Arif v Zar & Anor [2012] EWCA Civ 986

Case No B6/2012/0861[2012] EWCA Civ 986
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
FAMILY DIVISION
AND ON APPEAL FROM THE HIGH COURT OF JUSTICE
IN BANKRUPTCY
MOSTYN J.
FD 11 D 03106
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 18 th July 2012
Before
LORD JUSTICE THORPELORD JUSTICE RIMERLORD JUSTICE PATTEN
Between
SOFIA ARIFPetitionerARIF ANWAR ZARFirst RespondentRAZIZ REHANSecond Respondent
Valentine Le Grice QC (instructed by Zak Solicitors) for First Respondent/Appellant, Arif Anwar ZarPeter Shaw (instructed by Speechly Bircham LLP) for David Thurgood and Richard Hicken, the trustees-in-bankruptcy of Arif Anwar ZarJames Ewins (instructed by Hughes Fowler Carruthers Ltd) for Petitioner/Respondent, Sofia ArifHearing Hearing date : 3 rd July 2012
JudgmentLord Justice Patten :
[1]This is an application for permission to appeal by Mr Arif Anwar Zar (“the Husband”) and separately by his trustees-in-bankruptcy, Mr David Thurgood and Mr Richard Hicken of Grant Thornton UK LLP (“the Trustees”), against an order of Mostyn J dated 23rd March 2012. The judge of his own motion varied an earlier order of Registrar Derrett dated 16th March 2012 by which she directed that an application by Mrs Sofia Arif (“the Wife”) for the annulment of the Husband’s bankruptcy should be adjourned on an expedited basis to be heard by a judge of the Chancery Division. Mostyn J varied the Registrar’s order so as to transfer the annulment application to the Family Division with a direction that it be heard in December together with the Wife’s application for ancillary relief in her divorce proceedings.[2]The judge, as part of his order, vacated the hearing listed in the Chancery Division for half a day over 18th and 19th April and ordered the Husband and the Trustees to give disclosure of all documents and information in their possession relating to the Husband’s income, assets and liabilities including (in the case of the Trustees) the notes of any interviews conducted by the Trustees with the Husband. The judge also joined the Husband’s son of his previous marriage, Mr Raziz Rehan, as a party to the proceedings and ordered him to file a witness statement and to give disclosure of all documents he proposed to rely upon to establish the debts which he says are owed to him by his father.[3]The Husband was declared bankrupt on his own petition by an order of Registrar Derrett dated 6th October 2011. He had previously carried on business as an insolvency practitioner through a company called Rifsons Management Consulting Limited (“Rifsons”). According to his evidence in the annulment proceedings, Rifsons were in financial difficulties by October 2011 and an administration order was subsequently made in respect of the company in January 2012. He says that these problems were caused by Rifsons’ former director, a Mr John Andrews, who failed to account to the company for money received by him from clients for work done. This caused serious cash flow difficulties from at least 2009, as a result of which the Husband ceased to draw any remuneration from Rifsons. He became, he said, reliant on sums from third parties to meet his financial commitments.[4]The main source of these borrowings from May 2009 onwards is said to have been an overdraft facility granted by Barclays Bank in Jersey which was secured over a property in St John’s Wood which belongs to his son. The facility was in the sum of £500,000. By 5th October 2011 some £434,000 had been drawn down. The Husband says that he had exhausted any other possible sources of finance such as friends and had no prospect of being able to secure any further loans.[5]At the date of the bankruptcy order he says that he had unpaid liabilities to his solicitors in the divorce proceedings of £79,000, to Victoria College, Nottingham of £35,000 and to Westminster City Council in the sum of £6,600, all of which were immediately payable. There were also arrears of maintenance pending suit in the sum of £5,400. Further statutory demands from trade creditors totalling some £50,000 were received after the making of the bankruptcy order. He had no income with which to pay those debts and could no longer draw on the overdraft facility.[6]The annulment application is important for the wife. Unless she can set the bankruptcy order aside her application for ancillary relief is likely to be severely prejudiced. Unless she is able to demonstrate the existence of a clear surplus of assets over liabilities in the bankruptcy it will not be possible for the judge in the ancillary relief proceedings to make an award in her favour: see Hellyer v Hellyer [1997] 1 FCR 340. If, on the other hand, the bankruptcy is annulled it will be open to the court to make an order in the Wife’s favour without any danger of it being set aside in any subsequent insolvency proceedings as a transaction at an undervalue: see Hill v Haines [2007] EWCA Civ 1284. In making the order for ancillary relief the court is bound under s.25 of the Matrimonial Causes Act 1973 to take into account the husband’s liabilities to his commercial creditors but in a contest for limited assets it will not always follow that the creditors will take precedence over the wife’s claims: see Paulin v Paulin [2009] EWCA Civ 221 at paragraph 54.