St John Poulton's Trustee in Bankruptcy v Ministry of Justice

JurisdictionEngland & Wales
CourtCourt of Appeal (Civil Division)
JudgeLord Justice Lloyd,Lord Justice Pitchford,Lord Justice Pill
Judgment Date22 Apr 2010
Neutral Citation[2010] EWCA Civ 392
Docket NumberCase No: A2 2009/2069

[2010] EWCA Civ 392

[2009] EWHC 2123 (Ch)

IN THE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

Her Honour Judge Marshall Qc

Before: Lord Justice Pill

Lord Justice Lloyd

and

Lord Justice Pitchford

Case No: A2 2009/2069

Between
The Trustee In Bankruptcy Of Louise St John Poulton
Claimant Respondent
and
Ministry Of Justice
Defendant Appellant

Gabriel Moss Q.C. and Jonathan Lopian (instructed by Treasury Solicitor) for the Appellant

Augustus Ullstein Q.C. and James Dawson (instructed by DWF Solicitors LLP) for the Respondent

Hearing dates: 23 and 24 February 2010

Lord Justice Lloyd

Lord Justice Lloyd:

1

This appeal is brought against a decision on a preliminary issue in proceedings in which the claimant sues the Ministry of Justice, as being vicariously responsible for Her Majesty's Courts Service (HMCS), for damages either for breach of an alleged statutory duty or for breach of a common law duty of care. Judge Marshall Q.C. held that the action lay for breach of statutory duty but not at common law. The Ministry appeals, with permission granted by the judge, against the first of those conclusions. The claimant appeals, with permission granted by myself, against the second.

2

The facts from which the claim arises can be stated quite shortly. Louise St John Poulton, whom I will call the Debtor, was the subject of a bankruptcy petition issued in the Guildford County Court, presented on 21 January 2004 by Brighton and Hove District Council. Under rule 6.13 of the Insolvency Rules 1986, the court should have sent to the Chief Land Registrar forthwith notice of the petition and a request that it be registered in the register of pending actions. It did not do so. If it had, the Land Charges Registry staff should have made such an entry in the register of pending actions against the name of the Debtor. The Land Registry staff should have entered a notice in respect of the petition in relation to any registered estate which appeared to be affected, that is to say any in respect of which the Debtor appeared to be the registered proprietor. Neither of these things happened, because of the lack of notice to the Chief Land Registrar.

3

The Debtor was the registered proprietor of land at 35 Woking Road, Guildford. In March 2004 she sold this land, for net proceeds of some £45,000. It is accepted for the purposes of this appeal that, if the bankruptcy petition had been the subject of an entry in the register of pending actions and in the registered title of the particular estate, this transaction would not have taken place.

4

Later, a bankruptcy order was made in respect of the Debtor and, in due course, a trustee in bankruptcy (“the Trustee”) was appointed. The Trustee was unable to recover for the benefit of creditors the proceeds of the sale of the land at 35 Woking Road Guildford. That is the loss for which the Trustee seeks to recover compensation, for the benefit of the estate, by these proceedings. The claim is novel, but Mr Ullstein Q.C. for the Trustee told us that his instructing solicitors have other such claims pending, and know of yet others which await the outcome of this appeal.

Relation back of the trustee in bankruptcy's title and its implications

5

It is, and has at all material times been, a feature of English bankruptcy law that the assets of the bankrupt vest in the trustee in bankruptcy, whose task it is to realise them for the collective benefit of the creditors. It has also been a feature of that law that the assets which so vest should include those which were the bankrupt's property at a date earlier than the date of the order by which he or she becomes a bankrupt. By that means, the general body of creditors is to be protected against the risk that, during the process which leads to the bankruptcy, assets of the debtor will be disposed of in a way which does not enable to them to be made available for the benefit of creditors generally. At that time the debtor is bound to be under financial pressure, and may be tempted to deal with one asset or another in a way that would be inconsistent with the interests of the general body of creditors. Accordingly, dispositions of property by the bankrupt during a period before he or she became bankrupt are rendered void in certain circumstances, unless made with the consent of the court or later ratified by the court. By that means, in principle, the property of the bankrupt as at the start of the period should remain available for realisation by the trustee in bankruptcy for the benefit of the general body of creditors.

