Appealing the adjudicator's decision not to make a bankruptcy order (Budniok v Adjudicator, Insolvency Service)

Appealing the adjudicator's decision not to make a bankruptcy order (Budniok v Adjudicator, Insolvency Service)

In what is believed to be the first reasoned judgment dealing with an appeal from a decision of the adjudicator not to make a bankruptcy order, we consider the judgment in Re Budniok; Budniok v Adjudicator, Insolvency Service.

Original news

Re Budniok; Budniok v Adjudicator, Insolvency Service [2017] Lexis Citation 16, [2017] All ER (D) 02 (Mar)

The High Court of Justice allowed the applicant's appeal against a decision of the adjudicator of the Insolvency Service, in which the adjudicator refused to make a bankruptcy order in relation to him. On the evidence, there was nothing to prevent the order being made. The court also gave consideration to general issues arising out of appeals under the Insolvency Act 1986 (IA 1986).

What are the practical points to take away from this decision?

  • appeals from the refusal of the adjudicator to make a bankruptcy order are likely to be analogous to appeals challenging the decision of an office-holder, and are unlikely to be true appeals to which CPR Part 52 applies—this means that the court can probably review the matter afresh (whether or not on new evidence) and is given a wide discretion in relation to the conduct of such appeals
  • a number of practical issues in relation to the issue and conduct of appeals from a decision of the adjudicator (ie in relation to evidence, the role of the adjudicator and any third parties, and costs) were usefully considered by the chief registrar and his conclusions (whether or not he strictly had to make a decision on a particular issue) are likely to form the basis of future appeals of this kind
  • the new bankruptcy application regime essentially allows for the adjudicator to make determinations as to a debtor's centre of main interests (COMI) to the extent of being satisfied (or not as the case may be) that the debtor's COMI is in England and Wales, without being able to refer this (often complex) issue to the court

What was the background to this appeal?

On 6 April 2016, debtors' bankruptcy petitions were abolished and replaced by online bankruptcy applications that are determined by the adjudicator (a government official working for the Insolvency Service) rather than by a judge. That change in process has therefore removed the court from the process of making a bankruptcy order at the debtor's instigation, save that there is a right to appeal to the court where the adjudicator refuses to make a bankruptcy order following a review of her earlier refusal not to make a bankruptcy order.

That was the situation in this case. The debtor applied to the adjudicator for a bankruptcy order. As permitted by IA 1986, s 263L, the adjudicator sought further information on two occasions from the debtor in order to determine his application. The issue in this case—and which the adjudicator's information requests appeared to focus on—is that the debtor had moved to England from Germany in or about June 2014. Under IA 1986, s 263I(1)(a) the adjudicator only had jurisdiction to determine the bankruptcy application if the debtor's COMI was in England and Wales. Having received and considered further information received from the debtor, the adjudicator refused to make a bankruptcy order on the ground that she was not satisfied that the debtor's COMI was in England and Wales.

The debtor exercised his right under IA 1986, s 263N and requested that the adjudicator review her decision and offered to provide any further information necessary to verify his residence. However, the adjudicator confirmed her initial assessment and that her earlier decision not to make a bankruptcy order remained (under IA 1986, s 263N(2) the adjudicator has to review her earlier decision only with the information available to her at the time she made her earlier decision—so in this case she was unable to accept the debtor's offer to provide further information).

Accordingly, the debtor appealed to the court under IA 1986, s 263N(5) against the adjudicator's refusal to make a bankruptcy order. For the purpose of the appeal, the adjudicator sent an email to the debtor in which she elaborated on her decision to refuse to make a bankruptcy order. While the debtor provided a witness statement in support of his application, no evidence was filed by the adjudicator in response (although she did try to seek to informally put before the court some internet material that she had obtained prior to making her first determination on the debtor's application).

What were the legal issues that the chief registrar had to determine?

Given the recent introduction of the debtors' bankruptcy applications regime and the lack of case law exploring the relevant provisions of the IA 1986 and the Insolvency Rules 1986, SI 1986/1925 (IR 1986) in relation to that new regime, a number of preliminary issues were raised by both the chief registrar and counsel for the adjudicator:

  • What is the meaning of 'satisfied' in IA 1986, s 263K(2)? (issue one)
  • What is the nature of an appeal under IA 1986, s 263N(5)? (issue two)
  • How should evidence on an appeal be adduced? (issue three)
  • What role should the adjudicator play on an appeal? (issue four)
  • What role should creditors play on an appeal and should they be notified? (issue five)
  • Which court and what level of judge should hear appeals under IA 1986, s 263N(5)? (issue six)
  • Who should prepare the hearing bundle for the court? (issue seven)
  • Who should pay the costs of an appeal? (issue eight)

Finally, the chief registrar went on to consider the appeal itself.

What arguments were put forward in relation to the preliminary issues, and what did the chief registrar decide?

Issue one

It was submitted—and accepted by the chief registrar (para [18])—that the word 'satisfied' in IA 1986, s 263K(2) should be given its ordinary, natural meaning. Further, the adjudicator must be satisfied on an objective basis.

