Insolvency — Bankruptcy — Charging order — Discharge — Charging Orders Act 1979 — Insolvency Act 1986 — Trustee in bankruptcy obtaining discharge of charging order under section 3(5) of 1979 Act — Whether court entitled to discharge charging order where completed prior to bankruptcy order — Whether trial judge giving insufficient weight to policy of section 341(1) of 1986 Act
The respondent and his wife were the registered proprietors of a property. The appellant obtained an interim charging order against the property to secure a judgment of £10,000 in its favour in respect of a credit card debt. The charging order was made final in the following month. By then, a petition for bankruptcy had been presented against the first respondent, although this was unknown both to the appellant and to the judge who made the final order. The first respondent was subsequently adjudged bankrupt and his estate vested in the second respondent as his trustee in bankruptcy.
The second respondent applied to the court, under section 3(5) of the Charging Orders Act 1979, to discharge the appellant’s charging order. The district judge allowed the application. He found that although the final charging order had been properly made, albeit that the judge would not have made it had he been aware of the pending bankruptcy petition, it should be set aside, in the exercise of the court’s discretion, given the balance of interest and the nature of the assets that were available for distribution to creditors. This decision was subsequently upheld by the county court.
The appellant appealed. It contended that the district judge and the county court judge had given insufficient weight to a creditor’s right, under section 346(1) of the Insolvency Act 1986, to retain the benefit of an execution against land, such as a charging order, that was completed before the commencement of the bankruptcy. The appellant submitted that even if that provision did not completely exclude the operation of section 3(5) of the 1979 Act, the court should not exercise its discretion so as to circumvent the clear policy of the 1986 Act.
Held: The appeal was allowed. Under the 1986 Act, the bankruptcy of an insolvent individual begins on the day on which the bankruptcy order is made. The 1986 Act establishes the principle that a person who deals with the bankrupt before the making of a bankruptcy order, in good faith and without notice of the presentation of a bankruptcy petition, is entitled to retain property so acquired. The position with regard to charging orders is thereby altered from that which applied under the previous legislation and continues to apply in corporate insolvency. Although section 346 of the 1986 Act does not impose a restriction on the general power conferred by section 3(5) of the 1979 Act to discharge or vary a charging order, a creditor that completes execution before the bankruptcy order is made should not be deprived of its security solely by reason of the bankruptcy; some additional feature is required before it will be appropriate to exercise the general power under section 3(5). The courts below had erred in failing to recognise and give weight to the legislative policy underlying section 346(1) of the 1986 Act. The appellant’s final charging order had been properly made. It was not appropriate to set it aside solely by reason of the subsequent bankruptcy. There was nothing else in the facts of the case to justify a departure from the principle behind section 346(1). The charging order should be reinstated.
The following cases are referred to in this report.
Banque Nationale de Paris plc v Montman Ltd [2000] 1 BCLC 576, Ch
C&W Berry Ltd v Armstrong-Moakes [2007] EWHC 2101 (QB); [2007] BPIR 1199
Industrial Diseases Compensation Ltd v Marrons [2001] BPIR 600, Ch
Roberts Petroleum Ltd v Bernard Kenny Ltd (in liquidation) [1983] 2 AC 192; [1983] 2 WLR 305; [1983] 1 All ER 564, HL, [1982] 1 WLR 301; [1982] 1 All ER 685, CA
Wilson (D) (Birmingham) Ltd v Metropolitan Property Developments Ltd [1975] 2 All ER 814, CA
This was an appeal by the appellant, Nationwide Building Society, from a decision of HH Judge Charles Harris QC, sitting in Northampton County Court, upholding a decision of Deputy District Judge Jolly granting an application by the second respondent, Peter Windatt, as trustee in bankruptcy of the first respondent, Jonathan Wright, for the discharge of a charging order under section 3(5) of the Charging Orders Act 1979.
Marcus Flavin (instructed by the legal department of Nationwide Building Society) appeared for the appellant; the respondents did not appear and were not represented.
