- This is an appeal from the order of District Judge Hewetson Brown in the
St Albans County Court made on the 20th September 1999 whereby
he, inter alia, dismissed Mr Levy's application to set aside a statutory demand
dated the 4th June 1999 served on him by the Legal Aid Board ("The
LAB") on the 3rd July. The debt demanded comprised the taxed
sum due under an order for costs made by Mr Justice Thorpe on 19th
October 1994 in proceedings in the Family Division for ancillary relief brought
by Mr Levy's estranged wife ("the Wife") which amounted with interest
to the sum of £62,732.53p. The LAB were entitled to demand that sum by virtue
of the provisions of section 91(1)(b) of the Civil Legal Aid (General) regulations
1989. These provide:-
"91(1) Where in any proceedings to which an assisted
person is a party - ...(b) an order or agreement is made for the payment of
costs to the assisted person, the Board may take such proceedings in its own
name as may be necessary to enforce or give effect to such an order or agreement."
- Rule 12.3 of the Insolvency Rules 1986 under the heading "Provable Debts"
provides :-
"12.3(1) Subject as follows in both winding up and bankruptcy,
all claims by creditors are provable as debts against the company or, as the
case may be, the bankrupt whether they are present or future certain or contingent,
ascertained or sounding only in damages.
The following are not provable –
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;"
- In summary it was contended on behalf of Mr Levy that the bankruptcy demand
should be set aside as having been made for no tangible purpose because it
was made in respect of an "obligation arising under an order made in Family
proceedings" within Insolvency Rule 12.3(2)(a) and so was not provable in
Mr Levy's bankruptcy. Following the guidance given in the judgment of Mr Justice
Chadwick in Russell v Russell 1999 BPIR p259, in the absence
of special circumstances of the kind referred to by the Judge in that case
it would not be appropriate to make a bankruptcy order on a petition based
on such a debt. No such special circumstances were established before the
District Judge. A statutory demand made with a view to establishing a debtor's
inability to pay a debt intended to form the basis of a petition for a bankruptcy
order, though possible, was a pointless exercise because the demanding creditor
would not be in a position to derive any benefit from the ensuing bankruptcy
administration.
- The District Judge dismissed the application on the basis that, in relation
to the debt for costs, the LAB occupied a position separate from the Wife
and accordingly their claim to recover the amount of the costs from Mr Levy
did not fall within the provisions of Insolvency Rule 12.3(2). In his judgment,
having cited various authorities, which have also been cited to me and in
particular an extract from the judgment of Lord Justice Templeman in the unreported
case of the Debtor v The Law Society, 9th February
1981, he said this:-
"I see this passage as the key to whether the LAB is in
a different position to that of the Wife. I believe it is, and in my judgment
it lends support to that contention [that the position of the LAB was special]
while I note the words of regulation 91...the LAB's claim is equally made
pursuant to a statutory contract between it and the solicitors acting for
the wife. The solicitors act for her and in doing so, incur legal costs which,
by virtue of her financial position, she is deemed not able to pay without
legal aid. The solicitors do not seek those costs from her – the rules forbid
them to. Their claim is against the legal aid fund and they are entitled to
be paid from that fund and from nowhere else. But after they have been paid,
the LAB then has the right, as a separate cause of action, to recover such
part of those costs as may be recoverable from the husband and replenish,
at least in part, the fund depleted by the payment to the wife's solicitors.
...it is not the wife benefiting from the recovery of costs from the husband
but the public purse. ...[Counsel for Mr Levy] will say that the husband's
obligations still arises under "an order made in Family proceedings". I do
not agree. The obligation arises pursuant to the LAB'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 LAB's claim arises out of that statutory contract, not
the order."
- With respect to the District Judge I am not able to accept that this was
a sustainable reason for dismissing the application to set aside the statutory
demand.
- In the case of the Debtor v The Law Society Lord Justice Templeman
was considering an application by a debtor to set aside a bankruptcy notice
served on him pursuant to the relevant provisions of the Bankruptcy Act 1914.
The creditor serving the bankruptcy notice was The Law Society who at the
time occupied the same position as the LAB and had the benefit of regulations
with similar effect to regulation 91. The bankruptcy notice had been served
in respect of costs ordered to be paid by a husband to his estranged wife
in respect of matrimonial proceedings. After the order was made the husband
had obtained, by assignment, the right to enforce certain debts owed by his
wife. In the Court of Appeal he argued that these could be set off against
the claim for costs and accordingly the debt basing the bankruptcy notice
had been expunged. Lord Justice Templeman rejected this contention on the
ground that the relevant statutory provisions provided "that the costs
payable by Mr Kershman at the beginning, in the middle and at the end, all
belonged to the Legal Aid Fund and Mrs Kershman has nothing at all to do with
them. She is only relevant so far as those costs are concerned in that she
was not the person who made it necessary for the Legal Aid Fund to pay out,
and she triggered off the mechanism whereby the Legal Aid Fund is to be paid
back. She can never point to a single penny of costs payable under the order
made against Mr Kershman and say that she ever had the slightest interest
in that money. Mr Kershman cannot set off any sums payable to him by his wife
against the costs which he owes to the Legal Aid Fund."
