The Court of Appeal in Loson v Stack [2018] EWCA Civ 803 consider when instalment order might be granted in a judgment debtor’s favour, and its affect on pursuing a bankruptcy petition. 

Where a party establishes in ordinary civil proceedings a cause of action and on that an entitlement to a money remedy, or the Court imposes a costs order in his favour[1], the normal order is that the judgment debtor is ordered to pay the now judgment creditor the judgment sum, or costs sum, within 14 days of the date of the order. 

Where the judgment debtor then fails to pay the judgment creditor within the time provided, the judgment creditor becomes entitled to enforce the unsatisfied order by utilising the variety of enforcement processes made available by the law (i.e. charging orders, third party debt orders, attachment of earnings orders etc.). 

Where the case is in the County Court (but not the High Court[2]), a judgment debtor is entitled however to apply under CPR r.40.9A[3]for a variation in the date and/or rate of payment. CPR r.40.9A (8) reads:

‘The debtor may apply for an order that the money—

(a) if payable in one sum, be paid at a later date than that by which it is due or by instalments; or

(b) if already payable by instalments, be paid by smaller instalments.’

This provision and the law applying to applications for instalment orders under CPR r.40.9A (8) was recently considered by the Court of Appeal in Loson v Stack [2018] EWCA Civ 803 (‘Loson’). In particular, the Court of Appeal considered two issues:

(1) what affect an instalment order had on a judgment creditor’s ability to present and/or pursue a bankruptcy petition against the judgment debtor; and 

(2) how the balance ought to be struck between the competing interests of the judgment creditor and judgment debtor when considering whether an instalment order ought, or ought not, to be made, and on what terms.

Facts

On the basis of an unpaid parking ticket, Ms Loson’s vehicle was clamped and then removed to a pound by bailiffs. In response, Ms Loson issued a claim against the bailiffs, seeking an injunction to restrain them from disposing of her vehicle. Subsequently, Mr Loson’s claim was struck out and she was ordered to pay the defendant bailiff’s costs, subject to a detailed assessment, with an interim order for a payment on account of costs, in the sum of £5,000. When Ms Loson failed to pay this, the judgment creditor defendant bailiffs served a statutory demand upon her. Ms Loson applied to set the statutory demand aside, but this was dismissed. As a consequence, she was made subject to a further adverse costs order in the sum of £3,000 (so cumulatively, she was subject to £8,000 of adverse costs orders). Ms Loson did not satisfy either of these two costs orders. 

Ms Loson then applied under CPR r.40.9A for an order for a variation of the two costs orders, so as to allow her to pay the £8,000 by instalments of £50 per month. Details of her income and expenditure were provided, showing a surplus of income over expenditure of £67 per month. She had no savings but had loans and credit card debts in excess of £9,000. 

The judgment creditor bailiffs resisted the application, arguing that even without taking interest into account, it would require 160 months for the debt to be paid at the rate of £50 per month. 

Prior to the judgment debtor’s application being adjudicated upon, the judgment creditor bailiffs presented a bankruptcy petition against Ms Loson. 

When Ms Loson’s CPR r.40.9A application was heard before a DJ, Ms Loson argued for an instalment order of £50 per month on the basis that: (a) she was now a second year at college studyingfor a degree in Business Human Resources and that once she has graduated she would have improved career prospects which would enable her to pay off the judgment debts more quickly; and (b) bankruptcy was not a proportionate step for the creditors to take and was unlikely to put them into a better position than her offer. 

The DJ acceded to Ms Loson’s application and imposed the instalment order she sought. 

Issue 1: Instalment Order and Bankruptcy Petitions

The first issue the Court of Appeal considered when reviewing the DJ’s decision, was the DJ’s view as to the impact of any instalment order on the ability of the judgment creditor to pursue its bankruptcy petition. The DJ said:

‘…I do not think that the making of [an instalment order] would be an obstacle to the presentation of a bankruptcy petition. The issue would be whether the debtor has secured or compounded the debt to the reasonable satisfaction of the creditor, not to the satisfaction of the court.’

On the first appeal, HHJ Luba QC held that this view was wrong. In wrongly supposed that the instalment order would have no effect on a creditors ability to petition for the judgment debtor’s bankruptcy. On second appeal in the Court of Appeal, the Court of Appeal agreed with HHJ Luba QC. Patten LJ (with whom Floyd LJ agreed) said, at paragraph 11:

‘…the effect of the instalment order was that the petition debt of £5,418.80 and the further costs order of £3,000 were no longer due and payable.’

In other words, an instalment order varies when the judgment sum (or individual parts of it) become(s) due and payable. Since the bankruptcy petition had already been presented when the application for an instalment order was adjudicated upon, the imposition of the instalment order affected the judgment debts upon which the bankruptcy petition was founded. 