Issue two

The chief registrar identified this issue as the most difficult of the preliminary issues by reason of the use of the word 'appeal' in the IA 1986 and IR 1986 in different senses—ie both in respect of an appeal from a court order (to which CPR Part 52 applies), and an appeal from a decision of an office-holder (for example to reject a proof of debt). This distinction is important is because of the general restriction on the former to only consider the information that was before the judge at the time of the decision being appealed, whereas an appeal of the latter kind allows the court to review the matter afresh on the basis of evidence before it at that time.

It was submitted that it was plain from the wording of the new regime (or alternatively that it was Parliament's intention) that an appeal from her second decision to refuse to make a bankruptcy order was an appeal to which CPR Part 52 applied, and that to allow a court on appeal to consider the matter afresh would undermine the statutory scheme enacted by Parliament, which should be 'viewed as a whole [as] a closed procedure, self-contained and deliberately restricted in its scope'. For instance, the adjudicator has no discretion whether or not to make a bankruptcy order—if she is satisfied that the various conditions have been met, she must make a bankruptcy order; conversely, if she is not satisfied that any one of the conditions is met, she must not make a bankruptcy order.

However, the chief registrar did not agree that any of the material cited in support of the submission dealt with the question as to the nature of an appeal, and held that 'in the absence of anything in the statute dealing with the nature of the appeal, the intention of the legislature was to provide for an appeal, leaving it open to the court to apply the principles and procedure it would usually apply or which are most appropriate for dealing with it. It seems to me that the whole of the insolvency regime and the way in which it makes provision for decisions to be appealed or reviewed, not just to the adjudication process' (para [41]).

The chief registrar (at para [47]) rejected the submission that the court must determine an appeal from the adjudicator's decision only on the materials that were before the adjudicator. The court may (but is not obliged to) decide to consider the matter afresh based on new evidence. However, on the facts of this case (where no evidence was in fact adduced which was not before the adjudicator when she made her decision), it was not strictly necessary for the chief registrar to decide the issue, though he tentatively suggested that an appeal from the decision of an adjudicator is more akin to an appeal from an office-holder's decision rather than an appeal to which CPR Part 52 applies.

Issue three

Only the debtor adduced evidence in support of his appeal; the adjudicator adduced no evidence, supporting her neutral stance in respect of the appeal. The chief registrar reminded himself of the long established principle that 'evidence witness statement is not to be rejected as untrue unless it had been tested in cross-examination or is plainly unreliable or false because, for example, it is preposterous or so at odds with contemporaneous or other documentation that it can safely be disregarded' (para [60]). The chief registrar recognised that different issues may arise in an appeal from a decision of the adjudicator—at one end of the scale, it may simply be sufficient for the evidence to consist of the material that was before the adjudicator at the time of her decision; at the opposite end of the scale, it may be necessary for written evidence to be adduced and cross-examined at a hearing. For that reason, and because of the newness of the bankruptcy applications regime, the chief registrar did not seek to prescribe any hard and fast rules as to evidence, but otherwise suggested (at para [62]) that it would be a matter for the court seised of the appeal having regard to the overriding objective and the need for a fair hearing.

Issue four

The chief registrar agreed (at para [64]) with the submissions made that:

  • the adjudicator should be named as a nominal respondent in respect of any appeal made under IA 1986, s 263N(5)
  • the adjudicator should be served with the appeal (provided for by IR 1986, r 6.47(3) in any event)
  • the adjudicator should have the right to appear at the hearing and/or make submissions, but should not generally be obliged to do so
  • if the court decides that fresh evidence may be adduced on the appeal, the adjudicator should have the right—but not the obligation—to file evidence

Issue five

It was submitted that, as creditors are only entitled to inspect the bankruptcy file after a bankruptcy order has been made and there is nothing in the relevant rules regarding notifying creditors of an appeal, it was Parliament's intention that creditors should ordinarily play no role in an appeal.

The chief registrar agreed with this submission (para [66]), but also pointed out that this meant that, uniquely in insolvency, bankruptcy applications were a private matter between the debtor and the adjudicator and that this 'is an unfortunate departure from a key principle', 'sets one insolvency procedure apart from any other conducted under IA 1986 or the related legislation' and that 'it is particularly odd given that the adjudicator must be satisfied she has jurisdiction (which involves considering the location of the debtor's centre of main interests, something about which creditors may have a great deal to say)'. He also made reference to the fact that bankruptcy is a collective insolvency proceeding under Regulation (EC) 1346/2000 on Insolvency.

However, as it was 'ordinarily' the case that creditors should not play a role in an appeal from a decision of the adjudicator, there would be some cases where it would be desirable to allow third parties to appear and be heard. Indeed, in this case, the chief registrar had at an earlier directions hearing ordered that creditors be given notice of the appeal (before he had heard argument on the issue), albeit that no creditor took part.

Issue six

It was submitted that IR 1986, r 6.50A identifies the court to which appeals under IA 1986, s 263N(5) are to be made, usually being the debtor's own county court centre (defined in IR 1986, r 6.50A(3)) and that such appeals should be heard by a district judge (or a registrar in the limited circumstances where an appeal is heard in the High Court). Further, as a result of IR 1986, r 6.40A being repealed (which provided for the High Court to deal with debtors' bankruptcy petitions where the debtor resided or carried on business in the London insolvency district and the unsecured liabilities totalled more than £100,000), an appeal by a debtor residing or carrying on business in the London insolvency district will be dealt with by the county court, regardless of the amount of unsecured liabilities.

