the statutory formula that has traditionally been employed: ” Any assignment (or in Scotland, assignation) of or charge on, and any agreement to assign or charge, any benefit payable under a scheme made under section 1 of this Act shall be void.
49. The courts have given effect to that formula by holding that it precludes vesting in a statutory assignee or trustee in the event of a bankruptcy…”
73. Examination of the historical treatment of pension rights under the law of England, to which I have referred earlier in this judgment, leads to the following conclusions. First, that Parliament has, for a long time, recognised a need to exclude certain pension rights (in particular, rights under public service pensions) from the full operation of the bankruptcy law: see, for example, the Naval and Marine Pay and Pensions Act 1865, the Police Pensions Act 1921, the Army Act 1955 and the Superannuation Act 1972 (and its statutory predecessors).”
Mr Ley emphasised Chadwick LJ’s reference to the 1972 Act under which the 1986 Regulations were made.
In this case, however, I would point out that there is no provision in the 1986 Regulations expressly avoiding a purported assignment or expressly stating that the benefit of the pension shall not pass to the trustee or forfeiting a pension in the event of bankruptcy.
Mr Ley accepted that section 5 (1) of the 1972 Act, which provides that “Any assignment….of or charge on, and any agreement to assign or charge, any benefit payable under a scheme made under section 1 of the Act shall be void” , does not apply to this case. It relates only to civil service superannuation schemes and not to local government service pension schemes, which are governed by section 7 of the 1972 Act. But Mr Ley asserted that the effect of the statutory protection given to pension benefits by regulation E 32 to those in local government service is the same as that provided by section 5(1).
In addition Mr Ley cited cases concerning restrictions on the alienation of pay and pension benefits of public servants and of members of the armed services and the impact on the availability of those benefits to satisfy the claims of creditors: Flarty v. Oldlum (1790) 3 T.R. 681; Ex parte Huggins (1882) 21 Ch D 85; Lucas v. Harris (1886) 18 QBD 127 at 137-139; Re Saunders [1895] 2 QB 424 at 426; and Re Lupton [1912] 1 KB 107 at 114-115.
Mr Ley distinguished the decision of Ferris J in Re Landau [1998] Ch 223, holding that a revenue-approved non-assignable annuity contract was “property” which vested in the trustee in bankruptcy by operation of law, on the ground that the restriction on assignment in that case was contractual. It was well established that an attempt to contract out of the insolvency laws is ineffective being contrary to public policy: see Krasner v. Dennison (supra) at paragraphs 46 and 49. The restriction on assignment in this case is statutory. Mr Ley contended that it cannot infringe that public policy.
Definition of Property
Mr Ley also submitted that, notwithstanding the very wide inclusive language of section 436 of the 1986 Act, the entitlement to the pension benefits was not “property” of Mr Patel at the date of the bankruptcy order and did not vest in the trustee. He repeated his arguments on the inalienability of the pension benefits. He emphasised that the defining characteristic of property is that it can be transferred by the person entitled to it to another person. The pension benefits were deprived of that character by regulation E32. They could not be assigned either to the trustee or by him. For that reason alone they were not property.
Mr Ley cited Kilvert v. Flackett [1998]2 FLR 806, a decision of Mr Peter Scott QC, sitting as a deputy judge of the High Court, as a case in which it was apparently assumed by those representing the trustee and the bankrupt that the annuity benefits only went to the trustee for the period of the bankruptcy and that the lump sum pension benefits received by a dentist under the National Health Service Pension Scheme, which contains similar provisions to Regulation E32, did not vest in the trustee at all and so were available for an income payments order under section 310 of the 1986 Act. Property vested in the trustee would not be so available.
Mr Ley contended that there were other reasons for holding that the pension benefits were not “property.” At the relevant date (i.e. the date of the bankruptcy order) nothing was due for payment to Mr Patel under the pension scheme. He had not reached the retirement age of 65. He would become entitled to pension benefits, if he was made redundant over the age of 50, but that had not happened and it did not in fact happen until after his discharge from the bankruptcy. At the date of the bankruptcy there was nothing of value to vest in the trustee for him to realise for the benefit of creditors.
In addition the pension benefits arose from the provisions of a contract for personal services, namely his contract of employment. It was by virtue of that contract that he became a member of, and made contributions to, the scheme. Such personal contracts for labour are not property and do not vest in the trustee.
Even if the basic pension benefits were “property”, the enhanced benefits were not property, as there was no legal obligation to pay them. Mr Patel had no legal entitlement to them at any time. They were purely discretionary. There was no right, present or future, vested or contingent, to the enhanced payments.
The Legal Position
I am unable to accept either of Mr Ley’s main points. This appeal should be dismissed. In my judgment, the correct legal position concerning entitlement to the pension benefits on a bankruptcy is reasonably clear .
Vesting of choses in action
The legal right to the basic pension and to the basic lump sum were vested in Mr Patel before he was made bankrupt. He had a present legal right to compel the payment of scheme benefits in the future and on certain contingencies. That right was a “chose in action” within the very wide description of “property” in section 436 of the 1986 Act. The fact that the occasion for payment of pension benefits did not occur until Mr Patel was made redundant after the bankruptcy is irrelevant to the existence and vesting of the right, as is the fact that the right may have no immediate value (see de Rothschild v. Bell [2000] QB 33.)What matters is that the right to future payment existed at the date of the bankruptcy order. It was “property.” It accordingly vested in the trustee.
Not contracts of personal service
The vesting of choses in action regarding the pension benefits is unaffected by the principle that unexecuted contracts for purely personal services of the bankrupt do not vest in the trustee.Pension schemes provide benefits which are regarded in some contexts as “pay” or as a form of deferred pay for services rendered in the past, but the pension schemes which govern the rights are not themselves unexecuted contracts for personal services. The trustee is entitled to the right to enforce payment of the pension benefits, even though the entitlement to the pension may arise from the term of a contract of service, and even though the amount of the benefits is calculated by reference to the contributions made to the scheme over a number of years of service out of a salary paid under an unassignable, personal contract of employment. See, for example, Performing Right Society v. Rowland [1998] BPIR 128 ( right to distribution of copyright royalties vested in trustee.)
Discretionary payments
The enhanced benefits also fall within the description of “property” in section 436, even though they are discretionary and not receivable by Mr Patel as of right. “Property” is described as including “…every description of interest….arising out of, or incidental to, property.” The enhanced payments were incidental to property in the form of the basic pension benefits to which Mr Patel was legally entitled. It is not necessary that there should be a legal entitlement to the enhanced benefits themselves for them to qualify as an “interest… incidental to property.” For instance, it was held by Warner J in Re Rae [1995] BCC 103 at 113 that the non-exhaustive terms of section 436 extend beyond interests in property, in the sense of interests which are capable of being asserted or defended in legal proceedings, to an interest arising,for example, from the exercise of an administrative discretion or from an arrangement which may be unenforceable in any court, as explained by Sir George Jessel MR in Ex parte Huggins (1882) 21 Ch D 85 at 91.
That approach to the scope of section 436 is consistent with the promotion of the statutory objective of the provisions of the 1986 Act that, subject to certain specific exceptions, all a debtor’s property capable of realisation should be vested in the trustee for him to realise and distribute the proceeds among the creditors.
Non-assignment point
The provision in regulation E32 that pension benefits payable to the member are not assignable or chargeable does not prevent the automatic statutory vesting in the trustee in bankruptcy of rights to pension benefits. If, as is my view, entitlement to the pension benefits is “property”, section 306 applies to those benefits. The distinction between, on the one hand, regulations against voluntary assignment or charging of pension benefits, which do not prevent statutory vesting in the trustee in bankruptcy, and, on the other hand, regulations expressly providing that pension benefits shall not pass to a trustee in bankruptcy, was recognised by Parliament in paragraph 9 of Schedule 3 to the 1972 Act, as referred to in section 7(2) (a) in the context of superannuation of persons employed in the local government service. No such express provision was included in the 1986 Regulations. This is to be contrasted with section 5(1) relating to benefits under civil service superannuation schemes, and to other regulations made under the 1972 Act where, in addition to an express prohibition against assignment and charging such as was made in E 32 of the 1986 Regulations, an additional express provision has been made that pension benefits should not pass to the trustee in bankruptcy or other person acting on behalf of the creditors: see Regulation 32 (3) of the Teachers’ Superannuation (Consolidation) Regulations 1988 (SI 1988/1652).
I should add that I prefer to rest my decision on this point than on the obiter dicta in paragraphs 48 and 73 of Krasner v. Dennison (supra) referring to the effect in bankruptcy of an express provision (which was not in any event present in the 1986 Regulations) that an assignment or charge of a pension benefit under a scheme shall be void. It appears from the decision of this court in Lucas v. Harris (supra) at 139 (a case on execution) that the effect of such an avoidance provision in section 141 of the Army Act 1881 was left open in the case of bankruptcy.
Post bankruptcy pension contributions
There is a cross appeal by the trustee challenging the decision of the deputy judge to apportion the pension benefits between the estate and Mr Patel on the basis of the proportion of the contributions to the scheme made before and after the commencement of the bankruptcy. It is true, as submitted by Miss Stanley for the trustee, that the post-bankruptcy contributions by Mr Patel did not change the quality of the contingent rights, which had ceased to be vested in him and became vested in the Official Receiver and then in the trustee. The payments by Mr Patel did not create new statutory rights or new contracts to which he was entitled or which would entitle him to a share of the pension. See, for example, D’Avigdor-Goldsmid v. IRC [1953] AC 347 at 361, 364, 368, 376 and 378. The effect of the contributions was to lengthen the period of Mr Patel’s membership of the scheme and to increase the value of the existing right, which had vested in the trustee, by increasing the multiplier.