[7]The Wife’s case is that many of the Husband’s alleged debts are in fact shams. The creditors are the Husband’s friends and members of his family who have fabricated these liabilities in order to facilitate his bankruptcy. She claims that if the Husband’s liabilities were reduced to the genuine debts there would be a considerable surplus of assets from which an award in her favour could be made. She therefore contends that as of the date of the bankruptcy order the Husband was not balance sheet insolvent nor was he unable to pay his debts as they fell due.[8]There is a dispute about the Husband’s net worth. The Wife contends that even taking into account only the assets shown in the statement of affairs there is a surplus of assets over liabilities of some £482,828. But this is disputed by the Husband and his Trustees. If one treats Mr Rehan as having acquired a one-half interest in the matrimonial home by his alleged payment of £503,785 then the Husband’s interest in the property would be worth £900,000 and his total creditors (excluding the £503,785 paid by his son) would amount to £1,368,687. If, however, one were to treat all payments by Mr Rehan as loans then the Husband’s interest in the property would be valued at £1.8m against total creditors in the sum of £1,872,472. In order to succeed on her application for annulment under s.282 of the Insolvency Act 1986 it will be necessary for the Wife to establish that on the grounds existing at the time of the order, the order ought not to have been made. The critical issues therefore will be whether the Husband was then balance sheet insolvent and whether he was able at the time to pay or had a reasonable prospect of being able to pay his debts as they fell due.[9]The Wife alleges in her evidence that the debts shown as due to his son; to a Mr Declan McCarthy (who is said to be a friend) and to Victoria College, Nottingham are a sham. Together they amount to £1,985,587. Her reasons are set out in some detail in her affidavit. She says that the proper adjudication of these issues can only take place if there is full disclosure and cross-examination of witnesses. The Husband’s case is that even on the undisputed evidence it is obvious that he was unable to pay the debts currently due as at the date of the bankruptcy order.[10]Mr Registrar Baister gave directions for the filing of evidence on 9th January and adjourned the annulment application to a further hearing on 16th March. On 18th January at a directions hearing in the Family Division at which both the Husband and Wife and the Trustees were represented Mostyn J made an order inviting the Bankruptcy Court to transfer the annulment application to the Family Division to be heard with the Wife’s application for ancillary relief. On 16th March the further hearing of the annulment application took place before Registrar Derrett. By then the Wife had issued her own application for the transfer of the proceedings to the Family Division to re-inforce the invitation extended by Mostyn J in his order of 18th January. Mr Ewins, who appeared for the Wife on the application as he does today, submitted that an inquisitorial enquiry was needed in which there would be further disclosure of documents all of which could be provided for in the ancillary relief proceedings. The Trustees’ position was that the only significant asset of value was the matrimonial home (legal title to which remains vested in the Wife) and that they wished to know their position as soon as possible so as to be able (if still in place) to realise the assets for the benefit of the Husband’s creditors.[11]We have been provided with an agreed note of that hearing. It is clear that the Registrar was aware of Mostyn J’s order but she declined to transfer the proceedings. According to the agreed note of her reasons, she said:
“I am not deciding whether to annul the bankruptcy order today. The issue to be decided is whether to transfer the matter to the Family Division, or to allow the annulment application to be determined as a discrete issue in the Chancery Division. This is the normal venue for such decisions but I acknowledge [the] Applicant counsel’s citing of s.49 Senior Courts Act 1981. He has argued that this is clear authority for the transfer to be made. However, there is an equally valid argument that the matter should be decided sooner rather than later and that it is a discrete and separate issue in the bankruptcy. I am told that the matter could be accommodated in the Chancery Division for hearing within 4-6 weeks. The concern of this court is to ensure the proportionate administration of justice, and despite the submissions of counsel for the Applicant, the matters which should properly be addressed on an annulment application under s.282(1)(a) would be dealt with in a more cost effective manner in the Chancery Division, without disrespect to the Family Court. In my view the issues are straightforward. In my view if the annulment application is disposed of, the trustees in bankruptcy can properly act and should be allowed to get on with the realisation of assets and administer the bankruptcy estate, which will ultimately be to the benefit of the wife. If [the annulment application] is wrapped up in a lengthy hearing, it will cause problems in the bankruptcy and generate expenses which could be avoided. Therefore, despite the clear direction of Mr Justice Mostyn, and again with no discourtesy meant to the Family court, I am not moved to transfer proceedings to the Family Division. I am not persuaded that the transfer of the proceedings will be of benefit to the Applicant.”