Giving judgment, Sir John Chadwick said:
[1] This is an appeal from an order made on 24 September 2008 by HH Judge Charles Harris QC, sitting in Northampton County Court, in proceedings brought by the trustee in bankruptcy of Mr Jonathan Wright under section 3(5) of the Charging Orders Act 1979 (the 1979 Act).
[2] The section is in these terms, so far as material:
(5) The court by which a charging order was made may at any time, on the application of the debtor or of any person interested in any property to which the order relates, make an order discharging or varying the charging order.
The issue raised in the appeal is whether, and in what circumstances, the court should exercise its power under that section in a case where the debtor has been adjudged bankrupt but the charging order was made before the commencement of the bankruptcy.
[3] That issue arises from the terms of section 346(1) and (5)(b) of the Insolvency Act 1986 (the 1986 Act):
(1) Subject to section 285 in Chapter II (restrictions on proceedings and remedies) and to the following provisions of this section, where the creditor of any person who is adjudged bankrupt has, before the commencement of the bankruptcy.
(a) issued execution against the goods or land of that person, or
(b) attached to a debt due to that person from another person,
|page:40| that creditor is not entitled, as against the official receiver or trustee of the bankrupt’s estate, to retain the benefit of the execution or attachment, or any sums paid to avoid it, unless the execution or attachment was completed, or the sums were paid, before the commencement of the bankruptcy.
…
(5) For the purposes of this section
…
(b) an execution against land is completed by seizure, by the appointment of a receiver or by the making of a charging order under [section 1 of the Charging Orders Act 1979];…
(Emphasis added.)
Put shortly, the question is whether the effect of section 346(1) and (5)(b) of the 1986 Act is that, notwithstanding section 3(5) of the 1979 Act, a creditor is entitled to retain the benefit of a charging order over land comprised in the bankrupt’s estate where the charging order predates the commencement of the bankruptcy.
Underlying facts
[4] Mr Wright (the bankrupt) was adjudicated bankrupt on 12 July 2006 on a petition that had been presented some two months earlier, on 17 May 2006, by the supervisor of an individual voluntary arrangement in respect of which he was said to be in default. The estate that vested in the trustee in bankruptcy on appointment included the bankrupt’s share in property known as 15 Cedrus Court, Northampton: a property of which the bankrupt and his wife were registered as proprietors.
[5] At the date on which the bankruptcy order was made, the bankrupt’s share in 15 Cedrus Court was subject to a charging order in favour of the appellant, Nationwide Building Society. That charging order had been made to secure a judgment, in the sum of some £10,000, obtained by the building society on 7 April 2006 in respect of a credit card debt. An interim charging order had been made on 5 May 2006: that order was made final on 26 June 2006.
[6] It can be seen that the interim charging order was made before the presentation of the bankruptcy petition. Although the final order was made after the presentation of the petition, it is common ground that the building society did not then know that the bankruptcy petition was pending. Further, although the petition was presented in Northampton County Court, it is common ground that the district judge who made the charging order and who was subsequently to make the bankruptcy order did not know that at the time. It has not been suggested that, under the practice then prevailing in that court, he should have known of it.
Application under section 3(5) of the 1979 Act
[7] An application to discharge both the interim charging order of 5 May 2006 and the final charging order of 26 June 2006 was made by the trustee in bankruptcy by a notice dated 6 November 2007. It came before Deputy District Judge Jolly on 16 May 2008. He made the order sought. He held, correctly in my view, that: (i) the final order would not have been made had the district judge known, at the time, that there was a pending bankruptcy petition; (ii) in the circumstances that the district judge did not know of the pending bankruptcy petition, the final charging order had been properly made; and (iii) the existence of the pending bankruptcy petition, and the bankruptcy order subsequently made on that petition, were not of themselves sufficient to establish a right to have the charging orders set aside. It was a matter of discretion whether or not to accede to the application. He concluded:
Mr Wright was in a hopelessly insolvent position in the spring of 2006. Nationwide Building Society was only one of [his] 32 creditors. They took steps, perfectly validly and in good faith to protect their interest, but given the balance of interest and the nature of the assets available in this case for distribution to creditors, I think it is appropriate for me to exercise my discretion in favour of the trustee in bankruptcy and discharge the Charging Order.
