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Case No: B3 2000 0534
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION) ON APPEAL
FROM THE HIGH COURT CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 10 November 2000
B e f o r e :
LORD JUSTICE PETER GIBSON
LORD JUSTICE WALLER
and
LORD JUSTICE JONATHAN PARKER
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|
RAYMOND
LEVY
|
Appellant
|
|
-
and -
|
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LEGAL
SERVICES COMMISSION
|
Respondent
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(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
- - - - - - - - - - - - - - - - - - - - -
Miss Marcia Shekerdemian (instructed by Messrs Rosenblatts for the
Appellant)
Miss Nicola Rushton (instructed by Messrs Cawdrey Kaye Fireman and
Taylor for the Respondent)
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JUDGMENT
(As Approved by the Court)
Crown Copyright
LORD JUSTICE JONATHAN PARKER:
INTRODUCTION
1. This is an appeal by the applicant in the proceedings, Mr Raymond Levy,
against an order made by Evans-Lombe J on 4 February 2000 dismissing Mr Levy's
appeal from an order made by District Judge Hewetson-Brown on 20 September
1999. The District Judge had in turn dismissed an application by Mr Levy to
set aside a statutory demand served on him by The Legal Services Commission
(under its then name The Legal Aid Board) I shall refer to The Legal Services
Commission hereafter as "the LSC". The LSC is the respondent in the
proceedings and the respondent to this appeal. Evans-Lombe J refused
permission to appeal against his order, but permission was subsequently granted
by Peter Gibson LJ.
THE BACKGROUND
2. By an order dated 19 October 1994 made in ancillary relief proceedings
between Mr Levy and his former wife Mrs Jaqueline Levy, Thorpe J ordered (among
other things) that Mr Levy pay Mrs Levy's costs of the proceedings. Both Mr
and Mrs Levy were assisted persons for the purposes of the Legal Aid Act 1988.
The costs payable by Mr Levy under the order were subsequently taxed at
£51,876.48. On 4 June 1999 the LSC served a statutory demand on Mr Levy
in respect of these costs, with interest. The total sum so demanded
(including interest) was £62,732.53.
3. Regulation 91(1) of the Civil Legal Aid (General) Regulations 1989 provides
(so far as material) as follows:
"(1) Where in any proceedings to which an assisted person is a party -
(a)...... or
(b) an order ..... is made for the payment of costs to the assisted person,
the [LSC] may take such proceedings in its own name as may be necessary to
enforce or give effect to such an order ....."
4. It is common ground that, pursuant to Regulation 91(1)(b), the LSC is
entitled to serve the statutory demand in its own name and to present a
bankruptcy petition based upon it.
5. On 16 July 1999 Mr Levy applied to set aside the statutory demand under
Rules 6.4 and 6.5 of the Insolvency Rules 1986. On 20 September 1999 the
District Judge dismissed that application. Mr Levy appealed against the
District Judge's order. On 8 October 1999, no payment having been made on
account of the sum demanded, the LSC presented a bankruptcy petition against Mr
Levy. The petition was subsequently adjourned, first to await the outcome of
the appeal before Evans-Lombe J, and then to await the outcome of this appeal.
No creditor has given notice of support.
6. On 4 February 2000 Evans-Lombe J dismissed Mr Levy's appeal.
7. Under Rule 6.5(4) of the Insolvency Rules the court may set aside a
statutory demand if:
"(a) the debtor appears to have a counterclaim, set-off or cross-demand which
equals or exceeds the amount of the debt or debts specified in the statutory
demand; or
(b) the debt is disputed on grounds which appear to the court to be
substantial; or
(c) it appears that the creditor holds some security in respect of the debt
claimed by the demand, and either Rule 6.1(5) is not complied with in respect
of it, or the court is satisfied that the value of the security equals or
exceeds the full amount of the debt; or
(d) the court is satisfied, on other grounds, that the demand ought to be set
aside."
8. Mr Levy's case is that the statutory demand should be set aside pursuant to
Rule 6.5(4)(d), on the ground that his obligation to pay the costs in respect
of which the demand is made is not a provable debt in his bankruptcy, and that
the statutory demand is accordingly pointless since his failure to comply with
it will not lead to the making of a bankruptcy order.