[12]She therefore dismissed the transfer application and sent the annulment application to be determined by a judge of the Chancery Division on a summary basis without cross-examination of witnesses. Mr Ewins asked for permission to appeal but this was refused by the Registrar.[13]On 23rd March there was a further CMC in the ancillary relief application at which the husband, the Wife and the Trustees were represented. Mostyn J had no application before him from the Wife for the transfer of the annulment application to the Family Division, her application having been dismissed by the Registrar. But Mr Ewins submitted to Mostyn J that as a result of the Registrar’s order the Wife had been put at a considerable disadvantage because she would have no effective means of testing the veracity of the Husband’s evidence either by proper disclosure of documents or by his cross-examination in front of the judge. This would, Mr Ewins went on, open the floodgates, as he put it, to husbands who consider that they can circumvent the court’s powers in ancillary relief proceedings by obtaining an order of bankruptcy.[14]The Wife, he said, would also suffer a disadvantage even if she failed on her annulment application on the grounds that the Husband did in truth have debts due for immediate payment as at 6th October 2011 which he could not pay. In that event she would be reduced to arguing that there was an identifiable surplus of assets over liabilities which could be used to satisfy her claim for ancillary relief. The determination of the size of that surplus ought also to involve an effective examination by the court of whether any of the other debts (e.g. the sums allegedly due to the Husband’s son) were, as she alleges, shams. This would be impossible, he submitted, unless that inquiry was conducted as part of the ancillary relief proceedings.[15]The judge was sympathetic to these submissions. He said:
“9. One can see that on the hearing of any annulment application, there is likely to be an extensive dispute of fact requiring oral evidence and the pitiless exposure of truth or falsehood by the process of cross-examination. It was in that context that I made my request to the Bankruptcy Court, anticipating that in order to avoid a multiplicity of proceedings which is the imperative duty of all courts pursuant to Section 49(2) Senior Courts Act 1981, the annulment application would be heard at the same time and by the same judge hearing the wife’s financial remedy application. There is obviously a demonstrable overlap or congruence between the evidence relevant to the annulment application and the evidence relevant to the wife’s claim for ancillary relief. For it is accepted and it is established law that there is nothing to prevent the court making a lump sum award against a bankrupt, provided that the court exercising the powers to award a financial remedy following divorce has a ‘clear picture of the assets and liabilities of the bankrupt’; according to Lord Justice Peter Gibson in the case of Hellyer v Hellyer. 10. There is a plain congruence between the evidence that would be needed to be heard in order to make that assessment and the evidence that has to be heard in order to make the assessment, whether, in truth and having regard to the realities of his commercial life, the husband had no tangible prospect of paying the third party debts to which I have referred. 11. I fully expected that the Bankruptcy Registrar would make the transfer. It is to be observed that the making of such a transfer in order that the cases can be heard together, not only, as I have said, gives effect to Section 49(2) of the Senior Courts Act, but also corresponds to the almost invariable practice in these cases. I refer for example to the decision of F v F (Divorce: Insolvency: Annulment of Bankruptcy Order) [1994] 1 FLR 359, a decision of Mr Justice Thorpe as he then was, where the annulment application was in fact issued in the Family Division and where the annulment application was heard concurrently with the application for ancillary relief.”