[8] The building society appealed to the county court judge. He dismissed the appeal for the reasons set out in the judgment that he delivered on 24 September 2008. After consideration of the authorities cited to him, he concluded that section 3(5) of the 1979 Act gave the court a discretion “to discharge or vary when it considers after proper consideration of the circumstances that it is correct to do so”. That was not to be done lightly “because that would destroy the advantages of a charging order that is a useful remedy which the law provides”. He went on, in [11] of his judgment, to say:
The question therefore is, did the deputy district judge fail to consider what he ought to have considered? Or afford manifestly too little, or too much, weight to any particular factor, to such an extent that the exercise of his discretion should be set aside? I answer that question in the negative. It appears from the analysis of his Judgment that he did identify and consider the relevant and important features of this case. The close proximity in time of the Charging Order and the bankruptcy proceedings. The accident of listing which got the Charging Order heard before the bankruptcy. The number of creditors and the extent of the assets or, as he put it, the “Balance of interest and the nature of the assets available for distribution and the relevance of the delay in applying to set aside.” It might have been a good idea for him to have mentioned specifically that he took into account the fact that the creditor had obtained and would lose the advantages of a Charging Order but that is implicit in the Judgment as a whole. Accordingly while I do not say that I would have reached the same conclusion as Deputy District Judge Jolly in the exercise of my discretion, this is not a case [in] which I find that the decision was outside the borders of that which a reasonable judge could reach. Accordingly the appeal will be dismissed.
[9] The deputy district judge had made no reference in his judgment to the provisions of section 346 of the 1986 Act. The building society’s grounds of appeal to the county court judge included the following:
The effect on enforcement procedures of bankruptcy is governed by section 346 of the Insolvency Act 1986. That section provides that where the execution is completed before the commencement of the bankruptcy the judgment creditor is entitled to retain the benefit of the execution. Even if this does not completely exclude the operation of the discretionary jurisdiction under section 3(5) of the Charging Orders Act 1979, such discretion should not be exercised to circumvent the clear policy of the Insolvency Act, and is limited by the policy and provisions of that Act, to which the learned District Judge did not give sufficient weight.
The county court judge referred to that ground of appeal in [5] of his judgment: “Mr Flavin [counsel for the Building Society]… says in effect that when section 3(5) of the Charging Orders Act is read in conjunction with section 346 of the Insolvency Act 1986 it was not properly open to the district judge to make the order he did.” In [10], he said:
It seems to me that though it is undoubtedly the case that a charging order is a remedy of real utility and value, designed
to assist a creditor astute enough to obtain one and although the fact that he has obtained one is a very material factor for a judge considering discharge, to have in mind, section 346(1)of the Insolvency Act does not have the effect of limiting section 3(5) in the way that the building society suggests. I reach that conclusion because:
1) If this effect was intended by the legislature it would have been expected to have said so explicitly and it does not.
2) The language of section 346(1) is not without explicit provision apt to limit the breadth of section 3(5).
3) Section 3(5) has not been revoked or modified.
4) I agree with Judge Behrens in the IDC case [IDC v Marrons [2001] BPIR 600] that the provisions of section 346(1) are… “Dealing with the creditor’s rights to retain the proceeds of a [in that case] Garnishee Order. They do not deal with the court’s powers to set aside an order”.
5) There is no authority binding me to a contrary conclusion.
This appeal
[10] The building society appealed to this court with permission granted by Jacob LJ on 14 January 2009. He was satisfied that the case involved an important point of principle. The trustee in bankruptcy has taken the view that, in the interest of saving costs to the bankrupt’s estate, he should not oppose the appeal; but, helpfully, the skeleton arguments filed on his behalf at the hearings below were put before the court. We had the benefit of full argument by counsel on behalf of the appellant. At the conclusion of the hearing, we indicated that we would allow the appeal, set aside the whole of the order of 16 May 2008, set aside the order for costs made on 24 September 2008, but make no order for costs in this court or below. Our reasons would be put in writing.