The deputy judge held that the trustee was not entitled to the amount of the pension attributable to Mr Patel’s post-bankruptcy service and contributions. Although he did not explain the basis on which he made that exclusion, the deputy judge was, in my view, entitled to achieve that result by application of the principle in Ex parte James (1874) LR 9 Ch App 609 that the court will not allow the trustee, as an officer of the court, to retain monies for distribution among creditors where it would be contrary to just dealing to do so e.g. where a voluntary payment has been made to the trustee under a mistake of law. See also Ex parte Tyler [1907] 1 KB 865. The effect of Mr Patel’s contributions after the bankruptcy by way of the Council’s continuing deductions from his salary was to make more valuable the pension rights vested in the hands of the trustee. The contributions continued to be made by Mr Patel in the mistaken belief that the pension rights remained vested in him, whereas they had already vested in the trustee. In those circumstances the court is entitled to take the view that it is inequitable of the trustee to retain the benefit of the increase in value of the pension benefits attributable to the post-bankruptcy contributions which were made in the course of his continuing service with the Council in a mistaken belief as to the entitlement to the pension benefits.
The Future
It should be mentioned for completeness that in the Welfare Reform and Pensions Act 1999, which received the Royal Assent on 11 November 1999, provision is made in section 11 for pension rights under approved pension arrangements to be excluded from a bankrupt’s estate in cases where the bankruptcy order is made on a petition presented after the coming into force of the section. The relevant parts of the section were brought into force on 29 May 2000 by SI 2000 No 1382.
Result
The appeal should be dismissed.
LORD JUSTICE KAY:
I agree
LORD JUSTICE ALDOUS:
I also agree.
ORDER: Appeal dismissed with costs, not to be enforced without leave of the court; cross-appeal dismissed, with no order for costs; detailed assessment; the court indicated that it saw no reason why it is not just and equitable for the Legal Services Commission to shoulder the burden of costs; permission to appeal to the House of Lords refused.
(Order does not form part of approved Judgment)
Thomas & Anor (Joint Trustees In Bankruptcy of Stephen John Edmondson) v Edmondson
[2014] EWHC 1494 (Ch) [2015] WLR 1395, [2015] 1 WLR 1395, [2014] 3 All ER 976, [2014] EWHC 1494 (Ch), [2014] BPIR 1070
Mrs Justice Asplin:
This is an appeal by Messrs Simon Thomas and Nicholas O’Reilly, the present Joint Trustees in Bankruptcy of the Respondent, Mr Edmondson, (“the Joint Trustees”) against an order of District Judge Jones made on 20th November 2013 in the Slough County Court. Mr O’Reilly was substituted as Second Appellant in place of Ms Shelley Bullman by an order which I made on 17th December 2013.
The District Judge made a declaration that the then Joint Trustees in Bankruptcy were not entitled to an Income Payments Order against Mr Edmondson pursuant to section 310 Insolvency Act 1986 and the Joint Trustees appeal on the basis that the District Judge erred in law in determining that the Court had no jurisdiction to make an income payments order under section 310 Insolvency Act 1986 (“an Income Payments Order”) in circumstances where the bankrupt had previously entered into an income payments agreement pursuant to section 310A of that Act, (“an Income Payments Agreement”).
Background
The Respondent was made bankrupt on 21 August 2012, on the petition of HMRC. As a result of the bankruptcy order his tax code was changed to “NT”, meaning that income tax was not deducted from his earnings. On 7th December 2012, the Respondent entered into an Income Payments Agreement pursuant to section 310A Insolvency Act 1986 with the Official Receiver by which he agreed to pay to the Official Receiver or any person appointed as trustee of his bankrupt estate the amount by which his take home pay was increased by virtue of this NT tax coding, by way of contribution to his bankruptcy. The Income Payments Agreement was expressed to continue until the end of the tax year, in other words, until 5 April 2013.
In fact, Mr Thomas and Ms Bullman had been appointed as the Respondent’s Trustees in bankruptcy on 6 December 2012. Ms Bullman was replaced by Mr O’Reilly as the Respondent’s Joint Trustee on 20th November 2013. In May 2013 the then Joint Trustees sought to establish the Respondent’s income and expenditure for the purpose of finalising a further Income Payments Agreement. In subsequent correspondence the Respondent refused to agree a further Income Payments Agreement, contending that there was no surplus income available. As a result, on 19 August 2013 they applied in the Slough County Court for an Income Payments Order pursuant to section 310 Insolvency Act 1986 in the amount of £10,000 per month for the duration of three years from the date of the Order. It was this application which led to the Order which is the subject of this appeal.
As a result of District Judge Jones’ Order, the Joint Trustees have applied to amend their original application notice to include in the alternative, an application to vary the Income Payments Agreement reached on 7th December 2012 and to do so out of time. The application is to be heard in the Slough County Court in May 2014.
I am not concerned with the details of the Income Payments Order or the variation of the Income Payments Agreement which are sought, nor with the question of the exercise of discretion in that regard. I am concerned purely with the question of statutory construction which arises from District Judge Jones’ order. Should sections 310 and 310A Insolvency Act 1986, upon their proper construction be read to mean that in the light of the fact that an Income Payments Agreement was made, there is no jurisdiction in the court to make an Income Payments Order in respect of the Respondent?
The Relevant provisions and the argument in summary
The relevant parts of sections 310 and 310A Insolvency Act 1986 in their present form are as follows:
“310.-Income payments orders.
(1) The court may […] make an order (“an income payments order”) claiming for the bankrupt’s estate so much of the income of the bankrupt during the period for which the order is in force as may be specified in the order.
(1A) An income payments order may be made only on an application instituted –
(a) by the trustee, and
(b) before the discharge of the bankrupt.
…
(6) An income payments order must specify the period during which it is to have effect; and that period –
(a) may end after the discharge of the bankrupt, but
(b) may not end after the period of three years beginning with the date on which the order is made.
(6A) An income payments order may (subject to subsection (6)(b)) be varied on the application of the trustee or the bankrupt (whether before or after discharge).”
“310A Income payments agreement
(1) In this section “income payments agreement” means a written agreement between a bankrupt and his trustee or between a bankrupt and the official receiver which provides –
(a) that the bankrupt is to pay to the trustee or the official receiver an amount equal to a specified part or proportion of the bankrupt’s income for a specified period, or
(b) that a third person is to pay to the trustee or the official receiver a specified proportion of money due to the bankrupt by way of income for a specified period.
(2) A provision of an income payments agreement of a kind specified in subsection (1)(a) or (b) may be enforced as if it were a provision of an income payments order.
…
(4) The following provisions of section 310 shall apply to an income payments agreement as they apply to an income payments order –
(a) subsection (5) (receipts to form part of estate), and
(b) subsections (7) to (9) (meaning of income).
(5) An income payments agreement must specify the period during which it is to have effect; and that period –
(a) may end after the discharge of the bankrupt, but
(b) may not end after the period of three years beginning with the date on which the agreement is made.
(6) An income payments agreement may (subject to subsection (5)(b)) be varied –
(a) by written agreement between the parties, or
(b) by the court on an application made by the bankrupt, the trustee or the official receiver.
(7) The court –
(a) may not vary an income payments agreement so as to include provision of a kind which could not be included in an income payments order, and
(b) shall grant an application to vary an income payments agreement if and to the extent that the court thinks variation necessary to avoid the effect mentioned in section 310(2).”
In summary, the Respondent contends that the Income Payments Order regime created by s.310 of the Insolvency Act, and the Income Payments Agreements regime created by s.310A of the Insolvency Act 1986, are parallel but mutually exclusive. It is said that the legislative intention is that income payments by a bankrupt should last for no more than 3 years and that if one can move between regimes, that intention would be flouted, causing anomaly. Thus, it is said that since the Respondent entered into the Income Payments Agreement, albeit for a period of only five months, for that reason the Court may not now make an Income Payments Order against him.
On the other hand, the Trustees in Bankruptcy’s position is that mutual exclusivity is not borne out by the wording of ss. 310 and 310A of Insolvency Act 1986. On the contrary, it is said that the wording is clear and the previous existence of an Income Payments Agreement is no bar to the exercise of discretion by the court to grant an order under section 310. Mr Comiskey on behalf of the Joint Trustees says that the wording of the relevant sections is straightforward and obvious and on a plain reading, the fact that a person has entered into an Income Payments Agreement does not operate to deprive the court of the jurisdiction it would otherwise have to make an Income Payments Order. Had that been the intention of the legislature, Mr Comiskey submits that it would have said so.
He referred me to an extract from the speech of Lord Reid in Pinner v Everett [1969] 1 WLR 1266 at 1273 which is referred to under the heading “The plain meaning rule” at section 195 in Bennion on Statutory Interpretation 6th ed, in which his Lordship stated that it was only when the natural and ordinary meaning of the words in their context in the statute leads to a result which cannot reasonably be supposed to have been the intention of the legislature that it is proper to look for some other possible meaning. Mr Comiskey says that this is not the case here.
Secondly, Mr Comiskey submits that although section 310A was inserted into the Insolvency Act 1986 by section 260 Enterprise Act 2002 and at the same time, section 310 Insolvency Act 1986 was amended by section 259 of the 2002 Act, by express omission of the words “on the application of the trustees” from section 310(1), the insertion of a new section 310(1A) and the substitution of a new sub-section (6) and (6A) for the original sub-section (6), it is significant that no express amendment was made of the kind for which the Respondent argues by way of interpretation.
He says that as section 310 was not been amended expressly or indirectly by means of another statute in order to render the Income Payment Agreement and Income Payment Order regimes mutually exclusive, an amendment can only have come about impliedly and that is not the case here. In this regard, he referred me to extracts from the judgments of Bramwell and Brett LJJ in A-G v Lamplough (1878) 3 Ex D 214 at 227 and 229 and to the speech of Lord Neuberger in Boss Holdings Ltd v Grosvenor West End Properties Ltd [2008] 1 WLR 289 at [23] in which he stated:
“I have referred to, and relied on, the residence requirements in section 1(1) in its original form. In the Court of Appeal at para 25, Carnwath LJ said that he was inclined to think that no assistance could be gathered from provisions in the 1967 Act as originally enacted, because one should construe the 1967 Act in its current form. Consequently, he considered that no help in construing section 2(1) could be gathered from the residence requirement of every enfranchisement claim originally contained in section 1(1). I do not agree. In Suffolk County Council v. Mason [1979] AC 705, Lord Diplock said at 714E that certain “provisions … have since been amended by the Countryside Act 1968: but this cannot affect the construction of the Act of 1949 as it was originally enacted”. There are earlier observations to similar effect from Bramwell and Brett LJJ at 227 and 229 in Attorney General v. Lamplough (1878) 3 Ex D 214. In my opinion, the legislature cannot have intended the meaning of a sub-section to change as a result of amendments to other provisions of the same statute, when no amendments were made to that sub-section, unless, of course, the effect of one of the amendments was, for instance, to change the definition of an expression used in the subsection.”
