Rules are rules … A mistake without remedy

Rules are rules … A mistake without remedy

Walker, Peter

The creditors of bankrupts or of insolvent companies are protected by the courts’ power to prevent legal actions against their debtors, but mistakes are made. The judges these days are inflexible about this rule, although in some instances the results are harsh. Peter Walker considers a recent case.

When Ralph Waldo Emerson wrote: “A few strong instincts and a few plain rules suffice us”, he was thinking about ‘Spiritual Laws’ rather than the complications of the Insolvency Act 1986. A judge in the Chancery Division of the High Court in Manchester had to consider a claimant who had not complied with one of its provisions, and to reconcile apparently conflicting decisions of judges in this and in other areas of law subject to similar principles.

In the case In re Taylor [2007] 2WLR 148, the claimant had brought an action against a bankrupt and the company of which he was the managing director. The claim was under a contract of indemnity and guarantee and for the delivery up of goods. It was a potential debt provable in bankruptcy.

These circumstances are governed by section 285 of the Act, which empowers a court to stay any action against the bankrupt or his or her property. A court due to try any such case may also stay the action or set terms on which it is to continue, if evidence is produced either of the bankruptcy petition, or that the defendant is an undischarged bankrupt. Another aspect of the rules concerns court proceedings after a bankruptcy order has been made. No creditor of a debt provable in the bankruptcy has thereby a remedy against the property of the bankrupt concerning that debt. The claimant may not without leave of the court bring any action against the bankrupt before his or her discharge.

Judge Kershaw QC sitting as a High Court judge pointed out that the Insolvency Act contained no convenient definition of ‘a debt provable in bankruptcy’, although the words ‘Bankruptcy debt’ appeared in section 382. This includes a debt to which the bankrupt was subject at the beginning of the bankruptcy. It also was a debt, albeit subsequent to the bankruptcy or discharge from it, which was incurred before the bankruptcy. Where the liability arose from a tort rather than from a contractual debt, the relevant time was when the cause of action accrued. Judge Kershaw QC thought that Parliament could not have intended that ‘bankruptcy debt’ and a ‘debt provable in bankruptcy’ should have different meanings.

Breaking the complicated rules

Whatever the meaning there was a procedure, but the claimant without further ado started proceedings against both the bankrupt and his company. It did not have leave to do so, although by a subsequent application its claim under the guarantee was deleted. This was followed by another application to the court for leave after the event to start the proceedings against the bankrupt after the event.

Neither the bankrupt nor a lawyer on his behalf attended the hearing in Manchester. His father wrote a letter to explain that the absence was due to illness, but there was no supporting medical certificate or evidence of that. Judge Kershaw QC nonetheless decided to go ahead with the hearing.

He had no guidance from the Court of Appeal or the House of Lords, because those judges had not considered the problem. There were some inconsistent decisions in the High Court and elsewhere.

In some instances he would furthermore have to make an analogy with other judgments, and one of those was the result of a High Court case. Rendait í Blair [1890] 45 ChD. The law report is contained in a beautifully bound volume, and the Statute was the now longforgotten Charitable Trusts Act 1853. Charity school managers wanted to dismiss the master of the school under a discretionary power under Section 17 of the Act. The master applied for an injunction to stop this action, and he alleged that some of them been improperly appointed. Section 17 further provided that anyone wanting to bring an action against a Charity would firstly give notice to the Charity Commissioners. They could issue an order or certificate authorising the commencement of proceedings. The judges of the Court of Appeal pointed out that the intention of the section was to prevent strangers from bringing an action, when the proper people to do so were the Charity Commissioners. It did not instruct the court to dismiss the action if no such notice was given. The words directed what ought to be done, and the court could stay proceedings until the claimant had obtained the consent from the Commissioners.

Scotland and Ireland

That idea of considering the purpose of the Statute was a promising start for claimant in the case In re Taylor, but there was another decision also going back to the 1890s. This was the case In re Wanzer Ltd [1891] 1 Ch 303, where section 87 of the Companies Act 1862 provided that a claimant had to obtain leave to bring an action against a company subject to an order for winding up. Section 163 added that a sequestration ‘put in force’ after the commencement of a winding up was void.