Although the issue was not explored in detail, the chief registrar took the view that these submissions were correct, while expressing his regret that the role of the High Court had been reduced.

Issue seven

It was submitted that, as the court is entitled under IR 1986, r 6.50(4) to access a copy of the electronic bankruptcy file created by the adjudicator under IR 1986, r 6.50(1), the court should exercise such right and direct that no hearing bundle be prepared. If for whatever reason that is not possible, the debtor should prepare a hearing bundle.

The chief registrar considered that the parties should follow the relevant Practice Directions and the Chancery Guide, meaning that the debtor will generally be expected to prepare a hearing bundle and provide copies to the court, the adjudicator and any other who intends to appear at the hearing. However, there may be occasions where the adjudicator should prepare the bundle where it is beyond the debtor's ability to do so.

The hearing bundle should contain copies of the following documents:

  • original bankruptcy application
  • adjudicator's requests for further information
  • debtor's response to those requests
  • adjudicator's refusal to make a bankruptcy order
  • debtor's request for a review
  • adjudicator's refusal to make a bankruptcy order on review
  • debtor's appeal (application notice and supporting evidence)
  • any reasons given by the adjudicator expanding on why she has refused to make a bankruptcy order
  • any other evidence that the court has ordered to be filed, including the orders

Issue eight

IR 1986, r 6.47(6) provides that the adjudicator is not personally liable for costs incurred by any person in respect of an application made to court under IA 1986, s 263N(5). It was submitted—and accepted by the chief registrar—that this is the case even where the debtor's appeal is successful.

In relation to the adjudicator's costs of the appeal, it will fall the court's usual wide discretion to decide whether or not these are paid by the debtor.

In relation to the appeal itself, what did the chief registrar decide, and why?

Accepting that the adjudicator, in determining the debtor's application, was limited both in terms of time and the nature and extent of the information she was able to request, the chief registrar held that the adjudicator had misdirected herself in her approach to assessing the debtor's COMI, and that the decision she reached was wrong.

The issue in this case was the determination of the debtor's COMI, and whether that was in England and Wales. As the chief registrar identified, such inquiry often involves a complicated mixed question of law and fact, and he expressed his regret that the new regime contained no provision allowing the adjudicator to refer such questions to the court.

In considering the point afresh, the chief registrar held that the debtor was able to amply demonstrate by his evidence that his COMI was in England and Wales, and that the adjudicator gave too much weight to her concerns regarding the business that the debtor was promoting. Further, the debtor, in his evidence, had made two important assertions that he:

  • was resident in London, and that since 2014 his private and vocational interests have been in England, and
  • could not pay his debts and his COMI was in England and Wales and he had no intention of leaving the country

As the adjudicator had not filed any evidence challenging these assertions, the chief registrar was bound to accept them at face value as they were not inherently unbelievable and not contradicted (but instead supported) by the documentary evidence.

Accordingly, the chief registrar allowed the appeal and made a bankruptcy order.

To what extent is the judgment helpful in clarifying the law in this area?

As noted above, it is understood that this is the first reasoned judgment in relation to a new area of law, and to that extent it is very helpful in that it deals with some of the preliminary issues in relation to appeals against the adjudicator's refusal to make a bankruptcy order.

The judgment also identifies some of the perceived shortcomings in the procedure and practice relating to the new regime of debtors' bankruptcy applications, and it will remain to be seen whether those perceived shortcomings are accepted by the Insolvency Service and whether the legislation is amended. This will undoubtedly depend on what proportion of bankruptcy applications result in a refusal (the adjudicator must make a bankruptcy order when satisfied that England and Wales is the correct jurisdiction and that the debtor is unable to pay their debts), and the proportion of refusals that are a result of what might be called 'complex issues', such as the determination of the debtor's COMI.

Case details

  • Court: Bankruptcy High Court
  • Judge: Mr Chief Registrar Baister
  • Date of judgment: 22 February 2017

Further Reading

If you are a LexisPSL Subscriber, click the link below for further information:

The immediate effects of a bankruptcy order on the bankrupt

Reviews of orders from the insolvency court: what is the process and how can you appeal or review a decision and which court do you apply to?

Not a subscriber? Find out more about how LexisPSL can help you and click here for a free trial of LexisPSL Restructuring and Insolvency.First published on LexisPSL Restructuring and Insolvency

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About the author:

Stephen qualified as a solicitor in 2005 and joined the Restructuring and Insolvency team at Lexis®PSL in September 2014 from Shoosmiths LLP, where he was a senior associate in the restructuring and insolvency team.

Primarily focused on contentious and advisory corporate and personal insolvency work, Stephen’s experience includes acting for office-holders on a wide range of issues, including appointments, investigations and the recovery and realisation of assets (including antecedent transaction claims), and for creditors in respect of the impact on them of the insolvency of debtors and counterparties.