9. Rule 12.3 of the Insolvency Rules, under the heading "Provable debts",
provides as follows (so far as material):
"(1) Subject as follows, in .... bankruptcy, all claims by creditors are
provable as debts against .... the bankrupt, whether they are present or
future, certain or contingent, ascertained or sounding only in damages.
The following are not provable -
(a) in bankruptcy, any fine imposed for an offence, and any obligation
arising under an order made in family proceedings or under a maintenance
assessment made under the Child Support Act 1991;
(b)......
"Fine" and "family proceedings" have the meanings given by section 281(8) of
the Act ...." (Emphasis supplied.)
10. It is common ground that the ancillary relief proceedings in which the
order for costs was made were "family proceedings" for the purposes of Rule
12.3(2)(a). However, there is an issue between the parties as to whether Mr
Levy's obligation to pay Mrs Levy's costs of those proceedings is an
"obligation arising under an order made in family proceedings" within the
meaning of Rule 12.3(2)(a). Mr Levy's case is that it is, and that
accordingly the obligation is not a provable debt in his bankruptcy. The LSC,
on the other hand, contends that on its true construction Rule 12.3(2)(a) does
not include orders for costs made in family proceedings, with the consequence
that Mr Levy's obligation in relation to costs is a provable debt in his
bankruptcy.
11. If Mr Levy's contention that his costs obligation is not a provable debt
is correct, a further issue arises as to whether that is a sufficient ground
for setting aside the statutory demand under Rule 6.5(4)(d).
THE HEARING BEFORE THE DISTRICT JUDGE
12. Before the District Judge, counsel then appearing for Mr Levy accepted
that the court may, in special circumstances, make a bankruptcy order on a
petition based on a non-provable debt, but he submitted that where (as in the
instant case) the creditor is not asserting the existence of any such special
circumstances as would justify the court in taking that course there is no
sensible purpose in allowing the matter to proceed and that the statutory
demand should be set aside.
13. The District Judge dismissed Mr Levy's application, concluding that Mr
Levy's costs obligation was not an obligation "arising under an order made in
family proceedings" for the purposes of Rule 12.3(2)(a). He expressed his
conclusion thus:
"The obligation arises pursuant to the [LSC]'s statutory contract with the
wife's solicitors to conduct a piece of litigation. The fact that that piece
of litigation happens to be family proceedings is purely incidental and
irrelevant. The [LSC]'s claim arises out of that statutory contract, not the
order."
THE HEARING BEFORE EVANS-LOMBE J.
14. Evans-Lombe J rejected the District Judge's analysis, but dismissed Mr
Levy's appeal on different grounds. He held firstly that, assuming Mr Levy's
costs obligation to be a non-provable debt (i.e. to be an "obligation arising
under an order made in family proceedings" for the purposes of Rule
12.3(2)(a)), it would nevertheless be premature to set aside the statutory
demand on that ground since the court hearing the petition might, if satisfied
as to the existence of special circumstances justifying such a course, make a
bankruptcy order on the petition notwithstanding that the petition is based on
a non-provable debt. (This aspect of the case has been referred to in
argument as "the Timing Question"). Evans-Lombe J held secondly that in any
event, on the true construction of Rule 12.3, the expression "any obligation
arising under an order made in family proceedings" in Rule 12.3(2)(a) is
limited to substantive obligations (e.g. lump sum orders or orders for
periodical payments) and does not include orders for costs, with the
consequence that Mr Levy's costs obligation is a provable debt. (This aspect
of the case has been referred to in argument as "the Construction
Question").
15. The Judge approached the Timing Question on the footing that the
expression "any obligation arising under an order made in family proceedings"
in Rule 12.3(2)(a) has the widest meaning, and includes Mr Levy's costs
obligation. After referring to the judgment of Chadwick J in Russell v.
