Where a bankruptcy petition is founded upon a judgment debt (or a sum ordered to be paid), and the proper procedure for bring the petition has been completed, the judgement debtor/respondent to the petition will have only a selection of grounds upon which he/she can resist the Bankruptcy Court adjudicating the judgment debtor as bankrupt.

This article will consider one ground for resisting an immediate bankruptcy order on the petition, namely, that the judgment debt (or sum ordered) founding the petition is subject to an appeal which is pending. Readers should note that: (1) this article is part of a series of free-standing articles available on bankruptcy hearings; (2) the governing Insolvency Rules changed on 6th April 2017. Prior to that date, the Insolvency Rules 1986 ('1986 Rules') applied, since then, the Insolvency Rules 2016 (SI 2016/1024) have appled ('2016 Rules'); most authorities were decided under the 1986 Rules rather than the 2016 Rules and so references to the 1986 Rules are necessary; readers will need to bear this in mind when considering older authorities. 

The Governing Law

The Insolvency Act and the Insolvency Rules give the Court the power to adjourn or stay an application for a bankruptcy order. Section 266(3) of the Insolvency Act 1986 provides:

‘The Court has a general power if it appears to it appropriate to do so, on the grounds that there has been a contravention of the rules or for any other reason, to dismiss a bankruptcy petition or stay proceedings on such a petition, and where it stays proceedings on a petition, it may do so on such terms and conditions as it thinks fit.’

As Arden J in Westminster City Council v Parkin [2001] BPIR 1156 ('Parkin') said at 1157B, this ‘…gives the court an unusual but general power where there has been a contravention of the Rules or ‘for any reason’ to dismiss a petition or to stay proceedings on a petition.’ Peter Smith J in Re Micklethwait [2003] BPIR 101, at paragraph 6 described the power set out in the section as ‘quite unfettered’, and at paragraph 9 said ‘…the power can be exercised if the making of a bankruptcy order might cause an injustice.’

1986 Rules, r.6.25(2) provided:

‘If the petition is brought in respect of a judgment debt, or a sum ordered by any court to be paid, the court may stay or dismiss the petition on the ground that an appeal is pending from the judgment or order, or that execution of the judgment has been stayed.’

1986 Rules 6.25(2) was replaced by r.10.24(2) of the 2016 Rules, which reads:

'If the petition is brought in relation to a judgment debt, or a sum ordered by any court to be paid, the court may stay or dismiss the petition on the ground that an appeal is pending from the judgment or order, or that execution of the judgment has been stayed.'

In addition, r.6.29 of the 1986 Rules, entitled ‘Adjournment’, provided ‘(1) If the court adjourns the hearing of the petition, the following applies’ before noting certain procedural requirements, thereby envisaging that a bankruptcy petition may be adjourned. 1986 Rules, r.6.29 was replaced by r.10.23 of the 2016 Rules. The power to adjourn is also to be found in CPR r.3.1(2)(b) (see Edginton v Sekhon [2015] 1 WLR 4435 at paragraphs 14 and 15).

Distinction between Pending Appeal and Pending Permission to Appeal

The leading cases are Rehman v Boardman [2004] BPIR 820 ('Rehman') and Barker v Baxendale-Walker [2018] EWHC 1681 ('Barker').

In the Rehman case, the respondent Mr Rehman faced a petition based on a costs order obtained against him after he was found to have brought a fraudulent claim against an insurance company. At the first hearing of the petition, Mr Rehman sought an adjournment of the petition, on the ground that he had filed an appellant’s notice to the Court of Appeal against the judgment at trial. The appellant’s notice was out of time (by 22 months) and required permission to appeal, neither of which had been dealt with by the Court of Appeal.

The registrar refused to adjourn, and made a bankruptcy order against Mr Rehman. On appeal against the registrar’s decision, Lewison J held that Mr Rehman had not had a pending appeal; he said at paragraph 19:

‘all that has happened so far is that Mr Rehman has applied for permission to appeal out of time and for permission to appeal. Until such time as the Court of Appeal decides to extend time for the application and to grant permission to appeal there cannot, in my judgment, be said to be any appeal pending.’