That was a case in which the court was required to construe the phrase “designed or adapted for living in” in the definition of “house” contained in the Leasehold Reform Act 1967.
As a result, Mr Comiskey says that section 310 must be construed in the same way after the amendment to that section and the introduction of section 310A brought about by the Enterprise Act 2002 as beforehand. He says that before the amendment, section 310 contained no limit upon the jurisdiction of the court to make an Income Payments Order based upon an Income Payments Agreement having been entered into (because the ability to make such agreements had yet to be enacted) and section 310(6) in its original form provided:
“(6) An income payments order shall not be made after the discharge of the bankrupt, and if made before, shall not have effect after his discharge except –
(a) in the case of a discharge under section 279(1)(a) (order of court), by virtue of a condition imposed by the court under section 280(2)(c) (income, etc. after discharge), or
(b) in the case of a discharge under section 279(1)(b) (expiration of relevant period), by virtue of a provision of the order requiring it to continue in force for a period ending after the discharge but no later than 3 years after the making of the order.”
He says therefore, that under section 310 Insolvency Act 1986 in its original form it was possible to make Income Payments Orders for periods in excess of three years whilst the bankruptcy continued. It was only in relation to orders continuing in force after the discharge that the period was limited to three years from the making of the order. He pointed out that there was no time limit imposed under section 51 Bankruptcy Act 1914 in relation to similar payments orders. They came to an end on discharge, unless otherwise ordered. Under the 1914 Act the bankrupt had to apply for discharge and accordingly, the bankruptcy might continue for an indefinite period. Equally, section 7 Insolvency Act 1976 in summary, provided for semi-automatic discharge from bankruptcy after five years. Therefore, he submits that prior to the enactment of the Insolvency Act 1986 the court had power to make an Income Payments Order or an order of similar kind for an indeterminate period but which typically would be limited to the duration of the bankruptcy and after its enactment the position was the same, save that an order which continued after discharge could not be of more that 3 years duration.
He says that after section 310 was amended by the Enterprise Act 2002, the Court is required to specify the period during which an Income Payments Order is in force and puts a three year limit on that period but the Court would not be prevented from making another order if the bankrupt remained undischarged.
In contrast, Mr Briggs on behalf of the Respondent urges me to construe sections 310 and 310A Insolvency Act 1986 as amended and referred me to Inco Europe Ltd & Ors v First Choice Distribution (a firm) & Ors [1999] 1 All ER 820, a decision of the Court of Appeal in relation to the construction of section 18(1)(g) Supreme Court Act 1981 as amended by section 107(1) and Schedule 3 to the Arbitration Act 1996. In particular, he referred me to the judgment of Hobhouse LJ at 823c – e at which he held:
“In general terms, it is undoubtedly correct that the effect of an amendment to a statute should be ascertained by construing the amended statute. Thus, what is to be looked at is the amended statute itself as if it were a free-standing piece of legislation and its meaning and effect ascertained by an examination of the language of that statute.
However, in certain circumstances it may be necessary to look at the amending statute as well. This involves no infringement of the principles of statutory interpretation; indeed it is an affirmation of them. The expression of the relevant parliamentary intention is the amending Act. It is the amending Act which is the operative provision and which alters the law from that which it had been before. It is the expression of the parliamentary will as to what changes in the law Parliament wishes to make. . . . .”
He says that when one reads the amended provisions together it is clear that the plain meaning is not what the legislature intended and leads to anomaly, namely the possibility that the debtor might be subject to a repayment regime for more than three years. Accordingly, he says the Court should seek to find an interpretation other than the literal one. In this regard, he referred me to an extract from the judgment of Arden LJ in Price v Davis [2014] EWCA Civ 26 at [38] and [39] at which she held:
“38. The court must of course give effect to the intention of Parliament. In this case, the literal meaning of section 260 is that it applies only to the original meeting and that a further meeting summoned by a nominee under section 262 has none of the consequences which the IA86 attaches to the original meeting summoned under section 257.
39. However, where the effect of a literal interpretation of a statute is to create significant anomalies which the court is satisfied Parliament could not have intended, the court should seek to find an interpretation which avoids those anomalies.”
He says that if one is able to slip from the Income Payments Order to the Income Payments Agreement regime, a bankrupt might be required to pay over his income for an indefinite period before discharge rather than the maximum three years intended and that if the legislature had intended such a harsh regime to be imposed it would have said so. Furthermore, he submits that this anomaly cannot be resolved by reference to the discretion of the court as to whether to make an Income Payments Order where there has been an Income Payments Agreement and to determine its length.
He says that the three year limit was the intention of the legislation both before and after the amendments as a result of the Enterprise Act 2002. In this regard, he referred me to a Report of the Review Committee chaired by Sir Kenneth Cork entitled “Insolvency Law and Practice” and dated June 1982 in which Income Payments Orders were considered and it was stated that the debtor must not become ” a slave of his creditors”, that “the maximum period for an Income Payments Order in a Liquidation of Assets will be three years” and went on to state that “in the case of Bankruptcy, the Court will have power to extend an Income Payments Order beyond three years.” I should say at this stage, that it seems to me that the Report of the Review Committee does not support Mr Briggs’ submission and in any event, it contained a variety of proposals some of which did not find their way into the Insolvency Act 1986 and should be given little or no weight.
He also referred me to the White Paper of 2001 entitled “Productivity and Enterprise – Insolvency – A Second Chance” which foreshadowed the Enterprise Act 2002. Under the heading of “Bankruptcy Proposals” which included the proposal that bankrupts be discharged by a maximum of 12 months from the date of the bankruptcy order, at paragraph 1.20 which was subject to the side heading “Income Payments Orders” it stated as follows:
“Across the broad spectrum of civil debt enforcement the government is committed to Payments ensuring that those who can pay should pay. In order to ensure this happens – and against the background of a very much reduced period of bankruptcy – the Enterprise Bill will make it clear that bankrupts will be liable to make an affordable contribution from their income for up to three years from the date of the bankruptcy order regardless of whether they are discharged.”
In this regard, Mr Comiskey points out that in fact, the amendments to the Insolvency Act 1986 brought about by the Enterprise Act 2002 did not limit the length of any commitment to make payments to three years from the date of the bankruptcy order at all. He also says that paragraph 1.20 when read in the context of the proposed shorter bankruptcy period, does no more than reiterate that an obligation to make payments should not extend for more than 3 years after discharge, as before.
In addition, Mr Briggs referred me to the Explanatory Notes to the Enterprise Act 2002 itself. As Lord Steyn explained in his speech in R(S) v Chief Constable of S Yorkshire Police [2004] 1 WLR 2196 at 2199C:
” . . . Explanatory notes are not endorsed by Parliament. On the other hand, in so far as they cast light on the setting of a statute, and the mischief at which it is aimed, they are admissible in aid of construction of the statute. . “
The relevant Explanatory Notes in this case state:
“755. The current income payments order regime is designed to ensure bankrupts make an affordable contribution towards their debt from their income for up to three years, but in most cases they cease on discharge (see section 310(6)). Against the background of a reduced period of bankruptcy for non-culpable bankrupts, income payments orders will now last for a term of up to three years from the date of the order, irrespective of discharge (see new section 310(6) inserted by section 259).
756. Income payments orders are made by the courts on the application of the trustee in bankruptcy. In practice most are not usually contested. Income payments orders can be varied on the application of the trustee or the bankrupt.
757. In order to remove the need for court involvement in non-contentious cases, section 260 introduces the concept of the income payments agreement by inserting a new Section 310A into the Insolvency Act 1986.
758. Income payments agreements will provide a legally-binding written agreement between the bankrupt and the Official Receiver or trustee that requires the bankrupt (or a third party) to make specified payments to his trustee for a specified period. This will be enforceable as if it were an income payments order made by the court. Whilst in force, an income payments agreement may be varied on an application to the court by the bankrupt, trustee or the Official Receiver or by written agreement between the parties. A court may not vary an income payments agreement to include a provision that could not be included in an income payments order and must grant a variation if it takes the view that the variation is necessary to enable the bankrupt to retain sufficient funds to meet the reasonable domestic needs of the bankrupt and his or her family.
759. An income payments agreement must specify the period in which it is to have effect and that period can apply after a bankrupt is discharged but cannot extend to a date more than three years after the date of the income payments agreement.”
With regard to the Explanatory Notes, Mr Comiskey says that they are of little or no assistance and they do not suggest that the jurisdiction to grant an Income Payments Order is in any way affected by an Income Payments Agreement having been entered into.
Lastly, Mr Briggs says that I should concentrate on the effect of being able to slip between the two regimes rather than purely upon the meaning of the words in section 310 as amended. He says that each regime operates separately for the same purpose and that one cannot “mix and match.” He says that the Joint Trustees should have applied to vary the Income Payments Agreement which was agreed with the Respondent rather than seek an order subsequently.
Conclusion:
In my judgment, the learned District Judge erred in finding that the jurisdiction to grant an Income Payments Order under section 310 is ousted where there has been an Income Payments Agreement. It seems to me that the plain and ordinary meaning of section 310 is clear and that there is no reason to go beyond it. Furthermore, had the legislature intended that jurisdiction be limited in the way which is suggested, it seems to me that it would have said so at the time of the express amendments made by sections 259 and 260 of the Enterprise Act 2002.
My conclusion is supported by the extract from the speech of Lord Neuberger in Boss Holdings Ltd v Grosvenor West End Properties Ltd to which I have referred. In my judgment, the legislature cannot have intended the plain meaning of section 310 to change in the way contended for by the Respondent, as a result of the introduction of section 310A, coupled with specific amendments to section 310 itself which made no reference whatever to the jurisdiction to make an order under section 310 being affected by the existence of a previous agreement forged under section 310A. This is all the more so in this case given that section 310 was amended at the very same time as section 310A was introduced and section 310A makes reference to section 310. Of course, the amendment to section 310(6) did introduce a limit on the duration of an Income Payment Order, something to which I shall return.