[11] The point of principle on which the guidance of this court is required is whether there can be discerned, in the provisions of |page:41| section 346(1) of the 1986 Act, a clear legislative policy that, absent special circumstances, the interest of a judgment creditor that has obtained the benefit of a final charging order before the commencement of the debtor’s bankruptcy, should prevail over the interests of the unsecured creditors in having pari passu distribution of the bankrupt’s estate. If so, it can properly be said that the courts below erred in failing to recognise, or give weight to, that principle.
Legislative policy underlying section 346(1) of 1986 Act
[12] Section 346(1) of the 1986 Act was first enacted as section 179 of the Insolvency Act 1985 (the 1985 Act). It is the statutory successor to section 40(1) of the Bankruptcy Act 1914 (the 1914 Act), which was repealed by the 1985 Act. Section 40(1) of the 1914 Act was in these terms:
Where a creditor has issued execution against the goods or lands of a debtor, or has attached any debt due to him, he shall not be entitled to retain the benefit of the execution or attachment against the trustee in bankruptcy of the debtor, unless he has completed the execution or attachment before the date of the receiving order, and before notice of the presentation of any bankruptcy petition by or against the debtor, or of the commission of any available act of bankruptcy by the debtor.
Section 40(2) of the 1914 Act provided that:
For the purposes of this Act… ; an execution against land is completed by seizure, or, in the case of an equitable interest, by the appointment of a receiver.
[13] Section 40(1) of the 1914 Act must be read in conjunction with section 37(1) of that Act:
The bankruptcy of a debtor, whether it takes place on the debtor’s own petition or upon that of a creditor or creditors, shall be deemed to have relation back to, and to commence at, the time of the act of bankruptcy being committed on which a receiving order is made against him…
(Emphasis added.)
The effect was that (as under the present law) a creditor could not retain the benefit of an execution against land of the debtor, against the trustee in bankruptcy, unless it had completed the execution before the commencement of the bankruptcy; but (in contrast to the present law) the commencement of the bankruptcy was related back to the commission of the act of bankruptcy on which the receiving order was made.
[14] A short summary of the relevant provisions in the pre-1986 law may be of assistance. A debtor committed an “act of bankruptcy” in circumstances set out in section 1(1) of the 1914 Act. The commission of an act of bankruptcy might lead to the making of a bankruptcy order under section 18(1) of the 1914 Act. However, there were at least four intervening steps: (i) within three months following the commission of an act of bankruptcy, a creditor might present a bankruptcy petition (section 4(1) of the Act); (ii) on a bankruptcy petition being presented, the court could make a receiving order (section 3 of the Act); (iii) that would lead to a meeting of creditors (section 13(1) of the Act) and to the submission of a statement of affairs (section 14); and (iv) following the submission of the statement of affairs, there would usually be a public examination of the debtor: section 15. The effect was that the commencement of the bankruptcy (under section 37(1) of the Act) and the relevant date for the purposes of section 40(1) of the Act could be expected to have occurred some weeks, if not months, before the bankruptcy order was made.
[15] That was the position when the power to make charging orders for the purpose of enforcing judgments or orders of the High Court or any county court for the payment of money was conferred by section 35(1) of the Administration of Justice Act 1956 (the 1956 Act); that remained the position when that section was repealed by, and replaced by section 1(1) of, the 1979 Act.
[16] The position changed when the provisions relating to individual insolvency formerly in the 1914 Act were replaced by those first enacted as Part III of the 1985 Act and brought into force by the 1986 Act. Section 278 of the 1986 Act provides in terms that:
The bankruptcy of an individual against whom a bankruptcy order has been made
(a) commences with the day on which the order is made.