[16]Having referred to the Registrar’s reasons for refusing the transfer he went on: “16. It is plain from the note of the judgment which I have, that whilst she must have been referred to Paulin, the Registrar was probably not referred to Whig v Whig or the other cases I have mentioned. Nor was she, as Mr Ewins has confirmed, referred to the recent decision of the Court of Appeal, the Master of the Rolls presiding, in Edgerton v Edgerton [2012] EWCA Civ 181. In that case, there have been parallel partnership proceedings which had been issued in the Chancery Division which had led to a degree of case-management anarchy and a plethora of different hearings in different courts in Liverpool. In his judgment the Master of the Rolls said this at paragraph 52: ‘While there will of course be cases where the Family Court judge will direct that a preliminary issue as to ownership of assets involving a third party be heard in another division as a preliminary issue, the better course is normally for the Family Court to determine the issues. see TL v ML [2005] EWHC 2860 (Fam), [2006] 1 FLR 1263, paras 33-36, A v A [2007] EWHC 99 (Fam), [2007] 2 FLR 467, and Goldstone v Goldstone [2011] EWCA Civ 39. Continuity of judicial involvement is desirable both for efficiency and for consistency of decision-making’. By virtue of Rule 3.1, CPR 3.1(7) it is stated that a power of the court under the rules to make an order includes a power to vary or revoke the order. It is true that I am not hearing an appeal from Registrar Derrett and Mr Le Grice has cautioned me not to in a disguised way to exercise appeal powers in the absence of a notice of appeal having been issued; even if it is the case I think that Registrar Derrett was plainly wrong. However, the variation and revocation power is unbounded and it is open for me to exercise them if I think it is appropriate, having regard to the further material which is before me which does not appear to have been fully argued before Registrar Derrett and particularly and in relation to the failure to cite what I regard as the authority of key importance namely Edgerton v Edgerton.” ‘While there will of course be cases where the Family Court judge will direct that a preliminary issue as to ownership of assets involving a third party be heard in another division as a preliminary issue, the better course is normally for the Family Court to determine the issues. see TL v ML [2005] EWHC 2860 (Fam), [2006] 1 FLR 1263, paras 33-36, A v A [2007] EWHC 99 (Fam), [2007] 2 FLR 467, and Goldstone v Goldstone [2011] EWCA Civ 39. Continuity of judicial involvement is desirable both for efficiency and for consistency of decision-making’.[17]He therefore made an order under CPR 3.1(7) transferring the annulment application to the Family Division and varying the directions for the hearing as detailed above.[18]The success of that application will ultimately depend upon whether the Wife can show that the Husband was able to pay the debts which had fallen due as at the date of the bankruptcy order or had at least a real prospect of being able to do so within a reasonable period of time. This will involve an examination not only of what debts had actually become due and payable at the relevant date but also of what assets and other sources of finance were then available to the Husband which might have enabled them to be paid.[19]The Wife’s allegation that significant liabilities shown in the statement of affairs were in fact shams and were therefore non-existent will only allow her to succeed if on the unchallenged material it can be shown that the Husband was not only balance-sheet solvent but was also commercially solvent in the sense that he could find a means of raising the money to pay his current debts.[20]Part of Mr Ewins’ challenge to the Registrar’s order is against her apparent refusal to order wider disclosure in the proceedings and to provide for the cross-examination of the Husband and, if necessary, the Trustees. She gave no reasons for refusing to make these directions beyond saying that the issues in the case seemed to be straightforward and it may be that on a proper examination the Husband’s insolvency was not really in doubt as of the date of the bankruptcy order regardless of what allowance one might make for the debts allegedly due to his son and to Mr McCarthy.[21]That said, judges and registrars sitting in bankruptcy need to be alive to the real possibility that husbands (or wives) may attempt to use the protection of a bankruptcy order as a shield against the claims of their spouses for ancillary relief. Where there is credible evidence of this they should not be afraid to use the powers which they have to order full disclosure and to require the attendance and cross-examination of witnesses where this is necessary in order properly and fairly to determine the annulment application. In any such cases the more convenient course may well be to transfer the annulment application itself to be heard alongside the ancillary relief application in the Family Division where the evidence and issues are likely to be similar and costs can be saved by having a single hearing of both applications.[22]Whether this is the right course to take in any particular case will obviously depend upon the facts and will be a matter of discretion for the registrar in bankruptcy or the Chancery Division judge who is asked to make a transfer order. The court will have to balance the need to secure justice for the spouse against the need to ensure that all issues in the bankruptcy proceedings are resolved at minimum cost to the creditors. The registrar concluded in this case that the annulment application could be dealt with in a more cost effective way by the Chancery Division and, as she put it, that the proportionate administration of justice did not require a transfer of the proceedings to the Family Division.