While the bankruptcy petition may have been well founded when presented[4], the Bankruptcy Court was bound to take account of the change of circumstances since presentation affected by the instalment order, and in particular the degree to which the judgment debts founding the petition were no longer already due and payable. When determining the bankruptcy petition and whether to exercise its discretion to make a bankruptcy order, the reduction in the amount of judgment debt due and payable would be taken into account. Patten LJ put it this way, at paragraph 11:

‘In these circumstances, although the Court has jurisdiction to make a bankruptcy order based on the position at the date when the petition was presented, it is bound in the exercise of its discretion to take into account the change of circumstances created by the instalment order and there must be a considerable doubt as to whether it would make a bankruptcy order on the existing petition. Rule 10.24 of the Insolvency Rules 2016 provides:

“(1) 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.

(2) 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."

The same must obviously apply when the judgement debt is no longer payable and any arrears are below the current bankruptcy level.’

Issue 2: Instalment Orders and Balancing Competing Interests  

The second issue the Court of Appeal reviewed was the circumstances in which the Court ought to accede to a CPR r.40.9A application for an instalment order. 

One early point to note is that it should be assumed that the instalment regime proposed will apply until the judgment debt is fully satisfied, varied only potentially by a subsequent order[5](preceded necessarily by a further round of judicial scrutiny). Patten LJ said, at paragraph 21, that the Court should consider:

‘…making of an instalment order on the assumption that it was likely to provide the regime of recovering payment of the judgment debts unless and until varied by a further order.’  

As will be apparent, the imposition of an instalment order varies when and at what rate the judgment debt becomes due and payable. What the judgment debtor gains in additional time to pay, the judgment creditor loses in being forced to wait for payment to become due. This conflict of interests, the interests of the judgment creditor against the interests of the judgment debtor conflict, requires the Court to undertake a balancing exercise between the two sets of interests, to determine which set of interests ought to prevail – that is, who’s voice ought to prevail in the circumstances? The balance is, as Patten LJ said at paragraph 22, between:

‘…the desire of the judgment debtor to extend the time for payment and so avoid enforcement of the judgment debt against the position and interests of the judgment creditors who had an order … in their favour…’

Patten LJ set out the following guidance, at paragraph 23:

‘In a case such as this where the debtor cannot really pay anything, the correct course in my view is for the Court not to interfere with the judgment creditors' right to seek enforcement of the judgment by whatever means are available to them and which they choose to adopt. Although the power conferred on the Court by CPR 40.9A is not limited in terms or by authority to a material change of circumstances and CPR 40.9A(14) refers to the Court making such order as it thinks fit, the power does have to be exercised in a way which properly respects the rights of the judgment creditors which have been vindicated by the orders which the Court has made in their favour. I would not myself describe the circumstances in which the debtor can successfully apply for an instalment order as exceptional. Nor would I, in terms, endorse the view that the jurisdiction can only be exercised where the debtor is solvent. Any case in which the debtor seeks time to pay is, in one sense, an instance of insolvency at least insofar as the debtor is unable to pay his or her debts as they fall due. But I do accept that for the debtor to obtain the benefit of an instalment order, whether originally under CPR 40.11 or by way of variation under CPR 40.9A, the Court must be presented with a realistic repayment schedule backed up by evidence that the creditor can be expected to receive the amount of principal and any interest within a reasonable period of time. To that extent, the interests of the creditor will be paramount. Quite where the balance should be struck in terms of reasonable time will depend on the facts of each case. I accept that in a purely commercial context (such as the situation in Gulf International Bank) there may be less room for allowing time for payment particularly where the creditor has its own cash-flow requirements to consider. Equally there will be other cases where a limited period of time will enable the debt to be paid in full without any significant prejudice to the creditor particularly where interest is payable in the meantime.’

Consideration of CPR r.40.11 Case Law

In reaching this view, the Court of Appeal in Loson was influenced by the approach adopted in the High Court cases of Amsalem v Raivid [2008] EWHC 3226 (TCC) (‘Amsalem’) and Gulf International Bank v Al Ittefaq Steel Products Co [2010] EWHC 2601 (QB) (‘Al Ittefaq’), on the application of CPR r.40.11, and ‘…the considerations which the judge should take into account when exercising what is, at least on its face, a broadly expressed power.’ (paragraph 18). While the Court of Appeal in Loson stated, at paragraph 23, that Amsalem and Al Ittefaq were ‘…not, of course, directly applicable to a variation application under CPR 40.9A.’ (paragraph 23), the Court of Appeal in Loson went on to state that‘… the approach which the judges there took to a postponement of the usual date for payment has an obvious relevance to the issue which we have to consider.’

In Amsalem, the defendants were made subject to an interim costs order of £100,000, but they contended that they could only afford to pay a nominal sum per month. Akenhead J’s approach was to hold that the normal rule under CPR 40.11 was payment of the whole sum within 14 days, and that any extended time for payment required to be justified.