In support of his position, Lewison J referred to Shotley Point Marina (1986) Ltd v Spalding [1997] 1 EGLR 233, CA. In that case, the Court of Appeal was asked to construe s.64 of the Landlord and Tenant Act 1954 and a mechanism for calculating when proceedings were finally disposed of (s.64 provided that the lease would expire 3 months after final disposal). The final disposal date would be a later date if there had been ‘any proceedings on …an appeal’. The Court of Appeal therefore considered whether what occurred satisfied this test. On the facts of Shotley, no notice of appeal had been lodged within time (because of irregularities); but a later, out of time notice of appeal had been lodged, seeking with it, an extension of time. In due course, the extension of time application was refused. The Court of Appeal upheld the decision of the Court below, that there had been no proceedings on appeal and that the appeal had never been more than inchoate. Giving the main judgment, Brown P said at 234M:

‘In this case an appeal was never in fact commenced. The Court of Appeal was never seized of any appeal. That situation came about because of procedural irregularities which required the would-be appellant to obtain leave to institute and pursue an appeal…That subsequent involved a delay of some two months before the application for an extension of time was in fact made. Because of those deficiencies the appeal never commenced and, in the result, at the hearing in January 1989 this court upheld the submissions of the would-be respondent and refused leave to appeal. Accordingly in my judgment, there never was an appeal in this case. The proceedings in relation to the application for leave to extend time amounted to no more than an attempt to commence an appeal.’ 

Ralph Gibson J said in Shotley at 235A:

‘…if an appeal is not commenced in due time, there is no appeal in being in which there can be any proceedings for the purposes of section 64(2) unless or until extension of time for appealing is granted.’

In Barker, Insolvency and Companies Court Judge Briggs considered Rehman and agreed with Lewison J's distinction between pending appeals and (mere) pending permission to appeal applications. In doing so, Judge Briggs observed that: (1) a judgment debtor has the option to apply for a stay from the ordinary civil court that made the adverse judgment; and (2) 2016 Rules r.10.24(1) provides a opportunity for the Bankruptcy Court to take into account any permission to appeal application, given r.10.24(1) provides a discretion:

'On the hearing of the petition, the court may make a bankruptcy order if satisfied that the statements in the petition are true, and that the debt on which it is founded has not been paid, or secured or compounded') when deciding whether to make the bankruptcy order.' [author's bold]

Judge Briggs said, at paragraphs 38 to 39:

'In my judgment the language of rule 10.24(2) is focussed on providing the court with a discretion to stay if an appeal is pending. An ordinary reading of the language favours the meaning “to await”. Awaiting an appeal not awaiting permission to appeal. The language used in rule 10.24(2) refers to the existence of an appeal. An application for permission is not an appeal and as such no appeal is waiting to be heard.

I am persuaded by the distinction drawn by Lewison J (persuaded, as the High Court Judge had only one party represented at the hearing) and add that, in my judgment the Rules Committee would have in mind, when drafting the Rules, that the Court is exercising the jurisdiction provided by rule 10.24 at a final hearing. It would also have in mind that at a final hearing the Court has a discretion to make a bankruptcy order if satisfied that the statements in the petition are true and the debt upon which the petition is founded has not been paid secured or compounded for. Accordingly rule 10.24(1) and (2) provide quite separate powers aimed at different outcomes. In respect of sub rule (2) the Insolvency Rules Committee have had many opportunities to alter, vary or add to the words of sub rule (2) since 1986 and have not done so. I infer from this that the word “pending” reflects public policy and is deliberately limited to its meaning. There is no requirement to strain the language to include the words “or if there is an outstanding application for permission to appeal” in sub rule (2) when an outstanding application for permission can be one of a number of factors that the court can weigh when exercising its discretion to make a bankruptcy order under sub rule (1). In my judgment, there is no jurisdiction to stay the proceedings or dismiss under sub rule (2) unless there is a pending appeal where permission has been given or no permission to appeal is required (an automatic right to appeal).'

Returning to Rehman, notwithstanding Lewison J's finding that only pending appeals engaged r.10.24(2) (then r.6.25(2)) and the facts of Rehman being insufficient to engage r.10.24(2), Lewison J decided to continue to address the facts in Rehman as if there had been a pending appeal (i.e the appeal notice was lodged in time and permission had been granted). Making obiter observations, Lewison J referred to two authorities that ‘deal with the test which the court should apply in circumstances where the debtor wishes to challenge a judgment debt.’