Russell [1998] BPIR 259, in which Chadwick J concluded that although the
court had jurisdiction to make a bankruptcy order on a petition based on a
non-provable debt it would only exercise that jurisdiction in special
circumstances, and to a judgment of mine in Galloppa v. Galloppa [1999]
BPIR 352, the Judge continued as follows:
"This decision [i.e. Russell v. Russell] together with the judgment of
Mr Justice Jonathan Parker in the Galloppa case is clear authority for
the proposition that an order in family proceedings may form a valid
petitioning debt for the purposes of a bankruptcy petition. It may be that
when the petition comes to be heard, at which point the court may be informed
of the other debts for which the debtor is liable, the Bankruptcy Court may
conclude that it is inappropriate to make a bankruptcy order based on a
non-provable petitioning debt. Alternatively, as happened in the
Russell case, it may decide to do so because of special circumstances
such as the existence of other provable debts of the debtor. It should not be
overlooked that where a solvent husband declines to pay a sum ordered to be
paid by him in Family proceedings, an administration of his estate in
bankruptcy can still be of use to a wife notwithstanding she cannot prove in
respect of orders for matrimonial support. The effect of the bankruptcy order
is to deliver the husband's affairs to be administered by a trustee in
bankruptcy who, having paid his creditors will produce a surplus available to
be garnisheed by the wife.
Not until a petition is presented and comes to be heard will it be known
whether "special circumstances" exist justifying the making of a bankruptcy
order notwithstanding that the petitioning debt is based on an order in family
proceedings. It seems to me, therefore, that the challenge mounted by Mr Levy
to the statutory demand was an inappropriate challenge to make at the stage of
statutory demand although clearly appropriate if the amount of that demand was
subsequently used to base a bankruptcy petition when such petition came to be
heard. In my judgment the District Judge would have been justified in
dismissing the application to set aside the statutory demand on this ground and
for this reason his order should stand."
16. The Judge then turned to the Construction Question. In this connection
he referred once again to the judgment of Chadwick J in Russell v.
Russell.
17. In Russell v. Russell the wife presented a bankruptcy petition
based on an indebtedness arising under an order made in family proceedings for
payment of a lump sum and costs. Chadwick J held that notwithstanding that
the order for payment of a lump sum was on any basis a non-provable debt,
special circumstances existed in that case which justified the making of a
bankruptcy order. So far as the costs element of the order was concerned, it
appears that the question whether Rule 12.3(2)(a) applies to orders for costs
was not specifically argued before Chadwick J. However, in the course of
his judgment Chadwick J said (at page 264E):
".... there can be no doubt that the costs order was a provable
debt."
18. Later in his judgment in Russell v. Russell, Chadwick J referred,
without further comment, to the fact that the LAB had lodged a proof in respect
of costs. It seems clear, therefore, that although the point was not
developed before him Chadwick J considered that orders for costs in family
proceedings do not fall within the expression "any obligation under an order
made in family proceedings" in Rule 12.3(2)(a), and are accordingly provable
debts.
19. After referring to Russell v. Russell, Evans-Lombe J quoted an
observation to the opposite effect by Sir John Vinelott in Re a Debtor; JP
v. A Debtor [1999] BPIR 206. In the course of his judgment in that
case, Sir John Vinelott said (at page 215H):
"Although Chadwick J refers to the fact that a proof had been lodged by the
[LSC] in respect of costs, I do not think that this passage can be read, as was
suggested by Miss Shekerdemian who appeared for the husband, as a decision that
an order for costs made in proceedings for ancillary relief is capable of
ranking for a dividend. Prima facie, such a liability arises under an order
made in matrimonial proceedings as much as an order to pay a lump sum or for
periodic payments to the extent of accrued arrears. The point was not raised
before Chadwick J. I have not heard argument as to whether the [LSC] would be
in a better position than a wife in whose favour an order has been made."
20. Evans-Lombe J then continued:
"Insolvency Rule 12.3 is the product of the reform of bankruptcy legislation
flowing from the Cork Report and which is now contained in the Insolvency Act
and Rules 1986. Under the Bankruptcy Act 1914 the definition of provable debts
was contained in section 30 which, by subsection (3), subject to the exceptions
contained in the other subsections or section 30 made provable "all debts and
liabilities, present or future, certain or contingent" to which the debtor was
subject at the date of the receiving order or became subject thereafter before
his discharge. Subsection (6) of section 30 provided, as an exception to the
general rule in subsection (3), debts of which the value or liability was, in
the opinion of the Court, incapable of being fairly estimated. Claims arising
from Family proceedings are not specifically mentioned. A series of
decisions dealing with claims resulting from Family proceedings established the
principle that, whereas lump sum orders were provable as being defined
indebtedness, sums becoming due under periodical payment orders were not."