Section 306(1) provides for the vesting in the trustee in bankruptcy, immediately on his appointment, of “the bankrupt’s estate”. The “bankrupt’s estate” is defined as “all property belonging to or vested in the bankrupt at the commencement of the bankruptcy…”: section 283(1)(a) of the 1986 Act. Save to the extent permitted by section 284 of that Act (restrictions on dispositions of property in the period between the presentation of the bankruptcy petition and the vesting of the bankrupt’s estate in the trustee), there is no relation back under the 1986 Act as there was under the 1914 Act to a date before the making of the bankruptcy order. Moreover, section 284 does not affect the rights of persons who received property from the bankrupt before the commencement of the bankruptcy in good faith, for value and without notice that the petition had been presented: section 284(4) of the 1986 Act. There is, of course, power to restrain execution after the presentation of the petition (section 285(1) of the 1986 Act) and there are powers to set aside transactions at an undervalue or by way of preference (sections 339 and 340 of the Act) but those powers do not detract from the clear principle that a person who deals with the bankrupt (in good faith and without notice of the presentation of a bankruptcy petition) before the making of the bankruptcy order is entitled to retain property so acquired.
[17] The principle that property acquired from a debtor (in good faith and without notice of the presentation of a bankruptcy petition) is entitled to retain that property against the trustee in bankruptcy represents a change not only to the position in respect of individual insolvency before the 1986 Act but also a departure from the position, both before and after that Act, in respect of corporate insolvency. In a case where a company is wound up by the court (save where there has been an earlier resolution for voluntary winding up), the winding-up is deemed to commence at the time of the presentation of the petition for winding up: section 129(2) of the 1986 Act, and, formerly, section 229(2) of the Companies Act 1948 (the 1948 Act). Section 127 of the 1986 Act (and, formerly, section 227 of the 1948 Act) avoids any disposition of the company’s property made after the commencement of the winding-up, that is to say, after the presentation of the petition, unless the court otherwise orders. There is no saving for persons who acquired property from the company between the date of the presentation of the petition and the making of the winding-up order in good faith and without notice of the petition. Section 128(1) of the 1986 Act (and, formerly, section 228(1) of the 1948 Act) avoids any execution against the estate of a company after the commencement of the winding-up. Section 183(1) of the 1986 Act (and, formerly, section 325(1) of the 1948 Act) is in terms that are indistinguishable from those of section 346(1). However, there is, of course, the important difference that, in the former, the “commencement of the winding up” means the date of the presentation of the petition and, in the latter, the “commencement of the bankruptcy” means the date of the bankruptcy order. There can be no doubt, as it seems to me, first, that the legislature intended to alter the position in bankruptcy in respect of charging orders from that which had preceded the 1986 Act; and, second, that the legislature intended that, under the 1986 Act, the position in bankruptcy in respect of charging orders should differ from the position with regard to corporate insolvency.
[18] That principle, as it seems to me, underlies both the restriction in section 346(1) of the 1986 Act and the limitation to that restriction. A creditor that has issued execution against the land of a person who is adjudged bankrupt is not entitled, as against the trustee in bankruptcy, to retain the benefit of that execution unless the execution was completed before the commencement of the bankruptcy; that is to say, unless the execution was completed before the bankruptcy order was made. That is not to say that a creditor that has completed execution before the commencement of the bankruptcy will, in all circumstances, be entitled to retain the benefit of that execution. In the absence of an express limitation to that effect, the legislature is not to be taken to have intended to impose a restriction on the general power to discharge or vary a charging order conferred by section 3(5) of the 1979 Act. |page:42| However, it is, in my view, clear that the legislature did intend that a creditor that had completed execution before the bankruptcy order was made was not to be deprived of its security by reason of the bankruptcy order alone. Some additional feature was needed before it could be appropriate to exercise the general power under section 3(5) of the 1979 Act.