- In Galoppa v Galoppa 1999 BPIR p352 Mr Justice Jonathan Parker
was considering a contention that a legally aided wife in whose favour an
order for costs had been made against her husband in matrimonial proceedings
could not serve a statutory demand on her husband in respect of those costs
because only the LAB had power to enforce the order for costs. Mr Justice
Parker dismissed that argument and held that the costs order gave rise to
a debt owed by the husband to the wife which gave the wife locus standi to
serve a statutory demand. The case of a Debtor v The Law Society
was cited to the Judge. He dealt with it in this way:-
"There are two points to be noted about that case, as
I read the judgment. First, it was, of course a case about set off. The Court
of Appeal was not required to consider, neither did it consider the question
of whether Mrs Kershman had locus standi to serve a statutory demand in respects
of the costs. The ratio of the decision, as I read the judgment, was that
the debt sought to be set off were debts of a different character to the debt
created by the order for costs, given the effect of the relevant statutory
provisions and the relevant regulations. Secondly in order to understand fully
Lord Justice Templeman's statement that "the assisted person can neither sue
nor give a good receipt for the money, one has to imply the qualification
that the assisted person cannot sue without the consent or authorisation of
the relevant legal aid authority. [The rules then in force] then provided
as regulation 91(2) now provides, that the legal aid authority may authorise
an assisted person to bring proceedings in respect of sums payable to the
assisted person, notwithstanding that the sums in question are payable to
the legal aid authority. The decision in a Debtor v The Law Society
is, however, in my judgment, authority for the proposition that the payee
party ... is not the beneficial owner of the debt created by the order. However,
in my judgment, it does not follow that from that proposition that the assisted
person has no locus standi to issue a statutory demand in respect of that
debt. ... in my judgment the position is as submitted by Miss Markham, namely,
that the Court order creates a liability, a judgment debt, in favour of ...
the assisted person and that position is not affected by the fact that the
payee party is an assisted person and that the Legal Aid Act and regulations
apply in relation to the payment of that debt."
- In my judgment the judgment of Lord Justice Templeman is no authority for
the proposition on which the District Judge based his order. In particular
it is no support for the contention that the LAB has any rights which derive
other than from the original costs order as is made plain by the terms of
regulation 91(1)(b). It seems to me that the effect of that regulation is
to work a statutory assignment to the LAB of the amount of any relevant costs
order taking effect at the time the order is made but which does not in any
way alter the nature of the assigned debt.
- I turn to consider whether there are other ways in which the District Judge's
decision can be upheld. I do so initially on the basis that the words "any
obligation" in Rule 12.3(2)(a) are to be given the widest possible meaning
including a debt arising from an order for costs in Family proceedings.
- In Russell v Russell Mr Justice Chadwick was considering a
case where a husband was ordered in Family proceedings to pay a lump sum to
his former wife together with part of her costs of the proceedings. On no
payment being made the former wife served on the husband a statutory demand
for the lump sum and the costs which had not at that time been taxed and so
finally determined. The husband was also liable to pay other costs in other
non Family proceedings. A bankruptcy petition having been presented and after
the hearing but before judgment was delivered, the amount of the Family Division
costs was quantified. Mr Justice Chadwick was dealing with an appeal from
a bankruptcy order which was then made on the petition. He dismissed the appeal.
In giving judgment he referred to the fact that by the time the bankruptcy
order came to be made "the debt which was the subject of the petition included
not only the liability to pay [the lump sum] but also the liability
to pay the taxed costs ordered to be paid... . Whatever challenge may be made
to the lumps sum order, there can be no doubt that the cost order was a provable
debt." At page 265 of the report, Mr Justice Chadwick having drawn attention
to the consequences of rule 12.3(2)(a), which prevent a wife from proving
in the bankruptcy of her husband in respect of a lump sum ordered to be paid
to her in matrimonial proceedings, as highlighted by the Vice Chancellor Sir
Donald Nichols in re Mordant 1996 1FLR p 334 ,continued:-
"Prima facie, therefore, there will be little purpose
in making a bankruptcy order on the petition of a wife who founds her petition
on an order to pay a lump sum made in Family proceedings. Little purpose,
because the trustee in bankruptcy will have no function to perform in relation
to the wife and will be in no position to distribute any part of the estate
to her. Indeed the effect of the order is to postpone the wife to the other
creditors whose debts can be proved in the bankruptcy.