To the extent that it survives Lord Neuberger’s decision in Boss Holdings Ltd, this conclusion is in my judgment reinforced by the dictum of Hobhouse LJ (as he then was) in Inco Europe Ltd & Ors v First Choice Distribution (a firm) & Ors. He stated that it is the amending Act which is the expression of the legislature’s intention. In this case, although Income Payment Agreements were introduced and section 310 was itself amended, no amendments were made to section 310 which would justify the interpretation put on it by the Respondent.
It follows therefore, that I do not accept Mr Briggs’ analysis that, in fact, sections 310 and 310A read together cause significant anomalies to arise which the court is satisfied the legislature could not have intended and which requires the court to seek to find an interpretation other than the literal one, as Arden LJ described in Price v Davis [2014] EWCA Civ 26. It seems to me that even if the Respondent is correct and it was Parliament’s intention that a bankrupt should not be required to pay part of his income to his trustee in bankruptcy for more than 3 years, the potential for an anomaly if there is jurisdiction to make an Income Payments Order despite an Income Payments Agreement having already been entered into is met by the existence of the discretion of the judge when exercising the jurisdiction whether to make the subsequent order and if so, the length of the order in question. As Mr Comiskey readily accepts, on such an occasion, the existence of an Income Payments Agreement and its length are factors which are relevant to take into consideration. This is consistent with a paragraph under the heading, “Anomaly avoidable by exercise of discretion” in section 315 of Bennion on Statutory Interpretation 6th ed to which I was referred. The text goes on:
“A possible anomaly carries less weight” if there is interposed the discretion of some responsible person by the sensible exercise of which the risk may be obviated.”
The editor of Bennion went on to note:
“In a bankruptcy case both sides sought to support their arguments by citing anomalies which the opposite view would produce. That of the debtor however, depended on the possible making of orders discharging a person from bankruptcy subject to conditions subsequent. Thus it could be avoided by the careful exercise of the power to make such orders, although in practice these were rarely made.”
The footnote refers to Re, ex p Official Receiver v Debtor [1980] 1 WLR 263.
I should add that I do not accept that Mr Briggs is assisted to any great extent by the White Paper entitled “Insolvency – A Second Chance”. As Mr Comiskey pointed out, paragraph 1.20 makes reference to an obligation to contribute for a period of 3 years from the date of the bankruptcy order itself, something which is not reflected in either section 310 in its amended form or section 310A. I have already recorded my conclusion in relation to the Cork Report which I did not find of assistance.
In addition, I should add that although Explanatory Notes may cast light on the mischief at which it is aimed, I agree with Mr Comiskey that they do not assist the Respondent here. Although paragraphs 755 and 759 may suggest that it was intended that any obligation to contribute be limited to three years, the relevant Notes shed no light whatsoever upon whether it was intended that the Order and Agreement regimes should be mutually exclusive.
In any event, even if it is correct that as a result of section 310(6) in its amended form, the full duration of any obligation to make payments whether under an Income Payments Order or an Income Payments Agreement may not exceed three years, precluding the making of a second Order or Agreement before discharge where the first was for a full three year duration, something upon which I do not need to decide, in my judgment, that does not require an interpretation to be placed upon section 310 of the kind proposed on behalf of the Respondent. It is not necessary as a result, to construe section 310 to mean that where there has been an Income Payments Agreement there is no jurisdiction to make an order under section 310. As I have already said, the matter is cured by means of the discretion contained in section 310 as amended.
Booth v Mond
[2010] BPIR 1111, [2010] EWHC 1576 (Ch)
JUDGE HODGE QC:
This is my extemporary judgment in the case of Nigel John Hargreaves, case number 48 of 2009 in the Wakefield County Court, case number 0LS 30100 in the Leeds District Registry, and case number 445 of 2010 in the Manchester District Registry. The applicant in this case is Mr. Philip Booth, in his capacity as supervisor of an individual voluntary arrangement in respect of Mr. Nigel John Hargreaves, his revised proposals having been approved on 24th February 2009. Mr. Hargreaves is represented by Miss Cristin Toman of counsel, instructed by Chadwick Lawrence of Wakefield. The respondent to this application is Mr. David Emanuel Mond in his capacity as former trustee in bankruptcy of Mr. Hargreaves. He is represented by Mr. David Moyhuddin of counsel, instructed by Halliwells of Manchester.
The bankruptcy order from which Mr. Mond derives his status was made on 18th July 2005. On the same day, Mr. Lawrence Ian Freedman was appointed to act as Mr. Hargreaves’s trustee in bankruptcy. By a block transfer of insolvency appointments order made by myself on 16th November 2007, Mr. Mond was appointed as Mr. Hargreaves’s trustee in bankruptcy in place of Mr. Freedman. As I have indicated, Mr. Hargreaves was made bankrupt on 18th July 2005; and he was automatically discharged from that bankruptcy on 18th July 2006.
Prior to his discharge from bankruptcy, Mr. Hargreaves had entered into an income payments agreement dated 6th March 2006 pursuant to Section 310A of the Insolvency Act1986 (as amended). The insolvency payments agreement was made between Mr. Hargreaves as the bankrupt and Mr. Freedman as his then trustee in bankruptcy. It provided, by clause 1, that the bankrupt was to pay to the trustee the total sum of £66,484 by equal monthly instalments of £1,846.78 out of his income. Those payments were to be made by the bankrupt on the first day of each calendar month, the first instalment to be made on or before 1st March 2006, and for a period of 36 consecutive months. Section 310A provides that an income payments agreement for the purposes of the section means a written agreement between a bankrupt and his trustee which provides that the bankrupt is to pay to the trustee an amount equal to a specified part or proportion of the bankrupt’s income for a specified period.
A provision of an income payments agreement of such a kind may be enforced as if it were a provision of an income payments order. Section 310A(4) provides for sub-sections (5) and sub-sections (7) to (9) of Section 310 to apply to an income payments agreement as they apply to an income payments order. By sub-section (5), an income payments agreement must specify the period during which it is to have effect; and that period (a) may end after the discharge of the bankrupt, but (b) may not end after the period of three months beginning with the date on which the agreement is made. By sub-section (6), an income payments agreement may (subject to sub-section (5)(b)) be varied either by written agreement between the parties, or by the Court on an application made by the bankrupt, the trustee or the official receiver. By sub-section (7), the Court may not vary an income payments agreement so as to include provision of a kind which could not be included in an income payments order, and shall grant an application to vary an income payments agreement if and to the extent that the Court thinks variation necessary to avoid the effect mentioned in section 310(2). That sub-section provides that the Court shall not make an income payments order the effect of which would be would be to reduce the income of the bankrupt below what appears to the Court to be necessary for meeting the reasonable domestic needs of the bankrupt and his family.
The Insolvency Rules contain specific provisions relating both to income payments orders and income payments agreements. The provisions relating to income payments orders to are to be found in Chapter 16 of Part 6 at rules 6.189 through to 6.193, and the provisions relating to income payments agreements are to be found at Chapter 16A at rule 6.193A through to rule 6.193C. One of the issues that has arisen during the course of this hearing has been the effect in law of an income payments agreement and the means by which it is capable of enforcement.
In the course of her reply, Miss Toman, for the supervisor, submitted that an income payments agreement does not have contractual effect because there is no consideration for it. I reject that submission. I do so on two grounds: First, it seems to me that the consideration for entry into an income payments agreement is the implied forbearance by the trustee in bankruptcy of the institution of an application for an income payments order pursuant to Section 310; but in any event rule 6.193B sub-rule (2) provides that when the official receiver or the trustee signs and dates the income payments agreement it shall come into force. It seems to me that, by force of statute, even if there is no consideration for an income payments agreement, it thereupon becomes enforceable in the same way as any other agreement, by the force of the Insolvency Rules. Moreover, whilst specific provision many be contained within the Act and the Rules for the enforcement of an income payments agreement, it seems to me that any such means of enforcement are not intended to be exhaustive, and that the trustee in bankruptcy, as a party to the income payments agreement, is capable of enforcing it in any way that would apply to a normal contractual document.
Initially, and for a little over two years, Mr. Hargreaves kept up the income payments pursuant to the terms of his agreement; but it is common ground between the parties that the final nine instalments were unpaid such that, as at the date of the approval of the individual voluntary arrangement, a total sum of £16,620.84 was then due and owing. At no time has any application been made by Mr. Hargreaves, or by the trustee in bankruptcy, to vary the terms of the income payments agreement. It is unnecessary in those circumstances for me to go into what the likely outcome of such an application might have been, save to say this: that on the evidence before the Court, I am not satisfied that a case for varying the income payments agreement would have been made out. In particular, on the evidence before the Court, such as it is, I am not satisfied that Mr. Hargreaves would have been able to discharge the burden of establishing that the agreement had the effect of requiring him to make payments which would have reduced his income below what appeared to the Court to be necessary for meeting his reasonable domestic needs, together with those of his family.
In his individual voluntary arrangement, at paragraph 2.13, Mr. Hargreaves discloses that in April 2006 he had agreed to a three year income payments agreement with his trustee in bankruptcy commencing at £1,850 per month. He did not, however, disclose that he was in arrears with the payments thereunder; nor was his trustee in bankruptcy included within the schedule of creditors set out in the appended statement of affairs. There is in evidence before the Court an e-mail (at page 51 of exhibit DEMM1 to the witness statement of Mr. Mond dated 10th September 2009) which shows that, as of 11th December 2008, Mr. Hargreaves was sending an e-mail to a representative of the trustee in bankruptcy which showed that he was aware that the standing order for the income payments had been missed. He said that he had changed the family’s bank account a couple of months previously, and he had been assured that everything would transfer, but he would check and make sure that the standing order was paid in December and from then onwards. Meanwhile, he said he had sent an extra payment for the one missed. It is apparent from the fact that, as of only two or three months later, nine months arrears were in existence, that Mr. Hargreaves did not do so. Further light is thrown upon that by a letter from Mr. Hargreaves to the same representative of the trustee in bankruptcy dated 27th April 2009 (at page 44 of exhibit DEMM1) in which he states that he was five months in arrears to the end of 2008. Given his financial situation, he says that he should perhaps have submitted a request to vary the agreement during its last year, but he had instead chosen to honour the payments where possible until he reached the end of the previous year, when the pressure from his creditors became too great.