The English liquidator informed the Landlord of the company’s shop in Glasgow that he had wanted to remove the stock, and take it to London. The Landlord started Scottish proceedings to sequester the company’s property in those premises in order to pay the rent. Although there were differences in Scottish and English law relating to sequestration, the High Court judge decided that for the purposes of the Act the remedy was covered by section 163. If the creditor failed to obtain consent to bring the proceedings for sequestration under section 87, the liquidator could apply successfully to have a declaration that the Scottish proceedings were void.

The distance from Scotland to Northern Ireland is not great, but the two countries have different systems of law. The decision of the Northern Ireland Court of Appeal in Boyd v Lee Guinness Ltd [1963] NI 49, however, concerned another winding up of a company. This was an English company, but the plaintiff served a writ in Northern Ireland after the winding up order had been made in London. The plaintiff should have obtained leave to commence proceedings in accordance with section 231 of the Companies Act 1948.

There were second defendants to the action, and the Irish court had successfully applied to have a concurrent writ served on them in London. Their position was that, if the writ could not be served in against the first defendants, it failed against them. The majority of the judges in the Northern Ireland Court of Appeal agreed with that point of view.

Changing opinion

The claimant in that case at least knew of the liquidation of the company, but the applicant in Re National Employers Mutual General Insurance Association Ltd [1995] 1 BCLC 232 started her action in ignorance. When she discovered that a winding-up order had been made against the company, she applied for leave to continue the action.

Rattee J in the Companies Court had to consider a decision of Milmo J in Wilson v Banner Scaffolding Ltd [1982] Times. He had ruled that any such proceedings were a nullity, and that he was consequently powerless to grant leave retrospectively to proceed with the action. The reasoning behind that decision was the purpose of the legislation to protect the creditors, and the court would have to consider whether the action should proceed. Rattee J would not make any contrary ruling, and he pointed out that the liquidation was a matter of public record at Companies House.

The claimants also had no knowledge of a bankruptcy order in the case In re Saunders [1996] Ch 460. Lindsay J in the Chancery Division of the High Court thought that the earlier cases including those of the 1890s showed that the judges could grant retrospective leave to continue an action. He would not follow the decision in Re National Employers Mutual General Insurance Association Ltd, because the attention of the judge had not been brought to those cases. The courts had a duty to give effect to the purpose of the statute and not to frustrate it.

Lindsay J was going against the trend of current judicial thinking. In Seal v Chief Constable of South Wales Police [2005] 1WLR 3183 the claimant brought proceedings against the police authority. He alleged misuse of section 136 of the Mental Health Act 1983, but he failed to obtain the necessary leave of the High Court. The judges of the Court of Appeal ruled that this was not a directory instruction as in Rendall v Blair. It was mandatory, and the claim was struck out.

Precedent

Judge Kershaw QC in the Taylor case was faced with these views, yet his duty was ‘to apply the law’, and this included the law of precedent. Nourse J in Colchester Estates (Cardiff) v Carlton Industries PLC [1986] Ch 80 had emphasised the need for certainty. If there were two conflicting decisions of the High Court, the later decision was preferable provided that it included a consideration of the earlier one.

Judge Kershaw QC thought that this was too difficult an approach, particularly when sometimes unreported cases could later come to light. In any event he was not going to follow the Saunders case. The effect of section 285 rendered void any proceedings against a bankrupt by someone who is a creditor in respect of a debt provable in bankruptcy. No court could validate the action retrospectively.

It is important for credit managers to follow the statutory procedures strictly, but that is sometimes easier said than done. An action to recover a debt could be forestalled, for example, by an insolvency. There are no plain rules, and perhaps in the future the Court of Appeal or the House of Lords will change the more complicated rules again.

Copyright Institute of Credit Management Ltd. May 2007

Provided by ProQuest Information and Learning Company. All rights Reserved