[19] Further, section 346(5)(b) of the 1986 Act supplements the provision formerly in section 40(2) of the 1914 Act by the addition, after the words “an execution against land is completed by seizure, [or, in the case of an equitable interest], by the appointment of a receiver”, of the words “or by the making of a charging order [under section 1 of the Charging Orders Act 1979]”. Those additional words, as it seems to me, put beyond doubt the legislative intention that a judgment creditor that has obtained a final charging order before the making of a bankruptcy order is not to be deprived of the benefit of its security by reason of the bankruptcy alone.
[20] It follows, in my view, that the courts below were in error in failing to recognise and give weight to the legislative policy underlying section 346(1) of the 1986 Act. This court was entitled to substitute its own view as to the order to be made on the application under section 3(5) of the 1979 Act.
Should the charging orders be discharged?
[21] We were referred to observations made, both in this court and in the House of Lords, in Roberts Petroleum Ltd v Bernard Kenny Ltd (in liquidation) [1983] 2 AC 192 (HL); [1982] 1 WLR 301 (CA). The issue, in that case, was whether a charging order nisi should have been made absolute in circumstances where, between the date of the order nisi and the order absolute, the debtor company had commenced winding up (in that resolutions for voluntary winding up had been passed). The House of Lords, reversing the Court of Appeal, held that a final order should not have been made. Lord Brightman posed the question in these terms, at p208F:
The basic question, therefore, which confronts the court when it is faced with an application by an execution creditor to convert an order nisi into an order absolute in a case such as the present is whether the asset in question should fall outside the statutory scheme which, by virtue of the liquidation, is then in existence, or should be subject to that scheme.
He went on to express the view that, in the absence of persuasive authority to the contrary, the court should exercise its discretion, conferred (then) by section 35 of the 1956 Act and order 50 of the Rules of the Supreme Court, so that the asset fell into the statutory scheme then in existence: that is to say, the court should refuse to make the charging order final. After examining the authorities he remained of that view. The other members of the House agreed.
[22] The issue that was determined by the House of Lords in Roberts does not arise in the present case. At the date on which the charging order in the present case was made final (26 June 2006), the statutory scheme for the distribution of the debtor’s assets was not in existence (notwithstanding the presentation of the bankruptcy petition on 17 May 2006), and it did not come into existence with effect from 17 May 2006 (or any other date before 26 June 2006) by relation back to the making of the bankruptcy order on 12 July 2006. Nevertheless, it is necessary to have regard to a further passage in the speech of Lord Brightman. After setting out the provisions of section 325 of the 1948 Act, as amended by section 36(4) of the 1956 Act provisions now found in sections 183(1) and 346(1) of the 1986 Act Lord Brightman said (ibid at pp212G-213E):
I doubt whether section 325 has any direct application to the present case, because it is dealing with the right of a creditor to retain the benefit of a completed execution as against the liquidator, and I think it only comes into play after an order has been made absolute. It was not referred to in the judgments below. Nevertheless I think that the section has an important bearing on the case; for it would be odd if the court seized of the action took the view that it would be wrong to make an order absolute in circumstances in which, if an order absolute were made, the liquidator would under the terms of section 325 be unable to deny the execution creditor the benefit of the execution. So I think it is necessary to look at section 325 and see what, in the instant case, the legal position would have been if the order had been made absolute and the liquidator had invoked section 325. The argument of the respondent Roberts is that, on the plain wording of the section, the liquidator would have no right to deny Roberts the benefit of its execution. Roberts had issued execution against Kenny when it applied for and obtained the order nisi. At the date of the order nisi Roberts had received no notice of a meeting having been called at which a resolution for voluntary winding up would be proposed. Roberts had obtained an order for the appointment of a receiver. Therefore in the terms of the section execution was deemed to be completed before the date of the winding up.