21. The Judge then quoted a passage from the judgment of Balcombe LJ in
Woodley v. Woodley [1994] 1 WLR 1167, at 1178, in which Balcombe LJ said
he could see good policy grounds (the quotation in the Judge's judgment as
handed down wrongly reads: "... no policy grounds") for saying that a
lump sum order made in family proceedings should (like damages for personal
injuries) be both provable in bankruptcy and yet not be released on discharge.
The Judge noted that these sentiments were echoed by Sir Donald Nicholls V-C in
Re Mordant [1996] 1 FLR 334.
22. The Judge then continued:
"The question therefore becomes one of whether it is possible to construe
Insolvency Rule 12.3(2)(a) as not including a debt arising from an order for
costs in Family proceedings notwithstanding the width of the words "any
obligation" used in the subsection. To do so it is necessary to give the
subsection a purposive construction namely that the purpose of the section was
to exclude from proof in bankruptcy orders giving substantive relief such as
lump sum orders and periodical payments orders but not costs orders consequent
on any proceedings pursuant to which the substantive orders were made. After
some hesitation I have come to the conclusion that such a construction, though
placing a special meaning on the word "obligation", is possible, that I should
follow the lead of Chadwick J in the Russell case and not that of Sir
John Vinelott in Re a Debtor and that I should construe the section
accordingly. There is, perhaps, some significance in the fact that the
subrule also excludes from proof "any fine imposed for an offence" but not any
costs ordered by the Court imposing the fine, and an assessment under the Child
Support Act without mentioning costs. Applying the sui generis [sic] rule of
construction, it is possible to argue that orders for costs in Family
proceedings should not therefore fall within the subrule. Where it is
possible to discern a statutory purpose in altering the law so as to make all
debts arising from substantive obligations resulting from orders in Family
proceedings not provable, it is very difficult to discern a statutory purpose
in selecting orders for costs in Family proceedings from amongst all other
orders for costs so as to make them not provable. On this second ground it
seems to me that the order of the District Judge can be upheld."
23. The Judge accordingly dismissed Mr Levy's appeal.
THE ARGUMENTS ON THIS APPEAL
24. In support of this appeal, Miss Marcia Shekerdemian of counsel (for Mr
Levy) submits that the Judge was wrong in relation both to the Timing Question
and to the Construction Question.
25. Miss Sherkerdemian turned first to the Construction Question, since if it
be the case that Mr Levy's costs obligation is a provable debt, then there can
be no grounds for setting aside the statutory demand and the Timing Question
will not arise.
26. Miss Shekerdemian's short submission on the Construction Question is that
it is simply not possible to construe the words "any obligation arising under
an order made in family proceedings" in Rule 12.3(2)(a) in a restrictive sense,
so as to exclude a particular category of obligation arising under an order
made in family proceedings, namely an order for costs. In any event, she
submits, even if it were open to the court to ignore the clear meaning of the
Rule and adopt a "purposive" approach to its construction, there is no logical
reason why a lump sum order should be non-provable whereas a costs order made
in family proceedings should be provable. She submits further that there is
no scope in the instant case for the application of any such rule of
construction as the Judge sought to apply.
27. As to the Timing Question, Miss Shekerdemian felt constrained to accept
that the court has jurisdiction to make a bankruptcy order on a petition which
is based on a non-provable debt, for the reasons which Chadwick J gave in
Russell v. Russell. At the same time, she submitted that it is
difficult if not impossible to identify the kind of special circumstances which
would justify the court in taking such a course; and that even if Chadwick J
was correct in concluding that the circumstances which he found to exist in
Russell v. Russell were sufficient for that purpose, it is not suggested
by the LSC that similar circumstances exist in the instant case.
28. Miss Nicola Rushton of counsel (for the LSC) adopted the reasoning of the
Judge on both the Construction Question and the Timing Question.
