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Friday 10 August 2018

Iain Barker v Paul Baxendale-Walker: Guarding against the risk of dissipation of assets by a debtor pre- and post- the making of a bankruptcy order

The insolvency aspect of the long-running Baxendale-Walker litigation adds much needed to clarity to two practical issues arising in bankruptcy. James Bailey acted for the petitioning creditor.

  • First, it confirms that where a bankruptcy petition it based upon a judgment debt which is being appealed, a mere application for permission to appeal is not a “pending appeal” for the purposes of 2016IR r.10.24(2), which provides a discretion by which the petition might be stayed or even dismissed. However it most likely would be considered a pending appeal if the permission application were listed to be heard with any substantive appeal to follow.
  • Secondly, the court may appoint specific individuals as trustees in bankruptcy upon the making of a bankruptcy order pursuant to the court’s inherent jurisdiction, or alternatively pursuant to its power under s.363 of the Insolvency Act 1986.

The Debtor was a former solicitor and barrister who once specialised in advising on tax structures designed to reduce or eliminate his client’s tax liabilities, in particular through the use of Employee Benefit Trusts. Thereafter his lifestyle underwent a dynamic change and he is reported to have produced and acted in certain niche genres of film, as well acquiring publications such as the men’s magazine Loaded.

In 1999 he had provided some advice to the Petitioner which was found by the Court of Appeal in 2018 to have been negligent, resulting in a judgment debt in a sum of around £16million.

The Petitioner presented a bankruptcy petition and, unusually, secured the appointment of joint interim receivers pending its determination on account of the risk of dissipation by the Debtor of his assets.

At the hearing of the petition the Debtor argued that he had made an application for permission to appeal the underlying judgment to the Supreme Court. The Debtor contended that such an application amounted to a “pending appeal” for the purpose of IR 10.24(2) which provides:

If the petition is brought in relation to a judgment debt, or a sum ordered by any court to be paid, the court may stay or dismiss the petition on the ground that an appeal is pending from the judgment or order, or that execution of the judgment has been stayed.”

The Debtor sought to rely upon the decision of Arden J in Parkin v Westminster City Council [2001] BPIR 1156 which concerned an appeal to the Court of Appeal against a County Court judgment with permission on a separate application as to whether or not orders for payment of costs should be stayed whilst a set off as to costs was worked out. On the petition, Arden J (as she then was) considered that the court should have regard to whether the appeal had a reasonable prospect of success.

However the Petitioner contended that an application for permission to appeal was a bare right, relying on Rimer LJ in Commissioners for HM Revenue & Customs v Rochdale Drinks Distributors Ltd [2013] BCC 419: “The existence of a right of appeal says nothing as to whether any appeal will have merit….”. Further, the decision of Lewison J in Rehman v Boardman [2004] EWHC 505 which did not immediately appear to be consistent with the decision in Parkin, suggested that mere permission to appeal was not a pending appeal.

ICC Judge Briggs (Chief Registrar) was persuaded by the distinction drawn by Lewison J between those cases where permission to appeal and the substantive appeal were to be heard together (as in Parkin) and those where permission would be determined at an earlier stage. However although the application before the Supreme Court in the instant case did not trigger the discretion under IR r.10.24(2), he found that it could still be considered under the general discretion as to whether to make a bankruptcy order pursuant r.10.24(1). Ultimately, the continuing risk of dissipation of assets weighed heavily in the exercise of discretion and a bankruptcy order was made.

At the handing down of judgment, it had been understood by the Petitioner, the Debtor, the Joint Interim Receivers (“JIRs”) and the court that the Official Receiver intended to apply for a Secretary of State appointment pursuant to s.296 of the 1986 Act to permit the JIRs to continue in office. This seemed the sensible solution given their enhanced understanding of the Debtor’s affairs as a result of the 3 months they had already spent in office.

However as a result of other so-called creditors (which were said to be under the control of the debtor) surfacing within a day of the hearing and claiming debts of tens of millions of pounds, the Official Receiver considered that a Secretary of State appointment was no longer appropriate.

Concerned about delay, and the probability of any creditors’ meeting being hijacked, the Petitioner made an application pursuant to sections 375 seeking the appointment of the joint interim receivers as trustees in bankruptcy. Whether that procedural route was right or wrong, it was the route preferred by the Official Receiver who accordingly did not appear to oppose the application.

The substantive jurisdictions relied upon by the Petitioner behind s.375 were s.363 and the court’s inherent jurisdiction. In particular, the Petitioner relied on Clements v Udal [2001] BCC 658 where Neuberger J (as he then was) used the section to appoint a particular administrator.

The court observed that the court’s inherent jurisdiction is not statutory as it applies to an almost limitless set of circumstances and is called in aid to control its own processes and control the procedure before it. It can be used to ensure fair dealing in legal proceedings and aid convenience. At the same time, the court reminded itself that the jurisdiction was exceptional, per Neuberger J in Lancefield v Lancefield [2002] BPIR 1108.

The court considered that the jurisdiction under s.363 is different from the inherent jurisdiction of the court, and that s.363 gave the court a power over all bankruptcy matters, as defined in s.385. The power appears to be very broad, and the Petitioner relied upon Donaldson v O’Sullivan [2009] 1WLR 924 where Lloyd LJ observed: “There is also scope for the court to direct that things be done (or not done) in apparent conflict with express provisions of the legislation.

The opposing purported creditors contended that notwithstanding the power of the court, it was not possible to go so far as to appoint the interim trustees because to do so would run contrary to s.291A. However the court dealt with this as follows.

Firstly, the new section does not state that the “full power” provided by section 363 does not apply.

Secondly, the new section merely closed the time when the Official Receiver became the trustee. Previously upon the making of a bankruptcy order the official receiver would automatically become the manager and receiver for a certain period of time, being 8 or 12 weeks. The legislators felt that the limbo period was too long and therefore made his appointment as trustee automatic upon the making of an order of bankruptcy. In other words he no longer becomes a receiver and manager immediately. He becomes the trustee. That is the only change.

Thirdly, the court is given a specific power by section 291A to appoint a supervisor of an IVA. What is contemplated here is convenience. A supervisor is in charge of the affairs of the bankrupt. He may be the petitioner, and more often and not is likely to be the petitioner due to a failure of a term in the IVA. It is just and convenient that the supervisor, if he wishes to take the appointment, be able to do so. After all he will know the affairs of the debtor. Far more uncommon is a bankruptcy following the appointment of interim receivers as the appointment of such receivers is itself unusual.

Lastly, the fact that the section is silent as to a receiver’s appointment gives rise the court’s inherent jurisdiction to make an appointment of interim receivers as trustees. That vacuum can, where it is just and convenient to do so, be filled in exceptional circumstances such as these. That is part of controlling the court’s own process. There is nothing in statute to prevent such an appointment and there is nothing that permits such an appointment. The overarching power of control and management of the insolvency process is provided by section 363 or the court’s inherent jurisdiction in insolvency.

The court therefore found that it was able to use its inherent jurisdiction to appoint the joint interim receivers as trustees, but that even if it was wrong to do that, it could achieve the same effect pursuant to s.363.


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