The argument is formidable but I do not think it is correct. When the section speaks of an execution against land being “deemed to be completed… by the appointment of a receiver” I think it is looking at a final order of the court effecting such an appointment, and not at an order which is made provisionally, pending further consideration by the court when the application is heard inter partes. I would expect to find clear words if I am to construe “completion”, even “deemed completion”, as comprehending a mere interim appointment of a receiver which is made ex parte and not a final appointment. “Completion” of execution infers an element of finality. In the case of execution against goods, there must be both seizure and sale. In the case of an attachment of a debt there must be receipt of the debt. A debt due to the judgment debtor would not be paid to the judgment creditor under a garnishee order which was merely nisi. The argument based on section 325 is at best an argument by analogy as to what the position would be if the order were made absolute and the liquidator invoked this section. I think the argument founders because it is based on a misconstruction of the section.
[23] It is important to appreciate that Lord Brightman did not suggest that if an order absolute had been made before the commencement of the winding-up the liquidator would, under the terms of section 325 of the 1948 Act, be able to deny the execution creditor the benefit of the execution. Indeed, it is reasonably clear that he took the contrary view: that, had the order absolute been made before the commencement of the winding-up, the liquidator would have been unable to deny the execution creditor the benefit of the execution. Moreover, as he observed (ibid at p212H), if that were the position “it would be odd if the court seized of the action took the view that it would be wrong to make an order absolute in [those] circumstances”. The reason why that was not the position on the facts in Roberts was that, as at the date of the commencement of the winding-up, the order absolute had not been made. The execution had not been completed. The argument advanced on behalf of the execution creditor failed because it was wrong to construe the phrase “completion of the execution “ in section 325 of the 1948 Act as including the making of an order nisi or the interim appointment of a receiver. Properly understood, as it seems to me, Lord Brightman’s observations in Roberts provide support for the view that, absent special circumstances, it would be wrong to refuse an order absolute in circumstances where, if the order were made, the execution creditor would be able to rely on it against a liquidator in a winding-up: that is to say, if the order were made at a time when the winding-up had not commenced.
[24] For completeness, I should mention three decisions in the High Court to which we were taken. In Banque Nationale de Paris plc v Montman Ltd [2000] 1 BCLC 576, the charging order absolute was made on 1 February 1996; a winding-up petition was presented on 22 May 1996; and an order for the winding up of the debtor company was made on 10 July 1996. In those circumstance, it follows, in my view, that Ms Hazel Williamson QC was correct when, sitting as a deputy judge of the High Court on an application made by an unsecured creditor under section 3(5) of the 1979 Act (which failed on the grounds of lack of standing), she observed, at p581e-f, that:
the fact that section 183 [of the 1986 Act] provides that the creditor is entitled to retain against the liquidator the benefit of an execution that has been completed before the commencement of the liquidation, would probably provide an immediate and complete answer to any application which might actually be launched by the liquidator under section 3(5), in circumstances such as the present.
[25] Industrial Diseases Compensation Ltd v Marrons [2001] BPIR 600 (IDC) provides an example of circumstances in which it was held to be wrong to make an order absolute in the period between the presentation of a bankruptcy petition and the making of the |page:43| bankruptcy order. The Inland Revenue presented a bankruptcy petition against the debtor on 3 July 1998; on 5 August 1998, and again on 2 September 1998, the claimant (IDC), with knowledge of the petition, applied for and obtained garnishee orders nisi in respect of moneys that would become payable to the debtor on a contingency. On 3 December 2008, those orders were made absolute; a bankruptcy order was made on 12 January 1999. On the application of the trustee in bankruptcy, HH Judge Behrens, sitting as a judge of the High Court, set aside the garnishee orders on the ground that they should not have been made. He accepted that the district judge had been aware of the pending bankruptcy petition when he made the orders nisi, and there was no doubt that the county court judge was so aware at the time he made those orders absolute. After referring to Roberts and to observations of Buckley LJ in D Wilson (Birmingham) Ltd v Metropolitan Property Developments Ltd [1975] 2 All ER 814, Judge Behrens said, at p609C-D:
It seems to [me] as a matter of principle that the words of Buckley LJ which I have set out are of direct application. The presentation of the bankruptcy petition constituted proceedings to ensure the distribution of the available assets amongst the creditors according to the statutory scheme set out in the Insolvency Act 1986. In such a case the court should have regard to the creditors generally [and] not make an order which has the effect of giving one creditor priority over the others. It follows in my judgment that a garnishee order should not be made after the presentation of a bankruptcy petition.