There is no direct evidence from Mr. Hargreaves as to why he did not disclose the arrears under the income payments agreement in his proposal for his individual voluntary arrangement. Absent any such explanation, the inference that I draw is that Mr. Hargreaves was fully aware at the time of the proposal for his individual voluntary arrangement that he was in arrears, but he either chose not to disclose the fact or he considered – whether on professional advice or not it is not possible to say – that such arrears did not need to be disclosed for the purposes of his individual voluntary arrangement. But what I am satisfied of, on the evidence, is that it was not by any inadvertence that the existence of those arrears was not disclosed in his individual voluntary arrangement. So the position is that, at the time of the individual voluntary arrangement, there were arrears due and owing under the income payments agreement of some £16,620 odd; but the existence of those arrears, and the status of the trustee in bankruptcy as an actual or potential creditor, was not disclosed.
The trustee in bankruptcy wishes to recover those arrears from Mr. Hargreaves. Initially, he wrote to Mr. Hargreaves seeking to do so outside the individual voluntary arrangement; but, in response to Mr. Hargreaves’s letter of 27th April 2009 (to the effect that if he were to continue making payments under the income payments agreement, then he would immediately fall into arrears with his IVA payments, ultimately leading to its failure and no doubt to a second bankruptcy), on 29th April the trustee in bankruptcy, by his representative, wrote both to Dr. Hargreaves and to the supervisor of the voluntary arrangement indicating that, in order to deal with the arrears of the income payments agreement in the most pragmatic way, the trustee in bankruptcy would formally request that these be included in the IVA for the purpose of receiving a dividend in the sum of £16,620.84, the nine missed payments of £1,846.76 per month. After some intermediate correspondence, on 22nd June 2009 the supervisor responded that, having taken advice and looked at matters in detail, it was his contention that Mr. Hargreaves would have good grounds for making an application to the Court to vary the income payments agreement, and to have it discharged in its entirety, thereby wiping out the arrears and any claim in the IVA. For that reason he confirmed that the trustee in bankruptcy’s claim was rejected in its entirety. He also indicated that any court proceedings initiated against Mr. Hargreaves for recovery of this amount would be defended.
Miss Toman has taken me to the provisions of the IVA and, in particular, to cause 6.6, which provides that a proof may be admitted for inclusion in the arrangement by the supervisor, either for the whole amount claimed or in part; and if the supervisor rejects a proof in whole or in part he is to prepare a written statement of his reasons for doing so and to send it forthwith to the creditor. In the event of such rejection, the creditor or purported creditor is to have the right of application to the court on the admissibility of such proof of debt or claim, provided that such application is made within 21 days of the creditor receiving the written statement. I do not view the correspondence, the terms of which I have just recited, as amounting either to the submission of a proof of debt or its formal rejection. It does not seem to me that any restriction in clause 6.6 is engaged. Miss Toman also took me to clause 6.7, in which Mr. Hargreaves expressed his belief that he had disclosed all of his liabilities. He continued: “However, should I have inadvertently omitted any creditor the supervisor will have the authority to invite any such creditor to participate in the voluntary arrangement subject to the supervisor considering that the creditor has a valid claim and subject to, if admitted, the likely dividend to unsecured creditors not being reduced by more than 10 per cent”.
On the evidence, I am satisfied that if the trustee in bankruptcy’s claim were to be admitted, the likely dividend to unsecured creditors would not be reduced by more than 10 per cent. However, as I have already indicated, on the evidence, I am not satisfied that clause 6.7 is engaged in any way because I am not satisfied that the trustee in bankruptcy was omitted inadvertently. On the evidence, Mr. Hargreaves knew of his unpaid liability to the trustee in bankruptcy; and it does not seem to me, on the evidence, that I can say that the trustee in bankruptcy was inadvertently omitted as a creditor.
Following on from the exchange of letters to which I have referred, the trustee in bankruptcy clearly contemplated making an application for an order pursuant to Section 263(3) of the Insolvency Act that sums due to the trustee from the bankrupt pursuant to the payments agreement were incorrectly excluded from the individual voluntary arrangement, and for an order that the supervisor be directed to include the trustee as a creditor within the IVA for voting and dividend purposes. To that end, Mr. Mond prepared the witness statement of 10th September with exhibit DEMM 1 to which I have already referred. Before any such application was issued by the trustee in bankruptcy, however, the supervisor, acting by Chadwick Lawrence, issued his own application in the Wakefield County Court dated 14th October 2009 and issued on 16th October. That application sought directions pursuant to Section 263(4) of the Insolvency Act as to whether or not sums due to the respondent in his capacity as trustee in bankruptcy of Mr. Hargreaves pursuant to the income payments agreement should be included or excluded from the individual voluntary arrangement for voting and dividend purposes.
The evidence in support of that application consists of a single witness statement of Miss Katharine Elizabeth Roberts dated 14th October 2009 together with exhibit KER1. Miss Roberts is a solicitor employed by Chadwick Lawrence, the supervisor’s solicitors. In answer to the application, the trustee in bankruptcy, Mr. Mond, relies upon his witness statement of 10th September, together with a second witness statement made in response to Miss Roberts’s witness statement of 9th November 2009 together with exhibit DEMM2. Those three witness statements together comprised the evidence on this application. I have had the benefit of written skeleton submissions from Miss Toman and from Mr. Mohyuddin both dated 27th January 2010, and of a written note to the Court from Mr. Mohyuddin dated 16th February 2010 addressing the points made by Miss Toman in her written submissions. I have also had the benefit of oral submissions from Miss Toman for a little over an hour, from Mr. Mohyuddin for about 50 minutes, and in reply from Miss Toman for about 20 minutes.
In the course of her oral submissions, Miss Toman indicated that in addressing the issue whether the arrears under the income payments agreement attracted a dividend under the terms of the individual voluntary arrangement, there were essentially three questions to consider: The first was whether the respondent trustee in bankruptcy was a creditor for the purposes of the IVA; secondly, whether the arrears under the income payments agreement amounted to a provable bankruptcy debt; and, thirdly, whether it was legally possible for a trustee in bankruptcy to compromise his claim to the payment of arrears under an income payments order or agreement within the context of an individual voluntary arrangement.
A number of points were, I think, common ground. The first is that arrears under the income payments agreement were a bankruptcy debt in relation to the individual voluntary arrangement for the purposes of the statutory definition in Section 382 of the Insolvency Act 1986. That is because they constituted a debt or liability to which Mr. Hargreaves was subject at the time of his individual voluntary arrangement. The second matter which is common ground is that, although they were a bankruptcy debt for the purposes of the 2009 IVA, they were not a bankruptcy debt for the purposes of the earlier 2005 bankruptcy because inevitably they post-dated the commencement of the 2005 bankruptcy, having arisen only in the course of that bankruptcy by virtue of the agreement of 6th March 2006.
It is at this point that the measure of common ground dissolves. Miss Toman submits that the arrears, although a bankruptcy debt, are not a provable debt within the meaning of insolvency rule 12.3. It is necessary to look at rule 12.3 in some detail. It provides that, subject as follows, “… in administration, winding up and bankruptcy, all claims by creditors are provable as debts against the company or, as the case may be, the bankrupt, whether they are present or future, certain or contingent, ascertained or sounding only in damages”. There then follows, in sub-rule 12.3(2) a number of debts that are expressly provided not to be provable. They include “any obligation (other than an obligation to pay a lump sum or to pay costs) arising under an order made in family…proceedings”. I can pass over sub-rule 2(b) and move to sub-rule 12.3(3), which provides that nothing in the rule “prejudices any enactment or rule of law under which a particular kind of debt is not provable, whether on grounds of public policy or otherwise”.
Miss Toman submits that that exception applies to arrears under an income payments agreement or income payments order. I reject that submission. Miss Toman’s submission is founded essentially upon two cases: the first is a decision of Rimer J in the case of Re Bradley-Hole (A Bankrupt) [1995] 1 WLR 1097. At page 117, just below letter E, Rimer J records that under the pre-1986 insolvency regime it was clear that no proof could be made in a bankruptcy in respect of (a) arrears of any periodical payments at the date of the receiving order or (b) future payments due to be made after the date of the receiving order. He explains that the reason underlying these decisions was that neither the arrears nor the future periodical payments were capable of valuation or estimation, since it was within the discretion of the Court as to how far arrears might be enforced and the Court could also vary its order as to any future payments. The inability to prove for these payments in the bankruptcy did not mean that the beneficiary was remediless, but that they simply remained personal liabilities from which the bankrupt was not discharged by his bankruptcy and the intended beneficiary could continue to look to enforce payment of them out of his personal earnings. Rimer J then went on to explain that the new insolvency regime introduced in 1986 had preserved those principles, although it dealt with the matter differently. He expressed the view that, on a natural reading of the definition of a “bankruptcy debt” in section 382 it could be said to include indebtedness under periodical payments orders, a construction which he said appeared to be supported by section 281(5), which was concerned with the effect of discharge from bankruptcy. But he went on to say that it was clear that no proof could be made in bankruptcy for any obligation arising under a periodical payments order because of the effect of rule 12.3(2), to which I have already referred.
Relying on a passage in the commentary of Muir-Hunter On Personal Insolvency at paragraph 7-1245.10, Miss Toman submits that the public policy exception in Insolvency Rule 12.3(3) applies to arrears under both an income payments order and an income payments agreement. She says that it is clear from authorities such as the decision of the Court of Appeal in Cartwright v. Cartwright [2002] EWCA Civ 931 that foreign maintenance orders are not provable debts. The basis upon which they are not provable is that they are subject to variation or review by the Court and are therefore not final and conclusive. As such, they are not enforceable in the English courts and are therefore not provable in a bankruptcy. She submits that the important factor which makes a debt not provable is the fact that payments are subject to review by the Court. She submits that there is no reason to confine the rule that orders for the payment of a sum subject to review are non-provable to family proceedings, and that the reasoning in relation to family proceedings applies equally to the income payments agreement in this case.
