South Square has very highly regarded personal insolvency barristers. Members of Chambers have been involved with many high profile cases, they include Kevin Maxwell, Jonathan Aitken (acting for Guardian Newspapers Plc), Asil Nadir, George Best, Jack Dunnet (former MP and President of the Football League) and Kerry Katona (celebrity).
Members of Chambers often appear in the Bankruptcy Division of the High Court and County Courts across the country, acting for both Trustees in Bankruptcy and Individuals.
Members of Chambers that have specialist expertise in this area include:
Christopher Brougham QC
John Briggs
Felicity Toube
Christopher Brougham QC and John Briggs are Joint Senior Author’s of Muir Hunter on Personal Insolvency (Sweet & Maxwell, 1987 to date). It is described as the definitive reference work on personal insolvency. Also receiving plaudits from the leading UK legal directories, “Sources hail John Briggs as one of the best barristers in the country for complex personal bankruptcies. He has helped numerous clients avoid formal court proceedings”. Chambers UK 2011.
Christopher Brougham QC has recently written an article for South Square Digest, May 2010 edition reflecting on Section 284 of the Insolvency Act 1986.
Section 284: mishmash and mismatch?
Part IX of the IA 1986, which (via the IA 1985) replaced the Bankruptcy Act 1914, constituted the first major reform of bankruptcy law in over a century. Among the major changes made was the abolition of “acts of bankruptcy” which, if any of them were committed by a debtor, gave grounds for the presentation of a bankruptcy petition against him. Under the Bankruptcy Acts, a bankruptcy was deemed to have relation back to, and to commence at, the time of the commission of the relevant act of bankruptcy. Other provisions of the Bankruptcy Acts mitigated the potentially harsh consequences of this retrospective commencement. Under the Bankruptcy Act 1914, s.45:“Subject to the foregoing provisions of this Act … with respect to the avoidance of certain settlements … and preferences, nothing in this Act shall invalidate, in the case of a bankruptcy—
(a) Any payment by the bankrupt to any of his creditors;
(b) [Irrelevant]
(c) Any conveyance or assignment by the bankrupt for valuable consideration;
(d) Any contract, dealing, or transaction by or with the bankrupt for valuable consideration;
Provided that both the following conditions are complied with, namely—
(i) that the payment, … con veyance, assignment, contract, dealing or transaction, as the case may be, takes place before the date of the receiving order; and
(ii) that the person … to … or with whom the payment, … conveyance, assignment, contract, dealing, or transaction was made, executed, or entered into, has not at the time of the payment, … conveyance, assignment, contract, dealing, or transaction … notice of any available act of bankruptcy committed by the bankrupt before that time.”
References in this section to provisions with respect to the avoidance of certain settlements and preferences were references to ss.42 (Avoidance of certain settlements) and 44 (Avoidance of preference in certain cases) of the 1914 Act, the predecessors of ss.339 (Transactions at an undervalue) and 340 (Preferences) of the IA 1986.
A bankruptcy under the 1986 Act commences with the day the bankruptcy order is made (IA 1986, s.278(a)). Unlike the Bankruptcy Acts, the 1986 Act contains no provision deeming the bankruptcy to have commenced at an earlier date. However, under s.284: “(1) Where a person is adjudged bankrupt, any disposition of property made by that person in the period to which this section applies is void except to the extent that it is or was made with the consent of the court, or is or was subsequently ratified by the court.
(2) Subsection (1) applies to a payment (whether in cash or otherwise) as it applies to a disposition of property …
(3) This section applies to the period beginning with the day of presentation of the petition for the bankruptcy order and ending with the vesting … of the bankrupt’s estate in a trustee.
(4) The preceding provisions of this section do not give a remedy against any person—
(a) in respect of any property or payment which he received before the commencement of the bankruptcy in good faith, for value and without notice that the petition had been presented …”
This section was derived partly from s.227 of the Companies Act 1948 (now IA 1986, s.127) and partly from s.45 of the 1914 Act. It appears to have been drafted without regard to the provisions and language of IA 1986, ss.339 and 340.
Section 339 enables the court to set aside transactions at an undervalue entered into by an individual who is subsequently adjudged bankrupt. Subsection 339(3) defines a transaction at an undervalue, “for the purposes of this section”, as either a gift or transaction providing for the prospective bankrupt to receive no consideration (s.339(3)(a)), or a transaction in consideration of marriage or the formation of a civil partnership (s.339(3)(b)), or a transaction for a consideration the value of which in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by the prospective bankrupt (s.339(3)(c)). Section 340 enables the court to set aside payments to creditors made by an individual who is subsequently adjudged bankrupt. The court cannot make an order under s.340 unless the debtor was influenced in deciding to make the payment by a desire to put the creditor into a position which, in the event of the debtor’s bankruptcy, would be better than the position he would be in if the payment were not made (ss.340(4), 340(3)(b)). A transaction can only fall within the ambit of s.339, or a payment within the ambit of s.340, if it was entered into, or made, within a stipulated period “ending with the day of the presentation of the bankruptcy petition” leading to the relevant bankruptcy order (ss.341(1)(a), 341(1)(b)).
