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30-11-2016

Sands v Layne: The Court of Appeal has delivered its judgment in this matter. The jurisdiction of section 375 has been clarified, the trustee should have been joined to the proceedings to deal with the costs and expenses from the assets in his charge but the creditors were not considered as having been prejudiced by the bankruptcy order having been discharged by consent upon the petitioner being granted security.

The brief facts were that a local authority petitioned for bankruptcy and the order was made. The bankrupt disputed the making of the order on the grounds that an offer of security was refused. Mr Layne applied for permission to appeal out of time on the grounds that an offer of security was unreasonably refused. A trustee was appointed.

At the hearing of Mr Layne's application a consent order was approved. The bankruptcy order was discharged and the Local Authority was granted security. The trustee was not made a party to the application. There were unpaid creditors and other expenses of the bankruptcy.

At first instance, the trustee's application to set aside the order was refused. This was principally on grounds that the appellate court had no power under section 375 Insolvency Act 1986 to review a first instance decision but also on the grounds that there was no prejudice to creditors. Section 271 of the Act allowed the court to rescind the bankruptcy order and any creditor who considered that he wanted to challenge the application could issue a fresh application. Further, the trustee was not required to be joined into the application because there had been no trustee in office at the time it had been made.

The Court of Appeal has considered that an appellate court does indeed have jurisdiction under section 375 to review an order made at first instance. This is a welcome decision as the test to be applied under section 375 can be considered as wider than the latitude that an appellate court should properly give to the first instance decision-maker. It is a useful finding.

The Court considered that it was proper for the trustee to have been joined into the proceedings in order to make representations as to the costs and expenses to be paid out of the assets held by him. The court gave no authority for reaching such a decision which seems to be based on the idea that it was the right thing to happen. It is difficult to argue against that.

The perhaps most controversial point is the court's conclusion on the position of the creditors. At para 53 of the judgment of Lady Justice Arden she says, "In my judgment, a creditor who applies for a bankruptcy order is in control of the proceedings even though the order when made will constitute a collective remedy for the payment of all the debtor’s provable debts. It follows that the court may allow him to withdraw the application, though if there is another creditor who wishes to pursue the bankruptcy order, the court may substitute his name as the applicant in his place under Insolvency Rule 6.30. The court is not bound to refuse to allow him simply because the debtor is insolvent."

Following on from this the court can refuse a bankruptcy order if the creditor has unreasonably refused an offer of security. The interests of other creditors were not part of the court's consideration in exercising that jurisdiction. The conclusion, therefore, was the creditors' interests were not prejudiced and the trustee would not succeed on those grounds.

Brief Analysis 
Clarification of the application of section 375 Insolvency Act 1986 by appellate courts is to be welcomed. The finding that the trustee should have been joined into the proceedings to deal with costs and expenses is useful.

The position of creditors is more difficult to reconcile. Has the granting of the security removed an asset from the collective regime? If that security was granted at a time when the petition was pending, it is perfectly true that any creditor could take over carriage of the petition, seek the bankruptcy order such that any trustee could consider a section 284 challenge. In allowing the bankruptcy order to be discharged on these grounds, any creditor would now need to consider issuing a fresh petition to obtain a bankruptcy order for consideration for the granting of security to the original petitioner to be challenged as a possible preference. A more difficult action to win.

The case is a stark illustration that creditors are perfectly entitled to think of only their own interests and put themselves in a better position than others. For those creditors who might feel aggrieved about that, the onus is placed firmly upon them to ensure that they take the appropriate steps to protect their own positions and take over the conduct of petitions if that is required.

If they do not, there is arguably no reason why the court should assist them and it remains the case that the trustee in bankruptcy is not to be considered as the creditors' agent for these purposes. His role was limited to ensuring that the costs and expenses could be met out of the assets in his hands.

The message to take from this, it is submitted, is that creditors have to look after their own interests and, perhaps, take a more active part in bankruptcy proceedings. It will be interesting to see if this case will result in more notices of intention to appear on petitions being filed or if the case will enter the realms of a footnote on this point.

For further information on this matter please contact Graham McPhie (gmcphie@moonbeever.com) or Frances Coulson (fcoulson@moonbeever.com). 

This is intended for general information only and should not be considered as giving advice in relation to any individual case nor be taken as applying to any particular case. No liability is accepted for any such use of the information contained. 

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