As I say, I do not accept that submission. In her leading judgment in Cartwright v. Cartwright at paragraph 28, Arden LJ indicated that the Court there had to assume that the provision for periodical payments in a Hong Kong order was variable by the Hong Kong court. In those circumstances, the payments constituted a debt which by virtue of a rule of law was unenforceable in the United Kingdom. She then referred to Harrop v. Harrop. That is a reference to a decision of Scrutton J reported at [1920] 3 KB 386. At paragraph 17 of her judgment, Arden LJ had indicated that at common law a foreign maintenance order which was variable could not be enforced in England because it was not final and conclusive. That was the proposition for which she cited Harrop v. Harrop as authority.
The actual decision in that case was placed before me. It is clear that Scrutton J’s reasoning proceeded on the footing that the foreign maintenance order in that case had been liable to be discharged or varied upon an application being made for an order to enforce it (see page 398 of the report). On that basis, at pages 401 to 402, Scrutton J expressed the view that the order in that case, an order made in the State of Perak, now in Malaysia, was not final and conclusive within the doctrine of English law which enabled judgments of foreign courts to be enforced in England.
I accept Mr. Mohyuddin’s submission for the trustee in bankruptcy that it is not the fact of review that makes a debt non-provable in a bankruptcy; it is the fact of uncertainty and the absence of finality and conclusiveness which underlies the conclusion that the debt is non-provable. In my judgment, it would be an unwarranted extension of the cases concerning the non-provability of foreign maintenance and similar orders to extend them to arrears that have already accrued under either an income payments agreement or an income payments order. I can see no principled basis for saying that they fall within any rule of law which makes them not provable. There are no grounds of public policy which would justify such an exclusion; nor is there any reason in principle why they should not be provable in a bankruptcy.
In my judgment, arrears under an income payments order or agreement constitute a provable debt in the bankruptcy of the payer. It follows that, if Mr. Hargreaves’s arrears do not fall within the scope of his individual voluntary arrangement, it would be open to the trustee in bankruptcy to enforce payment by way of service of a statutory demand, followed, in the event of non-payment, by the presentation of a bankruptcy petition. That course would only be avoided if the arrears fall within the scope of the individual voluntary arrangement.
It then becomes necessary to decide whether the arrears do so fall within the scope of the individual voluntary arrangement. Miss Toman submitted that it was not legally possible for the trustee in bankruptcy to compromise a claim for arrears under an income payments agreement or an income payments order within an individual voluntary arrangement. I was referred in this context to further observations of Rimer J in Re Bradley-Hole at page 1118, beginning at letter F. There Rimer J held that it was not possible to compromise a claim for the benefit of a periodical payments order because such benefit was incapable of being released by agreement, but could only be discharged by the court. In Rimer J’s view, this principle prevented Mr. Badly-Hole from claiming in the voluntary arrangement in respect of payments destined to accrue in the period after the relevant date. He said that the essence of a voluntary arrangement was that under it each creditor compromised or released his rights against the debtor in respect of his pre-existing debt and received in exchange and in full satisfaction whatever payment terms were being offered by the debtor. It appeared to him that any claim by Mrs. Bradley-Hole in respect of those particular payments could only be on the basis that she had compromised or released her rights under the order against the bankrupt in exchange for the payment terms offered under the arrangement. In his judgment, it was not competent for her to make such a compromise or release; and he therefore concluded that she was not entitled to claim in the arrangement for any payments which fell due after 6th April 1990; but he went on to hold that the position was different with regard to the arrears which had accrued due by that date. Nevertheless, Miss Toman submits that that principle applies here.
It is clear from the terms of Section 310A(6) that an income payments agreement may, subject to sub-section (5)(b), be varied by written agreement between the parties. Therefore, unless sub-section (5)(b) of section 310A is infringed, there can be no problem about the trustee in bankruptcy varying by way of compromise the terms of an income payments agreement. What Miss Toman submits is that the terms of sub-section (5)(b) of Section 310A would be infringed by the trustee in bankruptcy seeking to include the arrears under the income payments agreement within the scope of the individual voluntary arrangement. This is because an income payments agreement may not end after the period of three years beginning with the date on which the agreement was made. Here the individual voluntary arrangement commenced almost at the end of the three year period of the income payments agreement and continues for five years. On that footing, Miss Toman submits that the trustee in bankruptcy’s adherence to the individual voluntary arrangement would contravene the prohibition in Section 310A(5)(b). I reject that submission. What that sub-section is seeking to do is not to regulate how an existing accrued liability under an income payments agreement or order is to be satisfied. What it is doing is providing that an agreement by a bankrupt to pay to his trustee an amount equal to a specified part or proportion of his income should not continue for longer than three years. That is not what the trustee would be doing by agreeing to accept payment of a pre-existing accrued liability under an income payments agreement outside the three year period. The debtor has already agreed to pay his income for three years, but he has not honoured that obligation, and arrears have accrued. All that the trustee in bankruptcy would be doing by adhering to an individual voluntary arrangement in respect of those arrears would be compromising the manner in which he should be entitled to receive payment of those accrued arrears. He would be receiving no additional income outside the three years period. I reject the submission that the individual voluntary arrangement takes effect as a variation of the income payments agreement which would have the effect of extending the period during which it is to have effect. As Mr. Mohyuddin submitted, the individual voluntary arrangement does not make the income payments agreement last longer than three years; it merely imposes a new obligation as to the method of satisfying that liability. It therefore seems to me that the trustee in bankruptcy was able to compromise his claim to the arrears within the context of the individual voluntary arrangement.
The final question is whether the trustee in bankruptcy is a creditor who is bound by, and entitled to the benefit of, the IVA. Mr. Mohyuddin submits that he is, irrespective of the true construction of the individual voluntary arrangement itself. That submission is founded upon what he submits is the wide effect of Section 260(2)(b) of the Insolvency Act 1986. That provides that the approved arrangement binds every person who in accordance with the rules was entitled to vote at the meeting (whether or not he was present or represented at it), or would have been so entitled if he had had notice of it as if he were a party to the arrangement.
Miss Toman submits that that is not the case, but that a creditor who is not a party to the arrangement is only bound to the extent that the contractual terms of the arrangement are expressed to bind him. She submits that that is not the case here. I was told that there was authority relevant to this issue, but it was not available to be placed before me. Happily, in those circumstances, I do not find it necessary in order to resolve this issue to decide between counsel’s competing submissions. I say that because it seems to me quite clear, on the terms of the individual voluntary arrangement itself, that it was intended to bind all of Mr. Hargreaves’s creditors, whether or not they were identified as such in the statement of affairs. I reject Miss Toman’s submission that ‘creditors’, for the purpose of the individual voluntary arrangement, is limited to those creditors identified as such in the statement of affairs. Miss Toman laid some emphasis upon the fact that, at certain places in the agreement, ‘creditor’ or ‘creditors’ appears with a capital letter ‘C’ and in others it does not. It seems to me that there is no consistent use within the individual voluntary arrangement of the lower or the upper case where the word ‘creditor’ or ‘creditors’ appears. That can be seen by looking at the apparently indiscriminate use of ‘creditor’ or ‘creditors’ with a small ‘c’ in sub-clauses 6.3 in the last line and 6.4 in the first line. There seems to me to be no rhyme or reason underlying the use of the upper or the lower case letter ‘C’.
What is clear, however, is that the proposal begins with a definition of terms which are expressed to apply to the voluntary arrangement without any qualification, such as would be introduced by the words “where the context so requires or admits”. ‘Creditors’, with a capital ‘C’, is defined as meaning secured creditors, preferential creditors and unsecured creditors. It is a comprehensive definition embracing all creditors of whatsoever nature. That is then reinforced by the succeeding provisions of the agreement. In paragraph [?] in clause 1.1 Mr. Hargreaves says that he makes the following proposal to his creditors for a voluntary arrangement in satisfaction of his debts. He expresses the wish to make an equitable distribution of voluntary contributions to his creditors. At clause 4.1 he says that his liabilities are also set out in the attached statement of affairs. He continues: “All my creditors on the day this proposal is approved, whether those creditors be present or future, certain or contingent, ascertained or for as yet unquantified damages, shall participate in the IVA unless otherwise stated”. At clause 8.9 he says that the supervisor will pay all his creditors in accordance with the terms of the voluntary arrangement as agreed on a pro rata basis in full and final settlement of their claims against him.
In my judgment, on its true construction, the individual voluntary arrangement is intended to bind all of Mr. Hargreaves’s creditors and not simply those identified as such in the statement of affairs by name. The only provision to which Mr. Toman can refer which points against that is the clause to which I have already referred, clause 6.7, referring to the inadvertent omission of any creditor. What Miss Toman submits is that this is crucial in narrowing the class of creditor to those disclosed in the statement of affairs. She submits that the discretion to expand the class of creditors is wholly inconsistent with the trustee in bankruptcy’s submission that the IVA is intended to apply to all creditors. In my judgment that gives to clause 6.7 a meaning and effect that it simply does not bear. I cannot see how clause 6.7 can operate to derogate from the width of the definition of ‘creditors’. Mr. Mohyuddin submitted that it is regrettable that, in practice, IVA proposals are not always happily drafted. In my judgment, clause 6.7 should be seen essentially as a provision inserted out of an abundance of caution, which does not in any way derogate from the breadth of the expressed definition of ‘creditors’ as meaning all of Mr. Hargreaves’s creditors, and thus as including the trustee in bankruptcy in his capacity of payee under the income payments agreement.
