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The High Court allowed an appeal deciding that the judge below had erred in law in ordering a stay of possession proceedings in the county court and directing a trial of the validity of the lender’s charge as an issue in the bankruptcy. The appeal court held that the judge below had no jurisdiction to make such an order under the Insolvency Act 1986 (IA 1986) and had failed to properly exercise any discretion that she may have had. Written by Christopher Boardman, barrister, at Radcliffe Chambers.
Re Roderick John Lynch Inspiration Finance Ltd v Cadwallader (in his capacity as trustee in bankruptcy of Roderick John Lynch) and another  EWHC 15 (Ch)
This case is an important illustration of the principle that the bankrupt’s property vests in the trustee in bankruptcy under IA 1986, s 306 subject to the proprietary interests of third parties, including those with charges over real property.
The court held that the enforcement of third-party proprietary interests are not proceedings within the bankruptcy. The fact that a dispute arises as to the validity of a lender’s security interest will not therefore render that dispute an issue arising in the bankruptcy itself. Therefore, it will not be open to judges (in this case an Insolvency and Companies Court Judge (ICCJ)) to interfere with the jurisdiction of the county court to determine possession proceedings.
Where a lender seeks to enforce its security after the making of a bankruptcy order, it should name the trustee in bankruptcy as a party to the proceedings. It is up to the trustee (with or without the benefit of directions from the bankruptcy court) to decide what role they wish to play.
Where the bankrupt is in possession, the lender should also name the bankrupt as a defendant. This will ensure that the bankrupt is personally bound to comply in with any order that the court may make.
Shortly after a bankruptcy order was made against Mr Roderick Lynch (the bankrupt), proceedings were commenced in the county court by a lender, Inspiration Finance Ltd (Inspiration) naming the bankrupt only as defendant. His Honur Judge Gerald, struck out the bankrupt’s defence and counterclaim on the grounds that his interest had passed to the trustee, Mr Alex Cadwallader (the trustee). He adjourned the claim to allow the trustee to take advice and state his position. Having done so, the trustee confirmed he did not intend to oppose Inspiration’s claim.
The bankrupt sought to challenge the trustee’s decision and direct him to adopt his defence and counterclaim by application to the bankruptcy court pursuant IA 1986, s 303. At a hearing of that application to which Inspiration was not party, ICCJ Barber made an order (the first order):
Inspiration responded by issuing an inter-partes insolvency application for an order setting aside the first order. ICCJ Barber rejected that application, upholding the first order save for a variation in the directions on the trustee’s application (the second order).
Inspiration appealed both the first and the second orders. Inspiration argued that ICCJ Barber had erred in law, alternatively had wrongly exercised her discretion, in making those orders. At the time of granting permission to appeal, the appeal court extended time to appeal against the first order.
Mr Justice Marcus Smith held that ICCJ Barber failed to properly address the merits of the bankrupt’s IA 1986, s 303 application. She had wrongly concluded that there would be no proper examination of the validity of Inspiration’s security. As a result, she had started from the position of putting the metaphorical ‘cart’ before the ‘horse’.
More importantly, Marcus Smith J held that neither IA 1986, ss 303, 363, 285 conferred jurisdiction on ICCJ Barber to stay Inspiration’s possession claim and determine the validity of its charge as an issue in the bankruptcy. That was the consequence of three interlocking principles:
Accordingly, the course taken by ICCJ Barber was not, in law, open to her.
In the light of his conclusion on the first ground of appeal, it was unnecessary for Marcus Smith J to consider Inspiration’s second ground of appeal in detail. However, the judge said that it was difficult to see how ICCJ Barber could have properly exercised any discretion she may have had. The making of an order in a matter which Inspiration had an interest without it being before the court was addressed by its subsequent application. However, the failure to properly dispose of the IA 1986, s 303 application was serious and if ICCJ Barber was going to make an order of this kind, it was incumbent on her to articulate why the IA 1986, s 363 application should prevail and she had not adequately done so.
Christopher Boardman is a barrister at Radcliffe Chambers, and a member of LexisPSL’s Case Analysis Expert Panels. If you have any questions about membership of these panels, please contact firstname.lastname@example.org.
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