29. As to the Construction Question, Miss Rushton submits that there is a
qualitative difference between orders made in family proceedings which make
financial provision for one party or the other, and orders for payment of the
costs of family proceedings. Orders for costs made in family proceedings are
not (she submits) made by way of provision for the payee party; they are merely
designed to reimburse the payee party pro tanto in respect of his or her
legal costs. She submits that this distinction in quality between financial
provision on the one hand and costs orders in family proceedings on the other
lies at the heart of the policy consideration which (as she submits) dictates
that words in Rule 12.3(2)(a) which are, on their face, wholly general words,
are to be construed in a restrictive sense.
30. On the footing that, contrary to her submission on the Construction
Question, Mr Levy's costs obligation is non-provable, Miss Rushton then turned
to the Timing Question. She submits that it is not for the LSC at the
statutory demand stage to establish special circumstances such as would or
might justify the court hearing the petition in making a bankruptcy order.
She submits that the Judge was right to say, in effect, wait and see, since
only when the petition comes to be heard will it be known whether the requisite
special circumstances exist justifying the making of a bankruptcy order.
CONCLUSIONS
The Construction Question
31. I can, for my part, see no scope whatever for construing the words "any
obligation arising under an order made in family proceedings" (I stress the
word "any") in Rule 12.3(2)(a) as excluding a particular type of
obligation arising under an order made in family proceedings. To my mind,
such a construction would involve rewriting the Rule. Moreover, even if the
terms in which the Rule is expressed allowed some scope for a "purposive"
construction such as is suggested by Miss Rushton (which in my judgment they do
not), I am far from satisfied that it is illogical for costs orders in family
proceedings to be treated for bankruptcy purposes in the same way as lump sum
orders. On the contrary, there seems to me to be much to be said for the view
that it is logical that they should be treated in the same way. Apart from
anything else, if the party in whose favour financial provision is made in
matrimonial proceedings (whether or not that party is legally aided) has to
prove in the bankruptcy of the unsuccessful party for the costs of the
proceedings, there must be a risk that the overall financial balance between
the parties intended to be reflected in the court order may be significantly
distorted.
32. As to the Judge's intended reference to the ejusdem generis rule, I
confess that I am unable to identify in Rule 12.3(2) any genus which
might serve to bring that rule into play. Nor, for that matter, can I discern
any context elsewhere in the Act or the Rules which compels a construction of
Rule 12.3(2)(a) which is contrary to the plain meaning of the words used.
33. I accordingly conclude that Chadwick J's indication in Russell v.
Russell - an indication given without the benefit of detailed argument - to
the effect that costs orders in family proceedings create provable debts was
incorrect, and that Sir John Vinelott's preliminary view to the contrary is
correct. It follows that in my judgment Evans-Lombe J reached the wrong
conclusion on the Construction Question.
The Timing Question
34. On any footing, a bankruptcy order made on a petition which is based on a
non-provable debt is an anomaly, since (as Chadwick J pointed out in Russell
v. Russell) the trustee has, by definition, no functions to perform in
relation to the petitioner. His function is to get in, realise and distribute
the bankrupt's estate in accordance with the provisions of Chapter IV of the
Insolvency Act 1986 (see ibid. section 305(2)), and section 324 of the Act
provides that whenever he has sufficient funds in hand for the purpose he
shall, subject to a retention to cover expenses, "declare and distribute
dividends among the creditors in respect of bankruptcy debts which they have
respectively proved". Consequently, a creditor with a non-provable debt
will receive no distributions in the bankruptcy, and the trustee will owe no
duties towards him. It would therefore seem surprising if the Act confers
jurisdiction on the court to make a bankruptcy order on a petition based on a
non-provable debt. However, as I indicated earlier, Miss Shekerdemian felt
constrained to accept that the Act does give the court such jurisdiction. Was
she right to do so?
35. As Chadwick J pointed out in Russell v. Russell (at pp.263-4),
section 264 of the Act provides that a bankruptcy petition may be presented
against an individual by one of the individual's "creditors". "Creditor" is
defined in section 383 of the Act as meaning (so far as material):
"(a) in relation to a bankrupt .... a person to whom any of the bankruptcy
debts is owed ....