For all of those reasons, therefore, I reject Miss Toman’s submission. The arrears under the income payments agreement amount to a debt; it is a bankruptcy debt for the purposes of the 2009 individual voluntary arrangement, but not a bankruptcy debt for the purposes of the earlier 2005 bankruptcy from which Mr. Hargreaves was discharged a year later. It is a provable debt; and it is a debt that falls within the scope of the individual voluntary arrangement. Had I not come to that conclusion, the inevitable result would have been, in my judgment, that the trustee in bankruptcy would have been entitled to enforce the arrears under the income payments agreement by seeking to petition for Mr. Hargreaves’s bankruptcy a second time, thereby defeating the individual voluntary arrangement, contrary to the wishes of Mr. Hargreaves and, no doubt, his creditors who supported the IVA. In those circumstances, I find it somewhat surprising that the supervisor should have taken the stance that he did. I can see no proper basis upon which, had it been necessary to do so, the supervisor should properly have refused to admit Mr. Mond in his capacity as trustee in bankruptcy pursuant to clause 6.7 had it been necessary for Mr. Mond to rely on that clause. The likely dividend to unsecured creditors would not have been reduced by more than 10 per cent, and Mr. Hargreaves should have disclosed the arrears at the time of his proposal; but the supervisor has taken the stance that he has, and I find that, for the reasons I have given, the respondent in his capacity as trustee in bankruptcy is entitled to be included within the IVA for voting and dividend purposes.
Official Receiver v Baker
[2013] EWHC 4594
MR JUSTICE WARREN: The appellant, the Official Receiver, is the trustee in Bankruptcy of the respondent, Mr Baker. The OR is represented by Mr Parfitt of counsel, Mr Baker has appeared today in person. He is not represented. He has been unable to afford to instruct counsel, although he did, I believe, visit an individual in June or July.
The OR appeals from a decision of Deputy District Judge Campbell in the Brighton County Court on 22 February 2013 when he dismissed the OR’s application for an income payments order coupled with an IPO under section 310 of the Insolvency Act 1986. The relevant facts can be briefly stated:
A Bankruptcy order was made against Mr Baker on 10 November 2011. The OR became trustee of the bankruptcy estate on 19 December 2011 following the filing of a notice under section 293 of the Act that there would be no meeting of creditors.
On 23 January 2012 the OR wrote to Santander bank requesting details of Mr Baker’s accounts with the bank. In May he received a reply when Santander confirmed that Mr Baker held four accounts with balances totalling £10,196, which had been credited post bankruptcy. These sums are currently being retained by Santander to the OR’s order.
It is not clear from the papers which I have read whether these amounts in the account represented earnings from Mr Baker’s activities prior to or after (or a mixture of both) the bankruptcy order. Nothing turns on that for present purposes because I shall be making my decision today on the basis that these monies do not fall within either section 306 or 307 of the Act. If when it comes to rehearing, if that is what the result of my judgment is, then Mr Baker will be able to take any points under those sections which he wishes, although I know that he has told me that his recollection is that these monies were all derived from his activities after the bankruptcy order.
On 26 September 2012 Mr Baker attended on the OR for interview. He stated that his only source of income was as a professional gambler, although he has told me today that he had also income from a wedding business and other sources of income. He said that the balance in the Santander accounts has accrued through the accumulation of gambling winnings but in the light of what he has told me it may be that they derived also from other activities.
On 27 November 2012 the OR wrote to Mr Baker enclosing a suggested income payments agreement under section 310A comprised of a single payment of £9,415, which was the sum in the accounts less £781, which the OR estimated to be the cost of Mr Baker’s essential outgoings for one month.
Having no response to that letter, on 14 January 2013 the OR made an application for an IPO under section 310 in the amount of £9,415. As I have said the application was heard by the deputy district judge on 22 February and he dismissed the application.
I now turn to the legislation and make a few preliminary comments as I set out the relevant provisions. Section 306(1) is concerned with the vesting of the bankrupt’s estate in the trustee on his appointment. Property does not vest in anyone on the making of the bankruptcy order itself. This would not catch the money in the Santander account.
Section 307 which is headed ‘After Acquired Property’ provides in subsection (1):
“Subject to this section and section 309 the trustee may by notice in writing claim for the bankrupt’s estate any property which has been acquired by or has devolved upon the bankruptcy’s commencement to the bankruptcy.”
And subsection (5) reads:
“References in this section to property do not include the property which as part of bankrupt’s income may be the subject of an income payments order for the section 310.”
So, on its face, it appears to catch all “property” and would thus include income once received paid after the bankruptcy order. While subsection (5) excludes the property described in that subsection, clearly if an IPO is made income received after the date of that order does not fall within subsection (1). The status of income received after the date of the bankruptcy award but before the IPO is a matter which I will come to later.
Section 309 provides for the time limit for notices under section 307 and 308. If no notice is served after the period of 42 days or any extended period the relevant property does not vest in the trustee in bankruptcy.
The trustee in bankruptcy may well decide not to serve a notice if the relevant property is onerous and such that under the old law he would simply have had to disclaim following its automatic vesting in him.
Section 310 is the section which deals with IPOs. Subsection (1) reads that:
“The court may make an order (“an income payments order”) claiming for the bankrupt’s estate so much income of the bankrupt during the period which the order is in force as may be specified in the order.”
Subsection (3) provides for the extent of the order and, paraphrasing, it can require the payment by the bankrupt of an amount equal to so much of the relevant payment as is claimed by the order or it can require a third party, such as an employer, who might be making a payment to the bankrupt, to pay it instead direct to the trustee.
I will read subsections (6):
“An income payments order must specify the period during which it is to have effect; and that period –
(a) may end after the discharge of the bankrupt but –
(b) may not end after the period of three years beginning with the date on which the order is made.”
Subsection (7) defines what is meant by “income of the bankrupt” for the purposes of section 310. I will not read it into the judgment. There is no issue in the present case that the money that we are dealing with is income within that section. If there is any point to take about that it would be for another occasion.
The central issue in this appeal turns on the meaning of subsection (1) and it is whether the trustee can claim any income received after the date of the IPO itself or whether he can also claim income received after the date of the bankruptcy order but before the IPO.
As to subsection (7), in the present case the OR contended and the district judge accepted that the winnings of the gambling activities fell within the subsection and as I have said if there is any point to take about that it can be dealt with if this matter is ever to get back before the district judge.
Section 333 deals with the duties of the bankrupt. Under subsection (1) there is a general duty to give the trustee information and to do all things that the trustee needs to get on with his job.
Subsection (2) provides:
“Where at any time after the commencement of the bankruptcy any property is acquired by or devolves upon the bankrupt or there is an increase of the bankrupt’s income, the bankrupt shall, within the prescribed period, give the trustee notice of the property or, as the case may be, of the increase.”
And the rules provide that the period there is 21 days.
Subsection (4) provides:
“If the bankrupt, without reasonable excuse, fails to comply with any obligation imposed by this section, he is guilty of contempt of court and liable to be punished accordingly (in addition to any other punishment to which he may be subject).”
In relation to subsection (2) there is no provision similar to section 307(5) but the reference to property, which is “acquired by or devolves upon”, and to “an increase in income” appear to me to reflect precisely the division between property within section 307 and income within section 310.
The decision of the district judge was simple in its reasoning. In summary he said this:
1) First, the period during which the order is in force, referred to in section 310(1), means the period after an income payment order is made by the court.
2) Secondly, the only income that can be claimed under an income payments order is income received by the bankrupt after the making of the order.
3) Thirdly, a court therefore has no jurisdiction to make an income payments order which has the effect of claiming for the bankrupt’s estate any income of the bankrupt which accrued prior to the making of the income payment’s order.
4) And fourthly, as the income in this case accrued prior to the date on which an order might have been made the court had no jurisdiction to make an order in respect of that income.
So the application was dismissed.
He rejected, also, the proposition that the court could make an order with retrospective effect, treating the order as coming into effect on the date of the bankruptcy order rather than on the date of the IPO itself, so that it could be said that it was in force from the date of the bankruptcy order.
Mr Parfitt submits that the deputy district judge’s conclusion is wrong. He does not submit that the court can make a retrospective order in the way I have just mentioned. Instead he makes three submissions which can be subsumed under the single head of construction, although there are separate points in them, as it were, in descending order.
Before considering those submissions I wish to say a little about the policy behind section 310 and to consider the authorities to which Mr Parfitt has referred in his skeleton argument and in his oral submissions.
Under the old law, the Bankruptcy Act 1914, the provisions for enabling a trustee to get hold of the income of the bankrupt were deficient. The Cork Committee, in its recommendations, said, effectively, that more emphasis should be placed, in future, on the payments of debts out of surplus income of a bankrupt and consideration should be given to his ability to pay early in the administration of his affairs. And it is fair to say that section 310 reflects the conclusions of the report.
The first case I wish to refer to is Pike v Cork Gully [1997] BPIR 723. In that case sums of money had been paid by Mr Pike into his account with the Abbey National Building Society. His trustees seised that sum in line with section 307. Mr Pike appealed asserting that the sums represented earnings for work done and materials supplied after the date of the bankruptcy order. As to that Lord Justice Millett said at page 724(e) that had that been so the trustee would have not been entitled to it, although he could have gone to the County Court and applied for an income payments order which had not been done. Mr Pike’s appeal was therefore dismissed on the basis that he had not provided to the courts below with any evidence to demonstrate that the money did, indeed, represent earnings. However, Lord Justice Millett did review some correspondence with the Court of Appeal, which suggested that Mr Pike’s version might be correct, but as to that Lord Justice Millett considered that Mr Pike could provide the further evidence to the trustee and ask him to consider it and to refund the money if he was satisfied that Mr Pike’s version was correct. If the trustee refused to do so, Mr Pike would be able to go back to the district judge under section 375(2) to ask him to review his previous order.
Although the point on which the district judge in the present case relied was decided in favour of Mr Baker, it is a point which was not argued before Lord Justice Millett, a judge I might add hugely experienced in insolvency matters, who did not perceive any difficulty in an IPO being made in relation to income already in hand.
Next comes Kilvert v Flackett, a decision of Mr Peter Scott QC reported in [1998] DPIR 721. After the date of his bankruptcy Mr Flackett, a dentist and member of the NHS pension scheme, became entitled to benefits under that scheme including a tax free lump sum of over £50,000.
