Introduction
On 3 May 2022, Jonathan Hilliard QC sitting as a Deputy Judge of the High Court handed down a judgment in favour of Rosenblatt client, London European Securities Limited, the Respondent to an appeal brought by a bankrupt individual, Mr Richard Addison.
The judgment provides some welcome guidance regarding which actions belong to a bankrupt’s estate and therefore vest in the trustee on his bankruptcy, and which remain personal to him. Please find a link to the full judgment here.
For advisers, if your client is approaching insolvency, the judgment might affect your advice on whether to issue a claim/file an appeal and what happens to your client’s ability to defend any claims.
If your client is against an entity approaching insolvency, it might affect your advice on how to respond to their claim and whether to push ahead to pursue the insolvency proceedings or not and the level of risk involved in doing so.
Summary
While there may be a significant amount of case law regarding whether or not claims of a bankrupt vest in a trustee in bankruptcy, until now there had been no case that directly decided the specific point considered by the Judge in Addison v London European Securities Limited as to whether or not the right to apply to set aside the statutory demand and to appeal against the refusal to set aside that demand was something personal to the bankrupt. In the present case, the Judge held that such a right was personal to the bankrupt and therefore did not vest in the trustee on his bankruptcy.
In Heath v Tang1, Hoffman LJ drew a helpful, albeit possibly non-exhaustive distinction between cases where a bankrupt is a claimant and may want to continue to pursue a claim for his own benefit that he had at the point a bankruptcy order was made against him, versus where a bankrupt is a defendant and when a claim can continue even after a bankruptcy order is made against him.
After considering it in some detail, the Judge held that such categorisation was unnecessary because the essential question is the same in both situations, namely: is the litigation, or aspect of it, something that can be regarded as personal to the bankrupt? There is no definitive answer which applies across all cases, but the judgment provides some useful relevant factors to consider.
The bankrupt’s estate
On the making of a bankruptcy order, the official receiver becomes trustee of the bankrupt’s estate, unless the Court appoints another person2.
The function of the trustee is to get in, realise and distribute the bankrupt’s estate3.
A bankrupt’s estate includes “(a) all property belonging to or vested in the bankrupt at the commencement of the bankruptcy, and (b) any property which by virtue of any of the following provisions of this Part is comprised in that estate or is treated as falling within the preceding paragraph” 4.
Property is intended to be a broad concept for these purposes, and includes “money, goods, things in action, land and every description of property wherever situated and also obligations and every description of property whether present or future or vested or contingent, arising out of, or incidental to property” 5.
The bankrupt as claimant
Most claims that a bankrupt had at the time of bankruptcy therefore vest in his trustee in bankruptcy because they are “things in action” and therefore form part of the bankrupt’s estate.
Given a bankrupt’s property includes things in action, it can include rights of appeal.
However, as Hoffmann LJ explained in Heath, that does not mean that all of the bankrupt’s causes of action vest in the trustee, because there are certain causes of action which remain personal to the bankrupt and these include cases in which the damages are to be estimated by immediate reference to pain felt by the bankrupt in respect of his body, mind or character, and without immediate reference to his rights of property6. This approach was reiterated in the Court of Appeal decision in Grady v HM Prison Service7 and cited by Lord Walker in Mulkerrins v PricewaterhouseCoopers (a firm)8, albeit he maintained that there is no simple bright line test for determining which causes of action remain personal to the bankrupt and which do not.
In the present case, the Appellant relied on the Court of Appeal decision in Avonwick Holdings Limited v Sayers9 as an example of rights relating to litigation not being property. In that case, it was held that privilege was not property of a bankrupt which automatically vests in the trustee in bankruptcy. However, the starting point in that case turned on a point based on the specific characteristics of privilege, which is that the bankrupt could only be deprived of privilege by express provision in a statute or necessary implication. Therefore, the judgment does not, and did not need to, seek to provide a general touchstone for determining which rights relating to litigation do vest in the trustee in bankruptcy.
The bankrupt as defendant
In Heath, Hoffmann LJ explained that the analysis where the bankrupt is a defendant is different and that a bankrupt who is a defendant will normally not have standing to bring an appeal. However, there are cases where the bankrupt can appeal an order against him. Such cases are not limited to cases concerned solely with the bankrupt’s body, mind, or character.