(b) in relation to an individual to whom a bankruptcy petition relates .... a
person who would be a creditor in the bankruptcy if a bankruptcy order were
made on that petition ...."
36. Section 382(1) of the Act defines "bankruptcy debt" as meaning (so far as
material):
"(a) any debt or liability to which he is subject at the commencement of the
bankruptcy ...."
37. It is to be noted that that definition makes no distinction between
provable and non-provable debts. A non-provable debt is a debt to which the
bankrupt is subject at the commencement of his bankruptcy, and thus falls
within the definition. Hence in the instant case Mr Levy's costs obligation
is a "bankruptcy debt", entitling Mrs Levy (and, by virtue of Regulation 91(1)
of the Civil Legal Aid (General) Regulations, the LSC) to present a bankruptcy
petition based upon it.
38. I therefore agree with Chadwick J in Russell v. Russell that since
the Act plainly allows a creditor with a non-provable debt to present a
bankruptcy petition based upon that debt, it must follow that the court has
jurisdiction under the Act to make a bankruptcy order on such a petition.
Accordingly in my judgment Miss Shekerdemian was right to accept that that
jurisdiction exists.
39. In what circumstances, then, will the jurisdiction be exercised? In
Russell v. Russell, Chadwick J referred to the need for "special
circumstances". At p.265F of the report he said:
"In the absence, therefore, of some special circumstances it seems to me that,
as a matter of discretion, it will not usually be appropriate to make a
bankruptcy order on a petition presented by a wife in respect of a debt which
arises under a lump sum order made in family proceedings."
40. He went on to conclude that special circumstances existed in that case
justifying the making of a bankruptcy order. He identified three such special
circumstances, as follows:
"First, this is a husband who has been found by the court to have been less
than frank in disclosing to the court particulars of his income and capital.
Secondly, this is a debtor who has failed to pay the costs ordered to be paid
in [other proceedings].
Thirdly, this debtor has failed to pay the costs which have been taxed in the
matrimonial proceedings ...."
41. It is apparent from the nature of the special circumstances which he
identified that Chadwick J regarded misconduct by the debtor as a relevant
factor in determining whether a bankruptcy order should be made on a petition
based on a non-provable debt. For my part, I find it difficult to see why
misconduct by the debtor should be relevant in this context. However badly
or irresponsibly the debtor may have behaved, the position still remains that
the petitioning creditor has no financial interest in the bankruptcy process.
Nor in my judgment, does the debtor's failure or refusal to pay other debts
(whether provable or non-provable) constitute a "special circumstance" in this
context. If the debts are non-provable, then non-payment of them is a
matter outside the bankruptcy regime; if they are provable, then the creditor
concerned has his remedy.
42. To my mind, the fact that the debtor may have so misconducted his affairs
that it may be said that he (in effect) deserves to be made bankrupt cannot
justify the making of a bankruptcy order on a petition based on a non-provable
debt.
43. It was suggested in argument (indeed it was suggested by Evans-Lombe J in
the passage from his judgment which I quoted earlier, in which he refers to an
administration of Mr Levy's estate in bankruptcy still being of use to Mrs Levy
notwithstanding that she cannot prove in the bankruptcy) that a petitioning
creditor with a non-provable debt may nevertheless have a legitimate interest
in initiating a bankruptcy if there is a prospect of a surplus being available
after all proving creditors have been paid in full. In my judgment, however,
it would be an abuse of the bankruptcy process to have recourse to it for that
purpose. The fundamental purpose of the bankruptcy regime is the distribution
of the bankrupt's estate rateably among proving creditors: that is its
raison d'etre. To seek to use the bankruptcy regime for the purpose of
establishing a surplus after the proving creditors have been paid in full is,
in my judgment, to seek to use it for a collateral purpose and is not
permissible.