6

The principle that the trustee in bankruptcy's title relates back in this way to an earlier date raises the possibility that there might be a transaction which is, in other respects, proper, being for full value and on normal and proper terms, the other party to the transaction having no idea that he is dealing with someone who is subject to a bankruptcy process, and where the relation back of the trustee in bankruptcy's title would therefore put the purchaser at an unreasonable risk of having his title avoided by a subsequent event which he has no reason to foresee and over which he has no control.

7

The statutory provisions which lie at the heart of this case are those designed to resolve the dilemma presented by, on the one hand, the need to protect the general body of creditors by the principle as to relation back of the trustee in bankruptcy's title and, on the other, the need to enable persons dealing with someone in relation to whom bankruptcy proceedings are under way to be aware of those proceedings and to protect such persons, in appropriate circumstances, if they enter into a transaction with the debtor unaware of the bankruptcy process.

The legislative provisions

8

The applicable statutory provisions are now to be found in the Insolvency Act 1986 and the Insolvency Rules 1986, the Land Charges Act 1972 and the Land Registration Act 2002. However, each of these re-enacts provisions which originated at the time of the 1925 property legislation, and those original provisions must be the starting point for a consideration of the question arising.

The position under the Bankruptcy Act 1914 and before 1926

9

To put these provisions into context, it is necessary to record in outline the bankruptcy procedure as it stood under the Bankruptcy Act 1914, to consider how the balance was struck between the interests of the creditors and those of a purchaser, and to see how things changed, first in 1925 and then later.

10

In order that a debtor should be made bankrupt under the 1914 Act, it was necessary to identify an act of bankruptcy, of which there were several different kinds. Within 3 months after an act of bankruptcy, a creditor could present a bankruptcy petition. (The debtor could do so as well, but that case is less significant for present purposes.) After that there were two stages: first a receiving order, under which the official receiver was constituted receiver of the property of the debtor, and the creditors would consider whether a proposal for a composition or scheme of arrangement might be accepted, or whether the debtor should be adjudged bankrupt. Subject to the outcome of that process, the debtor might be adjudged bankrupt. Only at the last stage did the debtor become bankrupt, and a trustee in bankruptcy was then appointed.

11

Under the 1914 Act, section 37, when a person became bankrupt, the bankruptcy was deemed to have relation back to, and to commence at, the time of the act of bankruptcy being committed on which a receiving order was made against him, or, if there was more than one, at the time of the first relevant act of bankruptcy within 3 months before the date of presentation of the bankruptcy petition.

12

However, section 45 gave some degree of protection to those who dealt with a person who later became bankrupt. It applied to a number of transactions, including any contract, dealing or transaction by or with the bankrupt for valuable consideration, and any conveyance or assignment by the bankrupt for valuable consideration, so long as it took place before the date of the receiving order. Moreover the other party to the transaction must not, at the time of the conveyance, assignment, contract, dealing or transaction, have had notice of any available act of bankruptcy committed by the bankrupt before that time.

13

Bankruptcy petitions were not advertised then, nor are they now, but receiving orders were to be advertised under section 11. Thus, subject to any delay in placing the advertisement, persons dealing with a debtor could be expected to have notice of a receiving order. The need for protection applied primarily to the period before that order.

14

So far as the protection of persons dealing with the debtor is concerned, assuming that there was no actual notice of an act of bankruptcy, under the 1914 Act and before 1926 it depended on whether the person in question had asked all proper questions of the debtor and had not become aware, as a result of the answers to those questions, of any act of bankruptcy. If the questions were not in fact asked, it depended on whether he would have become aware of it if honest answers had been given to the proper questions, had they been asked. A person dealing with a debtor could not find out in any direct way whether a bankruptcy petition had been presented, and had to rely on the debtor's answers to the proper questions. Of course, if these did reveal the existence of a petition, they would also disclose the act or acts of bankruptcy relied on in the petition.

The...

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