In Heath, the question for the Court was whether a bankrupt could bring an appeal against a judgment on which the bankruptcy petition was founded. Hoffmann LJ considered that he could not, and his analysis ultimately turned on whether the bankrupt had an interest in relation to the claim in question. A bankrupt has been divested of any further interest in the debts that he owed and in the property that he held, so he no longer has an interest in claims relating to them, but there are cases where the claim or application brought against the defendant is sufficiently personal to the bankrupt defendant that he has standing to continue to litigate in respect of them, such as by appealing the order made against him. Examples include an appeal against an injunction granted before bankruptcy against the bankrupt personally.
However, as in cases where the bankrupt is claimant, there is no specific bright line rule to determine whether a matter should be regarded as personal to the bankrupt or not. Relevant factors will include:
(a) whether the bankrupt’s status is at issue: Sands v Layne10;
(b) what common sense and fairness dictates: Sands;
(c) whether it is natural to regard the action as vesting in and for the trustee rather than the bankrupt to continue the litigation: Sands;
(d) whether the judgment in the litigation is or would be enforceable against the estate of the bankrupt: Heath;
(e) whether there are other routes by which the litigation can or could have been dealt with: Heath;
(f) the breadth of the concept of the bankrupt’s estate, and the public interest that lies behind this: Heath.
The present case
For the reasons given, the Judge considered that the correct question to ask is whether the right to apply to set aside the statutory demand and to appeal against the refusal to set aside the statutory demand was something personal to the bankrupt, rather than to ask whether it is a body, mind, and character case.
It was held that the Appellant did have standing to bring his appeal in this case, for the following reasons:
- The making of a statutory demand is an important part of the process towards making a person bankrupt and therefore changing his status. Similarly, the question of whether a statutory demand can be set aside is intimately tied up with the question of whether a person should be made bankrupt and his status.
- The right to appeal against the Court’s refusal to set aside a statutory demand is not something that can enure for the benefit of the estate by its nature. It cannot be turned to account for the estate’s benefit.
- The present case was very far away from the situations considered in Heath where the claims against the bankrupt were enforceable only against the estate vested in the trustee.
- A statutory demand creates via statute an evidential presumption that the recipient appears to be unable to pay his debts.
- Setting aside a statutory demand may lead to annulment of the bankruptcy order11 on the basis that the bankruptcy order ought not to have been made. Being able to appeal against dismissal of the statutory demand allows the bankrupt to seek to challenge the change in his status brought about by the bankruptcy order.
- A trustee would have little interest in pursuing an appeal against a refusal to set aside such a demand, because it would not be in the interests of the bankrupt estate to spend monies doing so.
- Therefore, were it to vest in the trustee, such a right of appeal would become meaningless in practice if, as here, a bankruptcy order was then granted off the back of the statutory demand. The ability of the bankrupt to apply to the Court12 to have the trustee given directions therefore offers little protection.
In the present case, the Appellant could have appealed the bankruptcy order and failed to do so, but the Judge considered that to be outweighed by the above points and held that it was “unattractive for the bankrupt to have to prosecute a new appeal against the bankruptcy order rather than continuing the appeal against the refusal to set aside the statutory demand”.
Notwithstanding that the Judge found in the Appellant’s favour in relation to the standing point, the Judge dismissed the Appellant’s appeal on both asserted grounds, maintaining that the lower Court was not wrong to refuse to set aside the statutory demand under rules 10.5(5)(b) or (d) of the Insolvency (England and Wales) Rules 2016.
Conclusion
While not only achieving a positive result for our client in this long-running case, this judgment also provides some welcome guidance regarding whether certain actions are personal to a bankrupt or whether they vest in the trustee on his bankruptcy.
If you are looking for some advice or representation in relation to contentious personal or corporate insolvency matters, please do not hesitate to get in touch with us to see if we can assist.
1 [1993] 1 WLR 1421
2 s.291A(1) Insolvency Act 1986 (the “1986 Act”)
3 s.305(2) 1986 Act
4 s.283(1) 1986 Act
5 s.436(1) 1986 Act
6 see Beckham v Dale (1849) 2 H.L.Cas.579, 604 and Wilson v United Counties Bank Ltd [1920] A.C. 102
7 [2003] EWCA Civ 527
8 [2003] UKHL 41
9 [2016] EWCA Civ 1138
10 [2017] 1 WLR 1782
11 s.282(1)(a) of the 1986 Act
12 s.303(1) of the 1986 Act
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