Suspension of discharge from bankruptcy (Weir (as trustee in bankruptcy of Claire Elisabeth Hilsdon) v Hilsdon)

Suspension of discharge from bankruptcy (Weir (as trustee in bankruptcy of Claire Elisabeth Hilsdon) v Hilsdon)

Richard Ascroft, barrister at Guildhall Chambers, discusses the case of Weir (as trustee in bankruptcy of Claire Elisabeth Hilsdon) v Hilsdon, which provides a worthwhile clarification on the suspension of discharge from bankruptcy.

Original news

Weir (as trustee in bankruptcy of Claire Elisabeth Hilsdon) v Hilsdon [2017] EWHC 983 (Ch), [2017] All ER (D) 33 (May)

The Chancery Division allowed, on one ground only, a bankrupt’s appeal against a district judge's order, suspending her discharge from bankruptcy until her trustee in bankruptcy confirmed to the court that she had complied with her duties. The court held, among other things, that a suspension of the discharge until the trustee confirmed to the court that the bankrupt had complied with his duties and obligations, or until the court otherwise ordered, satisfied the statutory requirement that the suspension be until the fulfilment of a specified condition. Accordingly, such an order was not always wrong in principle. However, the court held that, in the present case, the district judge's decision to impose an order in the form that he had was flawed for the failure to take into account the range of orders that could have been made, under s 279(3) of the Insolvency Act 1986 (IA 1986), and for the failure to consider whether the bankrupt’s failings had really justified an order in that form. The order was set aside and replaced with one imposing a fixed period of six months.

What was the background to the appeal?

On 9 February 2016 District Judge Payne (sitting in the County Court at Oxford) made an order suspending Mrs Hilsdon’s otherwise automatic discharge from bankruptcy in response to an admitted failure by her to comply with her statutory obligations under IA 1986. The order was expressed as follows:

‘The relevant period for the purposes of section 279 of IA 1986 and Schedule 19 to the Enterprise Act 2002 (EnA 2002) shall cease to run until such time as the Trustee in Bankruptcy confirms to the court by filing a report that the bankrupt has complied with [her] duties and obligations or until the court orders otherwise.’

Orders in this form (or similar variants) have been routinely made in courts. On 4 May 2017 Nugee J allowed an appeal by the bankrupt and substituted a fixed period of suspension of six months, to run from the date when Mrs Hilsdon would otherwise have had her automatic discharge (20 February 2016). The basis upon which the appeal was allowed was a failure by the court below to consider the range of orders that could have been made under IA 1986, s 279(3), in response to the established non-compliance.

The duration of an individual’s bankruptcy is governed by IA 1986, s 279, which provides in sub-section (1): ‘A bankrupt is discharged from bankruptcy at the end of the period of one year beginning with the date on which the bankruptcy commences.’

For the purposes IA 1986, s 279(1), a bankruptcy commences when the relevant bankruptcy order is made under IA 1986, s 278(a). The effect of discharge from bankruptcy is summarised in IA 1986, s 281(1).

What are the practical lessons that those advising can take away from the appeal?

When acting for the official receiver or trustee seeking an order suspending discharge, it is important to ensure that the evidence in support of the application identifies as specifically as possible the respects in which there has been non-compliance by the bankrupt and that the judge hearing the application is invited to consider the seriousness of the non-compliance and has the possible forms of order drawn to their attention.

The appeal in Weir v Hilsdon fell to be considered under the Insolvency Rules 1986, SI 1986/1925 (IR 1986). Rule 10.142 of the Insolvency (England and Wales) Rules 2016, SI 2016/1024 (IR 2016) sets out the current procedure applicable to suspension applications under IA 1986, s 279(3) and expressly requires any order for suspension to state, among other things, in what respects the bankrupt has failed to comply with his or her obligations under IA 1986.

What were the legal issues the judge had to decide?

The grounds of appeal numbered eight in total but the legal issues were really confined to two, namely:

  • the extent to which the applicant trustee could rely at the hearing below on correspondence not exhibited in the original evidence adduced in support of the application, and
  • the proper form of suspension orders

As to the first issue, Nugee J said that insofar as there was a tension between the decision in Hellard v Kapoor [2013] EWHC 2204 (Ch), [2013] All ER (D) 374 (Jul) (to the effect that a trustee should be confined to the grounds set out in the evidence filed with the application) and that in Bowles and anr v Trefilov (unreported, 29.04.16, Chief Reg Baister), he preferred the more flexible approach of the latter.

The second issue was the principal focus of the appeal judgment (and the only ground on which the appeal succeeded).

Section 279(3) of IA 1986 is in the following terms:

‘On the application of the official receiver or the trustee of a bankrupt’s estate, the court may order that the period specified in subsection (1) [being 1 year] shall cease to run until—

  • (a) the end of a specified period, or
  • (b) the fulfilment of a specified condition

in subsection (3)(b) "condition" includes a condition requiring that the court be satisfied of something: see s 279(5)'

What did the judge decide, and why?

The basis upon which the appeal was allowed was the failure of the district judge below to take into account the range of orders that could be made under IA 1986, s 279(3), and to consider whether Mrs Hilsdon’s failings really justified an order in the form made.

Those failures meant that the district judge’s exercise of discretion was flawed, permitting the appeal court to interfere and exercise the discretion afresh. It is important to understand that Nugee J did not say that the form of order used in the court below was necessarily always wrong in principle (see para [91]) and therefore one that ought never to be used. As he explained:

  • as a matter of language, the order was within the literal terms of IA 1986, s 279(3) (see para [92])
  • the terms of IA 1986, s 279(5), supported the use of such a form (assuming it was otherwise appropriate on the facts) (para [93]) in a case where the bankrupt is being uncooperative, obstructive, misleading or downright dishonest, there is a real difficulty in framing an order suspending discharge until the bankrupt has answered a specific list of questions, as the trustee may well not know quite what it is that he does not know (the ‘unknown unknowns’) (para [96])
  • two decisions of the High Court (Mawer v Bland [2013] EWHC 3122 Ch and Wilson v Williams [2015] EWHC 1841 (Ch), [2015] All ER (D) 275 (Jun)) had upheld the form of order. It did not, however, follow that the form used below was an appropriate one to make in all cases (para [99])

Mr Justice Nugee accepted (at para [100]) that it was not only in the interests of bankrupts but also in accordance with the policy of the reforms introduced by EnA 2002, that a bankrupt should be able to tell with some precision when their discharge will take place, so that they can move on and rebuild their financial lives.

The judge also accepted (at para [101]) that routine use of an order in the Mawer form of suspension order acted as a disincentive on the trustee to make progress during the year before automatic discharge takes place. Ultimately, when framing any order for suspension, the court was, said Nugee J, required to strike a balance between the competing considerations of a bankrupt knowing exactly what was required of them to obtain discharge and the desirability of preventing bankrupts who were uncooperative, obstructive, or downright dishonest from frustrating the legitimate enquiries of trustees seeking to fulfil their functions. Where that balance is to be struck in any given case must depend on the facts (para [102]).

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

Without intending to lay down any general principles, Nugee J was of the view that the court should be hesitant about reaching for the Mawer-type order as a routine or standard form (para [102]). Where on the spectrum of co-operation any particular bankrupt lies is, according to the judge, of the first importance in deciding what form of order, if any, under IA 1986, s 279(3), is appropriate. In his judgment, therefore, the court should always consider whether an order in Mawer form is really justified on the facts of the case, rather than treating it as the default option on an application.

For the future, it is reasonable to assume that Mawer-type orders are likely to be reserved for those cases where:

  • the relevant bankrupts are guilty of significant non-co-operation, obstruction or dishonesty, and
  • the official receiver or trustee is unable, because of the bankrupt’s conduct, to state with any confidence at the hearing of the application what specific information is required to constitute full compliance

What order was made with regard to suspension from discharge at the handing down of the appeal judgment?

In exercising his discretion afresh, Nugee J substituted a fixed period (six months) of suspension from discharge.

Successful applications under IA 1986, s 279(3) are, it is submitted, now more likely (in light of the decision in Hilsdon and the re-framed IR 2016, SI 2016/1024, r 10.142) to be met by suspension for a fixed period which, if it turns out to be inadequate, can be the subject of extension on any renewed application.

Those acting for trustees or the official receiver may consider it prudent to seek in such an order express liberty to apply (prior to expiration of the relevant period) for further suspension respect of any continuing non-compliance.

Interviewed by Tracey Clarkson-Donnelly.  First published on Lexis PSL R&I.

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

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