As summarized by Patten LJ at paragraph 18, Akenhead J’s view was that the rules:

‘…left it to the judgment creditor to decide how best to enforce a judgment in his favour and it would only be in an exceptional case that the court should interfere with those rights by postponing the debtor's obligation to pay. In a case where there was no realistic prospect of any substantial payment ever being made, the court should, he held, decline to extend the time for payment and should leave the judgment creditor free to enforce the judgment as he thought fit.’

Field J in Al Ittefaq adopted a similar approach. In Al Ittefaq, the defendants sought time to pay under CPR 14.9 and 14.10 following a judgment on admissions. At paragraphs 21 to 24 of his luminous judgment, Field J said:

‘When exercising the discretion under CPR 14.10, this court is bound to have regard to the interests of the relevant parties. These will inevitably include the interests of the judgment creditor whose claim will be vindicated by a judgment and the interests of the judgment debtor who invariably will be a business entity, usually a corporation. The court will also bear in mind that where enforcement of the judgment can take place within the jurisdiction, the judgment creditor will be free to choose from the available methods of enforcement, including a petition to secure the bankruptcy or the winding-up of the debtor, as the case may be, as to which there is a statutory right providing that the preconditions of the making of such an order are met.

In my opinion, Akenhead J's observation that inability to pay will usually not justify a pre-execution extension of time, with an insolvent debtor having to take the usual consequences of his or its insolvency, applies a fortiori where the parties are business entities.

Where the debtor is in a parlous financial situation, the interests of other creditors of the debtor and possibly those of the debtor's workforce and suppliers will be engaged.

But since this country's bankruptcy and winding-up regimes are designed to take account of these interests and are supervised by specialist courts, these third party interests will, in my opinion, only very rarely, if at all, be a justification for an extension of time under CPR 14.10 or 40.11 where the debtor is liable to be wound up or made bankrupt within the jurisdiction. This approach will also likely be adopted when a debtor is liable to be wound up or made insolvent under a foreign insolvency regime, the protection of third party interests being a matter for that regime rather than this court.

It follows that, in the ordinary way, this court will only exceptionally extend time under CPR 14.10 and 40.11 and then only where the judgment debtor is solvent and for relatively short periods of time and after which the whole judgment debt will become payable. Further, in reaching its decision, the court will give careful consideration as to whether some provision in respect of interest ought to be made in light of the fact that the judgment debtor will be being kept out of his money for the period of the extension.’

Decision on Loson Facts 

Returning to the facts in Loson, the Court of Appeal held that HHJ Luba QC had been right to set aside the DJ’s instalment order. This was because: (1) the DJ’s instalment order of £50 per month did not even keep pace with statutory interest on the principal. The principal would never be paid off and arrears of statutory interest would accrue; and (2) the judgment debtor Ms Loson had no ability to pay an increased instalment sum, nor, on the evidence, any realistic prospect of discharging in the reasonably near future or at all, any significant part of the judgment debt. For these reasons, and Ms Loson’s precarious financial position (in reality, she was on the verge of bankruptcy), no instalment order ought to have been made. Her appeal was dismissed. 

Conclusion

The decision in Loson v Stack [2018] EWCA Civ 803 provides a useful exposition of the law governing CPR r.40.9A applications for instalment orders. Where a judgment debtor applies for an instalment order under CPR r.40.9A, the Court will have balance the competing interests of the judgment creditor as against those of the judgment debtor. The Court will be conscious that the judgment creditor has had his rights vindicated by the judgment, and that any instalment order will postpone when the judgment sum (or parts of the judgment sum) become due and payable, and consequentially delay when the judgment creditor’s might utilize the various enforce mechanisms offered by the law.

Moreover, the Court will be mindful that Parliament has already struck a complex balance between the competing interests of creditors, and debtors unable to pay their debts as they fall due, in and through the various specialist insolvency regimes. Granting generous instalment orders too readily, risks upsetting the balance Parliament has struck in those regimes. Conversely though, instalment orders are not confined only to ‘exceptional’ circumstances, nor to where a judgment debtor is solvent (that is, balance sheet solvent; since an inability to pay as and when debts fall due is itself cash flow insolvency). However any judgment debtor seeking an instalment order must present the Court with a ‘…realistic repayment schedule backed up by evidence that the creditor can be expected to receive the amount of principal and any interest within a reasonable period of time.’ A Court might grant an instalment order where ‘…a limited period of time will enable the debt to be paid in full without any significant prejudice to the creditor particularly where interest is payable in the meantime.’ Short of this though, and depending on the facts, the Court might take the view that the judgment creditor’s interests are paramount and should prevail, and so dismiss the CPR r.40.9A application. A further influencing factor affecting this balancing exercise, is the fact that less indulgence is likely to be shown to judgment debtors holding judgment debts generated within a more commercial context, especially where the judgment creditor may have cash flow issues. Where an instalment order is made, interest ought to be awarded to the judgment creditor as compensation for being kept out of his money during the extended payment period.