Mr Flackett admitted that his reasonable living expenses were met sufficiently out of his income as a dentist such that the annuity under the scheme should be paid to his trustee in the period until his discharge from bankruptcy and secondly, that the lump sum was income within the meaning of section 310(7).
The district judge made an order directing that only £10,000 of the lump sum should be made subject to an IPO. On appeal, Mr Scott allowed the appeal, directed that the whole of the lump sum should be paid to the trustee.
It is not necessary to go into the detail of the appeal; the only point to take away is that both the district judge and Mr Scott proceeded on the basis that an IPO could be made in relation to the lump sum notwithstanding that it had been received by Mr Flackett before the application for the IPO had been made.
Although there is nothing to indicate that the issue now before me was raised, Mr Scott had this to say:
“The court’s discretion must be exercised by reference to the general purpose of the legislation, which is to vest in the trustee all property belonging to the bankrupt at the commencement of the bankruptcy (Insolvency Act section 306) and indeed after acquired property in limited circumstances (section 307) and to provide the payments in the nature of income received between the bankruptcy and the discharge should also benefit the estate unless there are reasons to the contrary.”
That description of the purpose was, at least, consistent with the Cork Report recommendation which I have already referred to.
I come then to the decision of Mr Justice Evans-Lombe in Supperstone v Lloyds Names Associations’ Working Party reported in [1999] DPIR 832.
This case concerned certain payments received by Mr Stockwell for work that he had carried out for certain action groups in relation to claims by Lloyd’s members against Lloyd’s. These payments were received after the date of Mr Stockwell’s bankruptcy but even to the extent that they represented payment in respect of the provision of pre-bankruptcy services they were a non-contractual entitlement. In other words all payments were strictly ex gratia honoraria in recognition of the enormous amount of work which Mr Stockwell had carried out.
Mr Justice Evans-Lombe held that the payments were income even if they were one-off. Accordingly, not only were they excluded from section 307 but, also, they still constituted income “from time-to-time” under section 310.
In fact an IPO could not be made in that case because Mr Stockwell had already been discharged. There was no consideration of the issue now before me. However, Mr Justice Evans-Lombe, another experienced insolvency judge like Lord Justice Millett, did not advert to any argument that section 310 was not, in principle, applicable because the income in question was received before an IPO had been made.
The final case referred to in this context is Raithatha v Williamson [2012] EWHC 909, [2012] 1 WLR 3559, a decision of Mr Bernard Livesey QC sitting as a deputy judge of this division.
The bankrupt, Mr Williamson, had an entitlement under a pension scheme to elect to take a pension either in the form of a lump sum or periodical payments. His trustee applied for an IPO by reference to the unexercised right of election. This was resisted on the basis that the entitlement to receive payments under the pension scheme did not amount to income for the purposes of section 310. Mr Livesey held that the payment which Mr Williamson was entitled to receive, but had not yet elected to receive, constituted a payment in the nature of income to which he was entitled under section 310(7). He went on to make an order.
At paragraph 18 of his judgment Mr Livesey QC said this:
“The position now is that, where the bankrupt has, prior to the bankruptcy order, given notice to the pension fund of his election to take up his rights under the pension scheme, the operation of s.310 will present no problem. In the light of any lump sum or periodical payment paid or to be paid pursuant to that election, the sums remain the property of the bankrupt save to the extent that the trustee has applied for and obtained an order pursuant to s. 310. On such an application, before making an IPO, the court will evaluate what is fair and just between the competing interests of in particular the bankrupt and his creditors and make an order which is appropriate in all the circumstances of the case”
Clearly here Mr Livesey is referring to payments received after the bankruptcy order. Payments received before that order will no longer be rights under the pension scheme and so would vest, when the trustee is appointed, under section 306. And nor did he address the issue now before me, but he clearly saw the provisions working in the way which Mr Parfitt now submits they do work. This is entirely consistent with what Mr Livesey said in the next paragraph of his judgment, paragraph 19:
“While dealing with the order which a court can make in these circumstances, the court’s power is set out in subsection (3) of section 310, subject, of course, to the limitation in subsection (6)(b). It was suggested in argument that the court could make an order which was expressed in terms of only (a) or (b) and not both. To my mind the power to make an order under (a) is designed to cater to situations where a payment has already been made to the bankrupt prior to the making of the IPO, that under (b) where payment has not yet been made.”
I should not be taken in citing that passage to be accepting that the two paragraphs interact in precisely the way in which Mr Livesey has identified. It may be that a particular payment of income not yet made could nonetheless pass through the hands of the bankrupt, although, I accept that the more usual and better course will be for the person making the payment to be required to make it direct to the trustee.
I turn now to Mr Parfitt’s submissions. At the outset I must say that in agreement with him I can see no policy reason at all why income received after the bankruptcy order but before the making of an IPO should not be capable of being made subject to such an order. If that is what the legislation requires, so be it. I think that might be thought to be a surprising result. This is because the conclusion of the deputy district judge really would leave a possible and possibly serious lacuna in the provisions. The bankrupt in some circumstances might quite properly be able to arrange that some income received in this twilight period, which could be a substantial amount when it is remembered that one-off payments can be income within section 307(5), could not be made the subject of an IPO and nor would they fall within section 307, as I will explain in a moment.
Mr Parfitt submits in his skeleton argument, effectively, as follows:
a) Income may come in the form of irregular one-off lump sums. I agree.
b) Income cannot be brought into the bankruptcy estate under section 307. I agree, but I will discuss that further in a moment.
c) Thirdly, a bankrupt does not have to tell his trustee in bankruptcy about the increase in income until 21 days after the income has increased. In relation to that see section 333(2).
d) Fourthly, there is no sanction on a bankrupt who does not comply with the notification requirement other than proceedings for contempt and, in particular, no financial sanction.
e) Fifthly, at least 28 days must elapse between an application for an income payments order being made and the hearing of such an application, see Insolvency Rule 6.1892.
The last of those two factors only go to emphasise the lacuna reflected in the first three factors. On one view, income only increases when the relevant additional income comes into payment. On that view any actual payment received before an IPO is made is not within the scope of section 310.
On another view, income might be said to increase when a person becomes contractually entitled to receive it immediately or in the future, but even in these circumstances it may well be that the actual payment ought to have been received within the 21-day period, and thus before the trustee has had an opportunity to apply for an IPO.
In either case the bankrupt is entitled to retain the increase.
That leads me into the question, which I have already mentioned, which is whether this income would, in fact, be outside the scope of section 307(5). The argument that it is outside that scope is this: section 307(5) excludes property from section 307(1) only if, as a part of the bankrupt’s income, it may be the subject of an IPO.
On the construction of section 310, adopted by the deputy district judge, an IPO cannot be made in respect of income which has already been received. Therefore, the argument would run, at the time of its receipt the income is not excluded from the meaning of the property in section 307 because it is not income which may then be the subject of an IPO.
I have raised that argument, I have asked Mr Parfitt about it, because it is the only argument which I can think of which might help Mr Baker in this context, but I do not consider that there is anything in it. In my judgment the purpose of section 307(5) is to identify the type of property which is excluded from the meaning of that word, as used in section 307, which, absent the subsection, would fall within it. If an item of property falls within the definition found in section 310(7), it is excluded from section 307 whether or not an order can, in the events which happen, be made.
As I said, Mr Parfitt does not submit that section 310(1) permits the court to make a retrospective order in the sense that ordering the IPO itself is to be treated as coming into force on the date on which the bankruptcy order was made. In my view, he is right not to make that submission.
Instead, he submits, to use his words, that the phrase “during the period for which the order is in force” refers to when the order claiming the income can take effect and not when the income had to be received by the bankrupt and by that I understand the submission to be that the phrase in effect qualifies “making an order claiming” rather than “the income to the bankrupt”.
Although the first limb of his submissions is that the natural reading of the subsection is in the sense that I have just indicated, he accepted in oral argument that the more natural meaning, at least looking at this provision in isolation, is that adopted by the district judge. I think he is right to acknowledge that difficulty facing him. But, of course, that is only one possible construction of section 310 read in isolation. It is not, however, to be read in isolation; it must be read with other provisions of the Insolvency Act 1986 including, in particular, subsection (3) of section 310 as well as section 307 and section 333. Thus section 301(3) deals with how the claim under section 310(1) is to be given effect to. It makes perfectly good sense in the context of, and indeed lends support to, the construction for which Mr Parfitt contends. It enables, through the route of paragraph (a), the trustee to recover, on that construction, an amount equal to the sums already received, even if the actual income has been spent.
Further, a construction which eliminates the lacuna which I have identified is to be preferred other things being equal to one which does not do so. The impact of section 307 therefore supports the construction for which Mr Parfitt contends. As to section 333(2), the underlying purpose of the notice requirement must surely be to enable the trustee to give the further notice under section 307 or to seek a further IPO or variation of an existing IPO. An actual payment of an increased income might be received before the trustee had had the opportunity to make an application. I can think of no rational explanation of why an increase in regular income should fall to be left out of account until a revised IPO is made or why a one-off income payment should fall to be left out of account altogether.
Further, section 333(4) provides the only remedy, if that is the right word, for a failure of a bankrupt to comply with his notice obligations and that is an exercise of the contempt jurisdiction. There is no power to put matters right in the sense of backdating an IPO or any other way of making the bankrupt disgorge that which could otherwise have been made the subject of an IPO. To that extent, a clear policy objective would be thwarted. I do not need to rehearse the well-known law relating to the purposive approach to statutory interpretation articulated by the House of Lords in Inland Revenue Commissioners v McGuckian [1997] 1 WLR 1991 on which Mr Parfitt relies, nor, indeed, from any other tax and other cases which have followed it. Nor do I need to refer to the general rules of construction which are now very well known and which one can derive from cases such as ICS and Rainy Sky. Effectively the courts must have regard to the purpose of the particular statutory provision in hand and give effect to it even if it requires some modest distortion of the language of the statute. But in a case such as the present where distortion is not necessary, I have no doubt that the correct construction of section 310 is to allow an income payments order to be made in respect of any income arising after the date of the bankruptcy order.
On that basis, in my judgment, the decision of the deputy district judge was incorrect and therefore I allow the appeal.