44. In what circumstances, then, might the court be persuaded to exercise its
jurisdiction to make a bankruptcy order on a petition based on a non-provable
debt? Since the jurisdiction exists, I have to accept that there may be wholly
exceptional cases where the court will be persuaded, in its discretion, to do
so. I confess, however, that I find it extremely difficult to foresee the
circumstances in which that may occur, since, for reasons already given, the
jurisdiction itself seems to me to be wholly anomalous. As at present
advised, the only situation in which I can envisage that there might be a
possibility of the court making a bankruptcy order on a petition based on a
non-provable debt is where a supporting creditor with a provable debt obtains a
change of carriage order pursuant to Rule 6.31. The effect of such an order
is that, in contrast to the situation where a supporting creditor is
substituted as petitioner and the petition is amended accordingly, the petition
remains unamended but the creditor who has obtained the change of carriage
order has the carriage of the petition in place of the petitioning creditor.
But I am far from saying that a change of carriage order would necessarily be
made in such circumstances, or that, if it were to be made, the court hearing
the petition would necessarily make a bankruptcy order.
45. Subject to that possibility (if it be such) I find myself unable to
envisage any circumstances in which the court could properly make a bankruptcy
order on a petition based on a non-provable debt.
46. Returning to the instant case, and to the Timing Question, as I noted
earlier the LSC does not suggest that any "special circumstances" exist in the
instant case such as might persuade the court to make a bankruptcy order on a
petition based on the statutory demand. That being the case, I can see no
reason why the statutory demand should be allowed to stand and the bankruptcy
process to continue. It seems to me that Rule 6.5(4)(d) is designed to meet
just such a situation. Subparagraphs (a), (b) and (c) of subrule (4) are all
directed at cases in which there is no real prospect of a bankruptcy order
being made on a petition based on the indebtedness the subject of the statutory
demand, and subparagraph (d) is in my judgment similarly directed. The
philosophy underlying the jurisdiction to set aside a statutory demand appears
plainly from the terms of Rule 6.5(4). It is to prevent the presentation of
bankruptcy petitions which have no real prospect of success. In my judgment,
the instant case falls fairly and squarely within Rule 6.5(4)(d).
47. I accordingly conclude that there is no basis in the instant case for the
"wait and see" approach adopted by the Judge, and that the statutory demand
should be set aside pursuant to Rule 6.5(4)(d).
48. I would therefore allow this appeal.
Lord Justice Waller.
49. I agree that the appeal should be allowed for the reasons given by Lord
Justice Jonathan Parker and Lord Justice Peter Gibson.
Lord Justice Peter Gibson
50. I agree that this appeal must be allowed. As we are differing from the
judge, I add a few words of my own on each of the two points on which the judge
decided the case.
The Construction Question
51. The short question which arises is whether "any obligation arising under
an order made in family proceedings" in r. 12.3.(2)(a) of the Insolvency Rules
1986 includes an obligation arising under an order for costs made in family
proceedings. It is common ground that there is no other case in which the
point was both in issue and argued. In Russell v Russell [1998] BPIR
259 at p. 264 Chadwick J. was clearly of the view that a costs order made in
family proceedings did create a provable debt. In Re a Debtor, JP v A
Debtor [1999] BPIR 206 at p. 215 Sir John Vinelott was no less clearly of
the opposite view.
52. Like Jonathan Parker L.J. I prefer the view of Sir John Vinelott, who, as
the former chairman of the Insolvency Rules Committee when the Insolvency Rules
were drafted, was particularly knowledgeable in this area.
53. The purposive construction which the judge applied rests on the purpose
attributed by him to r. 12. 3 (2)(a), viz. to exclude from the bankruptcy
obligations under matrimonial orders giving substantive relief. But the
validity of that depends on whether that limited purpose can properly be
extracted from the language of the rule. I have to say that I do not
understand how the judge could discern that to be the purpose when the only
guide to that purpose, the actual language used, is that any obligation
arising under an order made in family proceedings is not to be a provable debt.
That does not seem to me to allow the court to exclude some obligations arising
under such an order. Further I do not see why those drafting r. 12.3(2)(a)
could not properly take the view that when substantive obligations under orders
made in family proceedings are to be excluded from provable debts, so should
costs orders made in those proceedings. They may well affect materially the
ability of the spouse to meet the substantive obligations. The fact that it is
the Legal Services Commission which is seeking in this case to enforce the
costs order cannot make any difference to the construction of r. 12.3(2)(a),
which must have the same meaning whether or not the party awarded the costs is
legally aided.