The first is Re a Debtor (No.799 of 1994) ex parte Cobbs Property Services Ltd [1995] 1 WLR 467, [1996] BPIR 575, where Harman J said:

‘…the test advanced by Mr Patchett-Joyce which in my judgment is the correct way to look at the matter for the purpose of the registrar considering whether to exercise the power which he has to adjudicate upon the bankruptcy petition or whether to adjourn that petition pending an appeal, must turn upon the registrar’s consideration as to whether the appeal was serious and whether the appeal was being taken seriously. Mr Patchett-Joyce’s words are, in my opinion, entirely apt. Serious appeals are real appeals, to use Cotton LJ’s phrase, and could be called bona fide appeals; that is, appeals properly worth considering and raising a point of law or other relevant appellate ground of substance.’

The reference to Cotton LJ is to his decision in Ex parte Yeatman (1880) 16 Ch.D 283, where Cotton LJ said at 289 (about the old Bankruptcy Rules 1870):

'But a judgment had been obtained establishing the validity of the petitioning creditors' debt, and, in my opinion, when that is so, and the judgment has not been reversed, the registrar has power to proceed with the hearing of the petition, if in the exercise of his judicial discretion he thinks fit to do so. But if he is satisfied that a real appeal from the judgment is pending, he ought, in my opinion, as was done in the present case, to adjourn the hearing of the petition until after the appeal shall have been disposed of.'

Hoffman LJ summarised the practice as follows in Royal Bank of Scotland v Farley [1996] BPIR, 638, at 641:

'The bankruptcy procedure has ample safeguards built into it for enabling the bankrupt to challenge the existence of the debt. He may, as I say, do so on an application to set aside the statutory demand. If he has a bona fide appeal or application to set aside the judgment in existence at the time when the petition comes on to be heard, it is the invariable practice to adjourn the hearing of the petition until that application or appeal has been decided.’

In Yang v Official Receiver [2013] EWHC 3577 (Ch), [2014] BPIR 826 ('Yang'), HHJ Hodge QC, sitting as a judge of the High Court at first instance (appeal dismissed in Court of Appeal [2018] 2 W.L.R. 307) referred to guidance given by Hoffmann LJ in Royal Bank of Scotland v Farley [1996] BPIR 638 and took the view that that was also the appropriate way of dealing with a challenge on the hearing of a bankruptcy petition to a liability order in respect of unpaid council tax. "If," HHJ Hodge said, 'there is pending an appeal to the valuation tribunal, then the debtor can ask for the hearing of the petition to be adjourned pending the final determination of that appeal.'

In Okon v London Borough of Lewisham [2016] EWHC 864 (Ch), [2016] BPIR 958 ('Okon'), Mr Robin Hollington QC, sitting as a deputy High Court judge said:

'In my judgment, the issue before the Judge at the hearing on 9 June 2015 was whether the Applicant's intended appeal to the valuation tribunal was bona fide and substantial and whether in the exercise of her discretion she ought to adjourn the bankruptcy petition in order to await the outcome of that appeal.'

In Choudhry v Luton BC [2017] EWHC 960 (Ch), Newey J approved of the approach in Okon and Yang (paragraphs 9 onwards) and added that delay in raising an argument can be taken into account (paragraphs 8 and 18, based on Sekhon v Edginton [2015] EWCA Civ 816, [2015] 1 WLR 4435)

The need for the appeal to be pursued seriously (as well as having sufficient substantive merits), was explained further by Harman J in Cobbs Property, at 470:

‘The second half of Mr Patchett-Joyce's test, was the appeal being taken seriously?, is also appropriate…It is an appropriate test because, even if there be a point of substance on appeal, if the debtor seeking the adjournment of the bankruptcy hearing because of the appeal is not prosecuting his appeal with proper diligence, that is, taking it seriously, it can be said that he does not seem to think much of his appeal, and whatever the court may think of it, if the debtor is not prosecuting it seriously, the court should not allow the bankruptcy petition to be affected by it.’