So, what is the position where, after a petition has been presented against him and before the bankruptcy order has been made, the prospective bankrupt makes a disposition of his property at an undervalue as described in IA 1986, ss.339(3)(c), or pays one of his creditors, influenced (unknown to the creditor) by a desire such as is described in ss.340(4) and 340(3)(b), the disponee or creditor having no notice that the petition has been presented and being unaware of the prospective bankrupt’s insolvency? There is as yet no reported case in which either of these questions has been addressed. Is the disposition “for value” within the meaning of s.284(4)(a), and is the state of mind of the prospective bankrupt at the time of the payment to his creditor irrelevant? For if so, it seems that both the disposition and the payment would be valid as against the prospective bankrupt’s trustee, notwithstanding that had either been made immediately before the presentation of the petition, it would undoubtedly have been set aside under s.339 or 340. This would be a startling result and one that Parliament could not conceivably have intended. The trustee might seek an order under s.423 (Transactions defrauding creditors) setting aside the disposition or payment, but he would have to satisfy the court that the disposition or payment was made for one of the purposes set out in s.423(3), which would by no means always be the case, and could be particularly difficult to prove in the case of a payment by the prospective bankrupt to one of his creditors.
The 1986 Act contains no definition of “value”, just as the 1914 Act contained no definition of “valuable consideration”. Section 42 of the 1914 Act (the predecessor of IA 1986, s.339) excluded from its ambit any settlement made in favour of a purchaser in good faith and for valuable consideration. Under the general law a fraction of the market value of any property acquired, or even £1, could constitute “valuable consideration” for it, so in order to make s.42 effective against the mischief at which it was directed, these words in the section were given a purposive construction. “The consideration could constitute “valuable consideration” for it, so in order to make s.42 effective against the mischief at which it was directed, these words in the section were given a purposive construction. “The consideration given … need not be equal in value to the consideration given by the debtor, though it must be valuable consideration in the commercial sense” (Re Abbott (A Bankrupt) [1983] Ch 45, DC, at 54G). This interpretation was not necessarily applied to the same words in s.45 (see Re Keever (A Bankrupt) [1967] Ch 182 at 191E-192D).
Parliament could easily have inserted words such as “(not being an undervalue within the meaning of subsection 339(3))” after the word “value” in s.45(4)(a) but did not do so. There can be no doubt that a court, in considering the meaning of “value”, would strive to ensure the coherence of the bankruptcy regime. Whether the court would be prepared to go so far as to assume, within the subsection, an implied reference to s.339(3) remains to be seen. The alternative would be to give “value” the same interpretation as was given to “valuable consideration” in s.42 (but not in s.45) of the 1914 Act. Whether this would be a satisfactory solution depends upon whether a disposition of property for valuable consideration in the commercial sense is necessarily the same thing as a disposition of property for a consideration, the value of which is not significantly less than the value of the property.
An even more difficult problem for a court wishing to ensure the coherence of the bankruptcy regime is the problem of the post-petition payment to an innocent creditor by a debtor influenced by a desire such as is described in ss.340(4) and 340(3)(b). The discharge of the debt would be the “value” given for the payment and the creditor would have received the payment in good faith. As is the position under IA 1986, s.340, only pre-petition payments to creditors could fall within the ambit of the so-called “fraudulent preference” sections of the Bankruptcy Acts. In Re Badham (1893) 10 Mor 252, Vaughan Williams J solved the problem by holding that deliberate preferences were contrary to the policy of the bankruptcy laws and, in effect, a common law fraud to which the court was not bound to give the benefit of the protective provisions contained in s.49 of the BA 1883 (reenacted as s.45 of the 1914 Act). However, the correctness of this decision was subsequently doubted by Bigham J in Re Dunkley & Son [1905] 2 KB 683, and in Re Seymour [1937] Ch 668 Clauson J declined to follow it: “the words of [s.45] are plain and unambiguous, and it is my duty to give them the meaning which they seem to me, on the face of them, to bear. Accordingly … the protective section covers the case” (ibid. at 674). It will be interesting to see which of these two approaches is taken by a court considering the problem under s.284.
In conclusion, it is surprising and unfortunate, particularly in the light of the decision in Re Seymour (above), that Parliament chose, in enacting s.284, simply to cobble together s.227 of the Companies Act 1948 and s.45 of the 1914 Act, instead of employing language that matched the language of IA 1986, ss.339 and 340. It has thereby created potentially large loopholes in the law and endangered the coherence of the bankruptcy regime, which only the ingenuity of the bankruptcy judges can now ensure.