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.
In the present case, however, there are, as it seem to
me, special circumstances. 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 the proceedings brought by the Church Commissioners
to which I have already referred. Thirdly this is a debtor who has failed
to pay the costs which have been taxed in the matrimonial proceedings and
which are the subject of the order made in the Birmingham Court on the 2nd
February 1996. In relation to those costs a proof of debt has been lodged
in the bankruptcy on behalf of the Legal Aid Board pursuant to regulation
91 of the Civil Legal Aid general regulations 1989. That regulation enables
the Board to take such proceedings in its own right as may be necessary to
enforce the order for costs made on the 9th November 1994 and 2nd
February 1996."
- This decision 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.
- It seems to me that there is a second ground upon which the District Judge's
decision can be supported namely that on a true construction of Insolvency
Rule 12.3(2)(a), orders for costs in family proceedings are provable in bankruptcy
so that it is not inappropriate to make a bankruptcy order on a petition based
on such an order for costs. This was clearly the view of Mr Justice Chadwick
in the Russell case although he gives no detailed reasons for
arriving at it and the report does not indicate that he received any such
argument on the point as has been addressed to me. This was noted by Sir John
Vinelott in giving his decision in re a Debtor 1999 BPIR p206.
In that case the Judge was dealing with a contention by an estranged wife,
with the benefit of an order for a lump sum and costs in Family proceedings
for ancillary relief, that an individual voluntary arrangement prejudiced
her because, whereas in a bankruptcy, by reason of section 281(5)(b) of the
1986 Act her claim would not be released on discharge, because she was a "creditor"
within section 383(1)(a) of that Act as holding a "bankruptcy debt"
within section 382(1) her claim would be released as a result of the IVA.
The dividend payable to creditors in the voluntary arrangement was minimal.
At page 215 of the report Sir John Vinelott, having referred to the Russell
case and the passage which I have quoted from Mr Justice Chadwick's
judgment is recorded as saying:-
"Although Chadwick J refers to the fact that a proof had
been lodged by the Legal Aid Board in respect of costs, I do not think that
this passage can be read, as was suggested by Mrs 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 dividend. Prima facie, such
a liability rises 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 any
argument as to whether the Legal Aid Board would be in a better position than
a wife in whose favour an order has been made."
- 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 sub section (3), subject to the
exceptions contained in the other sub sections of 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. Sub section (6) of section 30 provided, as
an exception to the general rule in sub section (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 payments orders were not.
The old law is summarised in a paragraph in the 19th edition of
Williams & Muir Hunter on Bankruptcy at page 168 where attention is drawn
to the decision in Curtis v Curtis 1969 1WLR p422 where, in
the Court of Appeal, "it was assumed that a lump sum payment order would
support a bankruptcy petition and would constitute a provable debt...".
In Woodley v Woodley 1994 1WLR p1167 at page 1178 Lord Justice
Balcombe commented on insolvency rule 12.3 in a case arising from facts entirely
different from those of the present case. He said this:-
"I cannot leave this case without saying something about
the effect of rule 12.3 of The Insolvency Rules 1986. Before those rules came
into force orders for periodical payments were not provable in bankruptcy
... whereas an order for a lump sum was provable ... that position is understandable.
However rule 12.3 (2)(a) by making any obligation arising under an order made
in Family proceedings i.e. including a lump sum order, not provable, has changed
that position. Whether it was the intention of those who drafted the Insolvency
Rules 1986 to bring about this change I know not. It may be that it was considered
that as a debt arising from an order made in Family proceedings is not released
upon discharge of the bankrupt (section 281(5)(b) of the Act of 1986) therefore
it should not be provable. However there is no necessary or logical link between
the provability of a debt and its release on discharge. In some cases there
is such a link, e.g. a fine imposed for an offence which is not provable under
rule 12.3(2)(a) and is not released on discharge under section 281(4). On
the other hand a liability to pay damages in respect of personal injuries
is a provable debt in bankruptcy, not being the subject of any exclusion under
rule 12.3, but is not released on discharge: see section 281(5). It seems,
therefore, that any link between provability and release on discharge is a
matter of policy and I can see 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 released on discharge."
- This criticism was echoed by the Vice Chancellor Sir Donald Nicholls in
re Mordant ibid.
- Under the old law all claims resulting from orders for costs whether made
in Family proceedings or otherwise, once determined by a taxation were provable
debts.
- 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 sub section. To do so it is necessary to give
the sub section 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 ibid and that I should
construe the section accordingly. There is, perhaps, some significance in
the fact that the sub rule 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 rule of construction, it is possible to argue that orders
for costs in Family proceedings should not therefore fall within the sub rule.
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. For these reasons and notwithstanding the helpful submissions
of Miss Shekerdemian, in my judgment this appeal must be dismissed.