In Rehman, analysing Mr Rehman’s appellant’s notice as if a test of ‘reasonable prospects of success’ applied, Lewison J in Rehman took the view that the registrar has been plainly right to refuse the adjournment and to have made the bankruptcy order. In Lewison J's view, the Court of Appeal were ‘very unlikely’ to grant an extension of time because Mr Rehman could offer no explanation for the ‘very lengthy delay’ in making the application for permission to appeal. Even if he surmounted that hurdle, Lewison J held that the Court of Appeal would not grant permission to appeal (and one can interpose here, logically, allow the appeal). The challenge raised no point of law, but centred on the 1st instance judge’s decision as to the credibility of witnesses. There was ‘no realistic prospect of the Court of Appeal interfering [the first instance Judge’s] assessment of which witnesses she believed and which she did not.’

Rolled Up Hearing for Permission to Appeal and Appeal

It is worth noting how the law applies when the permission to appeal and appeal hearings are rolled up together, as explained by Judge Briggs in Barker. In Parkin, Arden J at 1158 said:

‘…the question arises what the bankruptcy court should do, if it is faced with a judgment debt and, on the other hand, …the judgment debtor is proposing to appeal?’

Arden J said the appropriate approach was for the Court to ‘consider whether or not the appeal has a reasonable prospect of success.’

After quoting Parkin, Lewison J in Rehman said, at paragraph 19:

‘It is worth noticing that Arden J was concerned with an application for leave to appeal rather than a pending appeal, so that it may well be appropriate to approach the question of permission to appeal in the same way as a pending appeal.’

In Barker, Judge Briggs clarified what Lewison J's was saying here. Lewison J's comment that Arden J's approach 'may well be appropriate', was specific to the fact that, in Parkin, the substantive appeal and permission to appeal application were listed to be heard together. Judge Briggs said, at paragraph 34:

'Mr Justice Lewison was taken to Parkin and noted that Arden J (who only had one party appearing before her) was concerned with an application for permission to appeal “rather than a pending appeal”. Arden J had not been addressed on or taken to r.6.25(2) but Lewison J thought that her approach “may well be appropriate” as the substantive appeal and permission application were to be heard together. The permission application and appeal effectively became one. In my view Lewison J retained the distinction between a pending appeal and an application for permission.'

In effect therefore, on this understanding of Parkin and Rehman, Parkin deals with, and is confined to, where the issues of permission to appeal and the substative appeal itself, are 'rolled up'. On this narrow view of Parkin, it is not in conflict with Rehman. Where there is a rolled up permission to appeal and substantive appeal hearing listed together, then Parkin will apply (as construed by Rehman and Barker) and the Bankruptcy Court simply apply the cumulative tests of: (a) ‘reasonable prospects of success’ (or is ‘real’ or ‘serious’), and (b) persecuted ‘seriously’, apply.  

Conclusion

In conclusion, the law on 1986 Rules r. 6.25(2)/now 2016 Rules r.10.24 is that r.10.24(2) is only engaged when an appeal is pending (or where no permission is required at all). Merely having lodged an appellant's notice in time (or out of time but having obtained an extension of time) will be insufficient. This is the ratio of Barker. Even when r.10.24(2) is engaged, the Court will ask itself where the appeal satisfies the cumulative tests of: (a) having ‘reasonable prospects of success’ (or is ‘real’ or ‘serious’), and (b) being persecuted ‘seriously’. Where the permission to appeal and substantive appeal hearings are listed together, the Bankruptcy Court will simply apply this latter cumulative (a) and (b) test. Where this cumulative test is satisfied, the Bankruptcy Court should adjourn the petition until the outcome of the appeal is known. As stated in Everard v The Society of Lloyd’s [2003] EWHC 1890 (Ch), at paragraph 61, ‘Cases such as ex parte Cobbs Property factor in the reality that sometimes judgments are reversed on appeal.’  Where r.10.24(2) is not available, debtors can fall back on the (more general) discretion the Bankruptcy Court has within r.10.24(1) (Barker, paragraph 39) to argue for an adjournment.

SIMON HILL © 2018

BARRISTER

33 BEDFORD ROW

NOTICE: This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.