54. Nor do I think that the judge was right to find justification for his
construction in the application of the ejusdem generis rule. That rule applies
when an enumeration of particular things having some common characteristic is
followed by general words (e.g. "A, B, C and other D"), the general words being
construed as limited by that common characteristic. But here one has merely a
particular thing, "any fine", followed not by general words but by another
particular thing, "any obligation", which is further limited by having to be
either "under an order made in family proceedings" or "under a maintenance
assessment". I see no scope for the application of the rule.
55. I therefore conclude that an obligation in respect of costs which arises
under an order made in family proceedings falls within r. 12.3(2)(a) and is not
a provable debt.
The Timing Question
56. The question whether Mr. Levy's challenge to the statutory demand is
premature is one on which the judge neither heard nor invited any argument.
And yet the judge's affirmative answer to that question formed the first ground
on which he decided the appeal from the District Judge. I think it regrettable
that the judge's decision was based on a point on which Mr. Levy was given no
opportunity to make submissions.
57. It was the judge's view that the challenge to the statutory demand was an
inappropriate challenge to make at the stage when the statutory demand was made
"although clearly appropriate if the amount of that statutory demand was used
to base a bankruptcy petition when such petition came to be heard." As I
understand him, the judge was accepting that the fact that the debt was not
provable was a valid objection to any bankruptcy order being made. Somewhat
inconsistently, the judge earlier appeared to suggest that a wife as creditor
with a non-provable debt might properly be interested in obtaining a bankruptcy
order as its effect was to deliver the husband's affairs to be administered
by a trustee in bankruptcy who having paid the creditors would produce a
surplus available to be garnisheed by the wife.
58. The statutory scheme to my mind is plain: a bankruptcy order is designed
to vest the debtor's assets in the trustee to enable the trustee to pay the
provable and proved debts of the debtor (s. 324 Insolvency Act 1986). A
non-provable debt is entirely outside the statutory scheme. I own to finding
it puzzling that the 1986 Act contemplates that a non-provable debt is a
bankruptcy debt (as defined in s. 382; see in particular s. 281 (5)(b)). But,
that being so, it would appear that Chadwick J. was right in Russell v
Russell to say that a creditor with a non-provable debt may present a
bankruptcy petition based upon that debt. However, like Jonathan Parker L.J.,
I find it extraordinarily difficult to conceive of any circumstances in which
the court would make a bankruptcy order on a petition founded on such a debt.
And if the court will not make such an order (save in some wholly exceptional
circumstance) on the hearing of the petition, it would be strange if it was
inappropriate for the debtor to seek to free himself of the threat of
bankruptcy by an application to set aside the statutory demand based on such a
debt. The presentation of a petition may have seriously adverse effects on the
debtor, and in my judgment it would be wrong to deny him the opportunity at the
statutory demand stage to avoid that harm by having the statutory demand set
aside when it is based on a non-provable debt which is highly unlikely to lead
to a bankruptcy order. There is no suggestion that any special circumstances
for making a bankruptcy order based on a non-provable debt exist in the present
case.
59. In my judgment there is no realistic prospect of a bankruptcy order being
made on the non-provable debt on which the Legal Services Commission's petition
is based. The statutory demand should therefore be set aside now.
60. For these as well as the reasons given by Jonathan Parker L.J., with which
I am in entire agreement, I would allow the appeal and set aside the order of
the judge.
Order: Appeal allowed and the order of the District Judge and the statutory
demand set aside. The costs of the Legal Services Commission to be set-off
against the debt owed by Mr Levy. Leave to appeal to the House of Lords
refused. Bankruptcy proceedings to be transferred to the High Court.
Bankruptcy petition dismissed with costs, but with a stay pending determination
by the House of Lords of the petition - if successful must ask the House of
Lords to continue with the stay. Legal Services Commission to pay costs of
application to the District Judge and to the judge, to be assessed on a
standard basis, if not agreed, and an order for the costs incurred while Mr
Levy was an assisted person, but with the set-off referred to above. Costs of
the appeal.
(Order does not form part of approved judgment.)
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