Official Receiver v May [2008] EWHC 1778 (Ch)

Case No CH/2008/APP/0015

[2008] EWHC 1778 (Ch)

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

ON APPEAL FROM NEWBURY COUNTY COURT

Venue Royal Courts of Justice, Strand, London, WC2A 2LL

Date 25 July 2008

Before

Mr Christopher Nugee QC

Between

THE OFFICIAL RECEIVERAppellant

GARY LEE MAYRespondent

Edmund Nourse (instructed by the Treasury Solicitor) for Appellant

The Respondent in person for in person

Hearing Hearing date: 13 June 2008

Judgment

Mr Christopher Nugee QC:

[1]This is an appeal, brought with permission granted by David Richards J on 18 February 2008, from the decision of District Judge Henry made on 19 December 2007 in the Newbury County Court. The Respondent, Mr Gary May, was made bankrupt on his own petition on 18 December 2006. In October 2007 the Official Receiver applied to the County Court for what is known as a Bankruptcy Restrictions Order (“BRO”) under schedule 4A to the Insolvency Act 1986. The District Judge declined to make one, stating that the question whether to do so was at her discretion. The Official Receiver now appeals to the High Court, essentially on the ground that she was wrong to regard the question as one for her discretion. In a previous case, Randhawa v Official Receiver

[2006] EWHC 2946 (Ch)

[2007] 1 WLR 1700

Mr Launcelot Henderson QC (as he then was) had considered this very question and concluded that the nature of the exercise the Court had to undertake when asked to make a BRO was not one of deciding whether to do so as a matter of general discretion, but was one of considering whether the bankrupt’s conduct was such as to make a BRO appropriate, this being a more limited investigation into whether “the bankrupt’s conduct was shown to have fallen below the appropriate standard”.

[2]Mr Nourse, who appeared before me, as he did in Randhawa, for the Official Receiver submitted that it followed from Mr Henderson QC’s decision in Randhawa that the District Judge’s judgment cannot stand, as she wrongly assumed that she had a discretion. I agree that if Randhawa correctly states the law, it must follow that the District Judge’s judgment was made on an erroneous basis and I will have to consider for myself whether to make a BRO; but in the course of argument I expressed some doubt whether Randhawa was indeed correct. In effect therefore the main question I have to decide is whether I should follow Randhawa or not.

[3]I can state the relevant facts quite shortly as they are not in dispute. i) Mr May, who traded as Affordable Autos, had a secondhand car business. According to his statement of affairs this business started trading in August 2000. ii) On 22 December 2004 Mr May acquired a new Yamaha WR50 F motorbike on hire purchase from Close Motor Finance. The cash price was £5,699 of which he paid £614 as an advance payment; he agreed to pay 36 monthly payments of £168.90 to discharge the balance and the various charges for credit (which together came to £6,080.40). iii) By May 2005, Mr May was being pressed by his creditors. In particular he had bailiffs demanding money from him. He sold the motorbike for £1,250 in cash, of which he thinks he paid some £800 to the bailiffs, spending the rest of the money (ie some £400) on his own living costs and alcohol. He does not know the name and address of the purchaser. iv) Mr May did not seek the permission of Close Finance to sell the bike; nor did he tell them that he had done so. He continued to make monthly payments to them: the copy ledger which I have unfortunately cuts off the dates of these payments but indicates that 7 standing orders of £168 were received in 2005 and some other payments (equal to a further 7 monthly payments) were paid by debit card or bank giro credit in 2005 and 2006; it also shows that some payments must have been late or missed as there are a number of entries for “notice of default fee”. v) The bike was sold at a considerable undervalue. Mr May’s own estimate is that it was worth about £3,500. He deliberately priced it at £1,250 for a quick sale as he was desperate for cash. vi) Affordable Autos ceased trading at the end of December 2005; a second business which traded under the name of Low Cost NT Motor Co, and which Mr May had started in March 2005, ceased trading in July 2006. vii) Mr May presented a petition for his own bankruptcy on 15 December 2006 and was made bankrupt on 18 December 2006. The Official Receiver’s report to the Court shows nil assets, and liabilities of £72,952. The total due to Close Finance at the date of bankruptcy was £4,066, made up of the outstanding balance of the monthly instalments of £3,716 and £350 for various fees incurred by reason of defaults.

[4]In these circumstances the Official Receiver, acting under the direction of the Secretary of State, applied to the Newbury County Court for a BRO. It is a requirement of the Insolvency Rules 1986 that the application is supported by a report which identifies the particular conduct by reference to which it is alleged that it is appropriate for a BRO to be made (r. 6.241). The report in this case was made by Mr MacLeay, a Deputy Official Receiver, on 22 October 2007 and identified as the conduct relied on the following:

“On 5 May 2005, without requesting authority from the finance company, