Smith (a bankrupt) v Ian Simpson & Company (A Firm) and another

JurisdictionEngland & Wales
JudgeMR JUSTICE JONATHAN PARKER,LORD JUSTICE LAWS,LORD JUSTICE EVANS
Judgment Date12 April 2000
Judgment citation (vLex)[2000] EWCA Civ J0412-6
Docket NumberCase No: CHBNKF 99/1125
CourtCourt of Appeal (Civil Division)
Date12 April 2000

[2000] EWCA Civ J0412-6

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT OF JUSTICE

CHANCERY DIVISION MANCHESTER DISTRICT

REGISTRY ON APPEAL FROM THE MACCLESFIELD

COUNTY COURT

Royal Courts of Justice

Strand, London, WC2A 2LL

Before:

Lord Justice Evans

Lord Justice Laws and

Mr Justice Jonathan Parker

Case No: CHBNKF 99/1125

Lynda Elizabeth Smith
Appellant
and
(1) Ian Simpson & Co
(2) The Official Receiver
Respondents

MR STEPHEN WHITAKER (instructed by Brindley Twist Taffts & James for the APPELLANT)

MS ANGHARAD START (instructed by Ian Simpson & Co for the RESPONDENTS)

MR JUSTICE JONATHAN PARKER
1

This is an appeal by Mrs Lynda Smith against an order made by His Honour Judge Maddocks sitting as a High Court Judge on 5 October 1999, on appeal from the Macclesfield County Court. By his Order Judge Maddocks dismissed the appellant's appeal against a bankruptcy order made against her by Deputy District Judge Steel on 23 June 1999. Permission to appeal was granted by Judge Maddocks. The bankruptcy order was made on the petition of a firm of solicitors, Ian Simpson & Co, based upon a debt of £5956.43 in respect of legal costs. The petitioner is the respondent to the appeal.

2

The appeal raises a question as to the meaning and effect of section 271(1) of the Insolvency Act 1986 ("the Act"), in circumstances where the debtor has, since the presentation of the petition, tendered the full amount of the petition debt from his own property and where there are supporting creditors who, although not eligible to be substituted as petitioner under r.6.30 of the Insolvency Rules ("the Rules"), would be eligible to apply for a change of carriage order under r.6.31. The question is whether, if the sum tendered were accepted by the petitioner, section 271(1) would preclude the court from thereafter making a bankruptcy order on the petition.

3

If (as contended on behalf of the appellant) the answer to that question is Yes, three consequences would follow. First, were the petitioner to refuse to accept the sum tendered its refusal to do so would be unreasonable, since ex hypothesi, acceptance would have meant that no bankruptcy order could be made on the petition and accordingly that the payment could not subsequently be avoided under section 284(1) of the Act, notwithstanding that it constituted a disposition of the debtor's own property, and notwithstanding the presence of supporting creditors. Second, the petition would fall to be dismissed under section 271(3) of the Act on the ground of unreasonable refusal to accept payment, unless there were special circumstances present justifying the court in declining to exercise its discretion under that subsection by dismissing the petition. Third, in the absence of such special circumstances, no change of carriage order could be made under r.6.31, despite the presence of supporting creditors desirous of seeking such an order; in other words, r.6.31 would be rendered nugatory in such circumstances, notwithstanding that it purports to empower the court to make a change of carriage order where the petition debt has been paid out of the debtor's own property. Thus, it is inherent in the appellant's contentions that r.6.31 is inconsistent with the Act and is to that extent ultra vires and of no effect.

4

If, on the other hand (as contended on behalf of the respondent), the answer to that question is No (that is to say, acceptance of the sum tendered would not preclude the court from thereafter making a bankruptcy order on the petition, pursuant to a change of carriage order) then the consequences would be that the refusal of the petitioner to accept the sum tendered would not be unreasonable (since, ex hypothesi, if a bankruptcy order were subsequently to be made on the petition the payment would be liable to be avoided under section 284(1)), and that it would be open to the petitioner to apply for a bankruptcy order on the footing that the petition debt remained unpaid. Alternatively, if for some reason the petitioner did not wish to proceed with the petition, it would be open to the court to make a change of carriage order under r.6.31. If such an order were made, the petition would then proceed on the basis of the original (and unpaid) debt.

5

Underlying the question at issue is the shorter and more fundamental question whether a petition debt has been "paid", within the meaning and for the purposes of section 271(1), where it has been paid out of the debtor's own resources. If Yes, the appeal succeeds; if No, it fails.

6

THE PROCEDURAL HISTORY

7

The petition was presented on 18 March 1999 with a return date of 20 April 1999. On the return date it was adjourned until 23 June 1999.

8

On 18 June 1999 the appellant gave notice of intention to oppose the making of a bankruptcy order on the ground that she wished to seek a taxation of the costs, the subject-matter of the petition. Notices of intention to support the petition pursuant to r.6.23 were received from five creditors, of whom two were represented before the Deputy District Judge. The two supporting creditors who were represented were firstly Premier Sports Media Ltd (a judgment creditor in the sum of £7324.87, judgment having been obtained on 21 June 1999) and a Mr McGarvey who claimed to be a loan creditor in the sum of £69,124.32 (demand having been made on 10 May 1999). One further supporting creditor, a Mr Masterson, claiming to be a creditor for £21,384.19 in respect of consultancy services, attended the hearing in person.

9

Immediately prior to the hearing, the appellant's then solicitor, Miss Edwards of Messrs Taylors, tendered to the respondent's solicitor a banker's draft in the full amount of the petition debt, conditionally upon the petition being dismissed. An attendance note made by the respondent's solicitor, the contents of which are not in dispute, records what transpired. The material part of the attendance note reads as follows;

10

"Spoke with [Miss Edwards] re third party funds. She was still unable to tell me the source of the funds and whether it was a loan or a gift. She told me that she had a bankers draft for the full amount of the debt but required an undertaking or guarantee that the petition would be dismissed, which I was unable to give. She had been expressly instructed by the third party that the money was not to be handed over until the petition had been dismissed. I could not agree to request a withdrawal or dismissal on those terms and she therefore said that she was intending to oppose the petition on the grounds that the debt was not due."

11

As appears from the attendance note, the respondent's solicitor was concerned that the payment (if accepted) might be avoided in the event of a bankruptcy order being made on the petition.

12

Although the Deputy District Judge appears to have been aware that a banker's draft had been tendered and refused, he did not specifically address this aspect of the matter in his judgment. He confined himself to addressing the grounds of opposition advanced by the appellant in her notice of opposition (namely that the debt was not due since the costs had not been taxed). In the result, he rejected those grounds and proceeded to make a bankruptcy order.

13

The appellant appealed, contending (in summary) that the petition should have been dismissed on the ground that the respondent's refusal to accept a tender of the full amount of the petition debt was unreasonable.

14

Judge Maddocks rejected that contention and dismissed the appellant's appeal. The appellant now appeals to this court, pursuant to the permission granted by Judge Maddocks.

15

THE RELEVANT PROVISIONS OF THE ACT AND THE RULES

16

I start with the relevant provisions of the Act.

17

Part IX of the Act (in the Second Group of Parts) deals with bankruptcy. Chapter I of Part IX (containing sections 264 to 282 inclusive) is headed "Bankruptcy Petitions; Bankruptcy Orders". Chapter II of Part IX (containing sections 283 to 291 inclusive) is headed "Protection of Bankrupt's Estate and Investigation of his Affairs".

18

Section 264 provides that a bankruptcy petition may be presented by a creditor. Section 266(2) provides that a bankruptcy petition shall not be withdrawn without the leave of the court. Section 267 provides that, subject to immaterial exceptions, a creditor's petition may be presented only if, at the time it is presented, four requirements are met. The requirements are: that the debt on which the petition is based exceeds the bankruptcy limit (subs.(2)(a)); that the debt is for a liquidated sum (subs.(2)(b)); that the debt is one which the debtor appears either to be unable to pay or to have no reasonable prospect of being able to pay (subs.(2)(c)); and that there is no outstanding application to set aside a statutory demand served in respect of the debt (subs.(2)(d)).

19

Section 268(1) provides that for the purposes of section 267(2)(c) a debtor appears to be unable to pay a debt only if either he has failed to comply with a statutory demand served in respect of it within three weeks of service or (if the debt is a judgment debt) execution on the judgment has been returned unsatisfied.

20

I turn next to section 271, the provisions of which are central to this appeal. Section 271(1) provides as follows:

21

"(1) The court shall not make a bankruptcy order on a creditor's petition unless it is satisfied that the debt, or one of the debts, in respect of which the petition was presented is either-

(a) a debt which, having been payable at the date of the petition or having since become payable, has been neither paid nor secured or compounded for, or

(b) a debt which...

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    ...statutory provisions and rules in a little more detail. As a result of the Court of Appeal decision in Smith v Ian Simpson & Co [2001] Ch 239 ( Smith v Simpson), the following provisions should be considered in the round so that they all work coherently 15 The first is s.271(1) of the Act.......
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    ...Ms Holcombe wants to run could get off the ground. 8 So far as the legal argument itself is concerned, I should refer to refer to Smith v Ian Simpson and Co [2001] Ch 239 which Ms Holcombe very properly drew to my attention as an authority which was potentially adverse to her argument. Evan......

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