He concluded, ibid, at p611C, that:
For these reasons I have come to the clear conclusion that none of these garnishee orders should have been made… In the exercise of my discretion I set them aside.
[26] It is important to have in mind that, in both Wilson and IDC, the question was whether a court should make a garnishee order absolute in circumstances where it knew of pending insolvency proceedings. The distinction between the two cases (as Judge Behrens recognised) was that in the former the winding-up had commenced on the presentation of the winding-up petition, whereas in the latter the bankruptcy had not commenced on the presentation of the bankruptcy petition. The judge did not find that distinction material and, given that the court knew of the bankruptcy petition when the garnishee orders were made, I think that he was right to take that view. He was right to hold that, in those circumstances, the orders should not have been made absolute on 3 December 1998: the appropriate course at that time would have been to adjourn the application for the orders to be made absolute until after the hearing of the bankruptcy petition.
[27] Although the sequence of events in the present case is indistinguishable from that in IDC, there is an important difference on the facts. In IDC, the garnishee orders should not have been made absolute when they were made because the court then knew of the pending bankruptcy petition: as I have said, the right course was to await the outcome of that petition. In the present case, the court did not know of the pending bankruptcy petition when the charging order was made absolute. It is impossible to say that the charging order absolute should not have been made at the time it was made. There are no grounds for an appeal against the charging order made in the present case: the question is whether the order that was correct at the time should now be set aside by reason of the subsequent bankruptcy order.
[28] C&W Berry Ltd v Armstrong-Moakes [2007] EWHC 2101 (QB); [2007] BPIR 1199 provides an example of circumstances in which a charging order absolute, properly made at the time it was made, was later discharged on an application under section 3(5) of the 1979 Act. The charging order absolute had been made on 22 July 1992. At that date, as David Clarke J observed (ibid in [8], at p1201), the judgment creditor did not know that a bankruptcy petition had been presented against the debtor. He observed that: “It may well be that had the deputy district judge in July 1992 received evidence as to the position of other creditors, particularly the petitioning creditor Acorn Minimix, he would not have made the order absolute.” However, plainly, he accepted that the district judge was not aware of the petition at the time. In that respect, the position is the same as that in the present case and David Clarke J’s decision to reject the submission that the charging order should be set aside on the ground that there was a bankruptcy petition pending against the debtor at the time it was made is direct authority in support of the appellant’s contentions in the present case. In the event, he upheld the decision of the judge below to set aside the charging order on the ground that the judgment creditor had acted in such a way including proving in the bankruptcy without relying on its security that it should no longer be permitted to rely on that order. He said ibid in [29], at pp1204-1205:
… I do attach importance to the fact that they never sought to value their security and never mentioned the existence of the charging order, or their intention to revert to reliance upon it, at any stage over many years. Whilst their conduct did not amount to surrender, in my judgment, it does justify the exercise of the court’s discretion in favour of [the applicant].
[29] As I have said, I am satisfied that the legislative intention that underlies section 346(1) of the 1986 Act is that a judgment creditor that has obtained a final charging order before the making of a bankruptcy order is not to be deprived of the benefit of its security by reason of the bankruptcy alone. I find nothing in the authorities that compels a different view: indeed, there is support for that view in two of the decisions in the High Court IDC and Berry and it is consistent with the approach of the House of Lords in Roberts. There is nothing in the facts of the present case to justify a departure from that principle. I think the courts below were wrong to discharge the charging orders that had been made in this case.
Conclusion
[30] For the reasons that I have now set out in this judgment, I hold that the appeal should be allowed and the order of 16 May 2008 be set aside.
Lloyd LJ said:
[31] I agree.
Maurice Kay LJ said:
[32] I also agree.
Appeal allowed.