[23]We have not been asked as part of this appeal to review the merits of the Registrar’s decision. Mostyn J considered that she simply failed to secure a method of trial for the annulment application which will enable effective justice to be done and gave far too much weight to the need for a speedy and therefore summary disposal of the annulment application. His other criticism is that she failed to pay due regard to what was said by this court in Edgerton v Edgerton even though it is clear from her decision that she did consider the provisions of s.49(2) of the Senior Courts Act 1982 and the need to avoid a multiplicity of proceedings.[24]The only issue before us is whether the judge had jurisdiction to make the order he did or properly exercised such jurisdiction if it exists. The court’s jurisdiction in bankruptcy is statutory and is now contained in Part IX of the Insolvency Act 1986. The power to make a bankruptcy order or to annul a bankruptcy order is vested in the court which means either the High Court in respect of the London insolvency district or the County Court for the insolvency districts outside London. In the High Court bankruptcy is a matter assigned to the Chancery Division under s.61(1) and Schedule 1, para 1(e) of the Senior Courts Act 1981 and the jurisdiction is exercised by the registrars in bankruptcy who are specialist judges in this field. They conduct bankruptcy proceedings not under the CPR but in accordance with the Insolvency Rules 1986 (“IR”) made under the power contained in s.412 of the Insolvency Act. These are made and reviewed by the Lord Chancellor after consultation with the Insolvency Rules Committee: see s.413. Under IR 7.6A(3) all High Court hearings in bankruptcy must come before a registrar in the first instance. An appeal against an order made by a registrar in bankruptcy lies to a High Court judge: see Insolvency Act 1986 s.375(2).[25]The rules relating to bankruptcy are contained in Part VI of the IR. The applicant for annulment is required under rule 6.206 to set out in a witness statement the grounds of the application and the facts on which it is based. If the annulment application is made pursuant to s.282(1)(b) Insolvency Act (debts and expenses of the bankruptcy all paid or secured) the trustee-in-bankruptcy must then prepare and serve on the applicant a report setting out the circumstances leading to the bankruptcy; the assets and liabilities of the bankrupt as at the date of the bankruptcy order; details of the creditors who are known to have claims; and any other matters as the person making the report considers to be necessary for the information of the court: see IR 6.207(2). Further, IR 6.210(1) requires the trustee to attend the hearing of the annulment application. The trustee is an officer of the court and it is therefore incumbent on him to provide the parties to the application and the court with a proper summary and analysis of all relevant matters. Orders for disclosure against him will therefore be exceptional.[26]The IR apply the provisions of the CPR to insolvency proceedings under IR 7.51A except so far as inconsistent with the IR. Although the power to transfer proceedings between the divisions of the High Court under CPR 30.5 is general, the power of a High Court judge of another division to transfer proceedings involving an estate in bankruptcy into that division of his own motion are limited under IR 7.15(3) to proceedings brought to enforce a claim by or against the insolvent estate. An annulment application does not fall within this rule. It seems to me that any application to transfer an annulment application should therefore be made (as it was in this case) to a registrar in bankruptcy or a judge of the Chancery Division.[27]In this case Mostyn J purported to exercise the powers contained in CPR 3.1(7) which he described as unbounded. He was clearly wrong about this. There is a long line of authority beginning with my decision in Lloyds Investment (Scandinavia) Ltd v Ager Handerssen [2003] EWHC 1740 (Ch) and culminating in the recent decision of this court in Tibbles v SIG PLC [2012] EWCA Civ 518 which confirms that far from being unrestricted, the power of the court to vary or revoke one of its own orders is ordinarily limited to cases where there has been a material change of circumstances since the order was made or the original order can be shown to have been based on misstated facts or material non-disclosure. In most other cases the finality of the court’s orders has to be respected and the proper way of challenging the order is by way of appeal.[28]It seems to me that this case is no exception. None of the grounds relied upon by Mr Ewins before Mostyn J constituted a change of circumstances or anything akin to material non-disclosure. They were all criticisms of the merits of her decision. The proper forum for raising those points is in front of a judge of the Chancery Division on an appeal. It was not therefore open to Mostyn J under CPR 3.1(7) to transfer the annulment application in to the Family Division and to vary the registrar’s order. To proceed in this way is also likely in my view to lead to confusion and unfairness. The regulation of proceedings in bankruptcy is a matter for the registrars and judges of the Chancery Division to which it is assigned. There had already been an adjudication of the transfer issue by the registrar and the other parties to the application were entitled to rely on that order unless varied or set aside on appeal.[29]The submission was made to us that the power contained in CPR 3.1(7) was not in fact exercisable in this case because the registrar’s order was not one made under the CPR (“these Rules”). The only available power was that contained in s.375(1) of the Insolvency Act which enables the court to review, rescind or vary any order made in the exercise of its insolvency jurisdiction. But the exercise of that power will also as a general rule require there to be new evidence or a material change of circumstances: see Ahmed v Mogul Eastern Foods [2005] EWHC 3532 (Ch). It does not therefore assist the Wife in relation to the order which Mostyn J made. If she wishes to challenge Registrar Derrett’s order then she must appeal.[30]I would therefore grant permission to appeal to the Husband and to the Trustees and allow their appeals.

Lord Justice Rimer :

[31]I agree.

Lord Justice Thorpe :

[32]I also agree.

Cited in 7 later judgments