Discharged bankrupt’s income payments order not enforceable in later bankruptcy (Azuonye v Kent (in her capacity as trustee of the bankrupt estate of the appellant))

Barnaby Hope, barrister at Selborne Chambers, examines the Court of Appeal’s decision in Azuonye v Kent (in her capacity as trustee of the bankrupt estate of the appellant) that after a debtor was discharged from bankruptcy but later adjudged bankrupt for a second time, the debtor’s liability for future payments under an income payments order (IPO) made in the earlier bankruptcy was a provable debt in the later bankruptcy and so was not enforceable by the trustee in the earlier bankruptcy.

Azuonye v Kent (in her capacity as trustee of the bankrupt estate of the appellant) [2019] EWCA Civ 1289

What are the practical implications of the judgment?

This decision in Azuonye v Kent (in her capacity as trustee of the bankrupt estate of the appellant) covers a relatively narrow issue. Given that Lewison LJ noted, when granting the appellant permission to appeal, that the scope of a provable debt was an ‘issue of general importance’, there may have been an opportunity for the Court of Appeal to develop this concept generally, but it did not. This was understandable, given that Re Nortel GmbH (in administration) [2013] UKSC 52, [2013] 4 All ER 887 is very clear in its application.

However, trustees in bankruptcy, bankrupts and former bankrupts can now be clear that an IPO will not survive a later bankruptcy. Any sums due under it will be a provable debt in the later bankruptcy (for the benefit of the earlier bankruptcy creditors), but the earlier trustee cannot continue to collect payments from the bankrupt or a third party. If bankrupts are discharged from the later bankruptcy, they will be released from the obligations under the IPO.

As David Richards LJ noted in closing, however, there are measures to prevent this from being abused (at para [42]). If bankrupts wrongly obtain a bankruptcy on their own application, it can be annulled. The later trustee can apply for a fresh IPO. And, in any event, any property obtained by bankrupts between discharge from the earlier bankruptcy and the making of the later bankruptcy order would be property of the later estate.

What was the background?

The appellant was initially made bankrupt on a creditor’s petition and the respondent was appointed as his trustee in bankruptcy. The county court made an IPO on the respondent’s application under section 310 of the Insolvency Act 1986 (IA 1986) requiring the appellant and/or his pension provider to pay a sum of money each month to the respondent for three years, which sums formed part of his estate for the earlier bankruptcy.

The appellant was automatically discharged from the earlier bankruptcy one year later. As permitted by IA 1986, s 310(6)(a), the IPO continued in force.

When the appellant was unable to pay his debts, he applied to make himself bankrupt for a second time, which was granted.

At a county court hearing, the appellant contended that the later bankruptcy meant no further payments had to be made under the IPO. The judge disagreed and so payments continued to be made to the respondent by the appellant’s pension provider.

The appellant appealed unsuccessfully to the High Court but was granted permission to appeal to the Court of Appeal.

What did the Court of Appeal decide?

David Richards LJ, who gave the only judgment, set out the issue succinctly as ‘whether the liability of a debtor for future payments under an [IPO] made in the debtor’s bankruptcy ranks as a provable debt in a later bankruptcy of the same debtor’ (at para [1]). He restated the issue as ‘whether the IPO nonetheless continues in force and continues to be enforceable for the benefit of the estate in the first bankruptcy, as the respondent submits and the courts below have held, or whether the claim for payments falling due after commencement of the second bankruptcy is a provable debt in the second bankruptcy, as the appellant submits’ (at para [16]).

It was accepted before the court that on an ordinary construction, future payments under an IPO would constitute provable debts under rule 14.2(1) of the Insolvency (England and Wales) Rules 2016, SI 2016/1024, in the light of the guidance in Re Nortel (at para [21]). However, the respondent relied on SI 2016/1024, r 14.2(6), which says that the ordinary position may be reversed by an ‘enactment or rule of law under which a particular kind of debt is not provable’.

The court therefore considered two arguments, one based on the relevant legislative provisions and the other based on the relevant case law:

  • whether IA 1986, ss 334–335 applied to discharged earlier bankruptcies and thus rendered future payments under an IPO non-provable

  • whether there was a rule of law arising out of Booth v Mond [2010] EWHC 1576 (Ch), [2010] All ER (D) 285 (Jul), Re Bradley-Hole (a bankrupt) [1995] 4 All ER 865 and Cartwright v Cartwright [2002] EWCA Civ 931, [2002] All ER (D) 34 (Jul) that future payments under an IPO were non-provable

Legislative provisions

IA 1986, s 335(2) provides:

‘Any sums which in pursuance of an income payments order under [IA 1986, s] 310 are payable after the commencement of the later bankruptcy to the existing trustee shall form part of the bankrupt’s estate for the purpose of the later bankruptcy’.

The respondent contended that the words ‘are payable after the commencement of the later bankruptcy to the existing trustee’ pre-supposed that, but for that section, the future IPO payments would continue to be payable to and enforceable by the first trustee and would not be provable in or affected by the later bankruptcy. It followed that, where IA 1986, s 335 did not apply, the future IPO payments remained payable to and enforceable by the first trustee.

David Richards LJ rejected this argument (at paras [25]–[29]). He held that IA 1986, ss 334–335 did not apply to discharged bankruptcy situations. Parliament would have legislated specifically for this if it had been the intention. Further, if the respondent were correct, there would be ‘a curious situation whereby diametrically opposed results would follow for future IPO payments, depending on whether the bankrupt was a discharged or an undischarged bankrupt at the commencement of the later bankruptcy’. As he noted, it would not be right that the creditors of the earlier bankruptcy estate could benefit from the future IPO payments.

Case law

The respondent submitted that the courts in Booth, Bradley-Hole and Cartwright had decided that variable orders such as IPOs were in principle non-provable debts. Having analysed the case law, the court disagreed (at paras [31]–[40]). In summary, it held that:

  • the ratio of Cartwright  only extended to the provability of orders made by foreign courts and therefore was not binding 
  • Bradley-Hole was limited to the non-provability of variable orders made in family proceedings and there were special policy reasons why those orders were not provable  
  • Booth supported the appellant’s position in that it stated that it was ‘not the fact of review’ that made a debt non-provable  
  •  the respondent’s submission could not be reconciled with Re Nortel (which post-dated the above decisions)

Conclusion

The only remedy open to a trustee of an earlier bankruptcy in whose favour an IPO is made is to prove in a later bankruptcy for any arrears and future payments under the IPO. If there is a surplus in the estate, that trustee would obtain a dividend, which would be distributed by the trustee pari passu to the creditors of the earlier estate.

Barnaby Hope appeared for the appellant in this case.

Interviewed by Robert Matthews.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

 

 


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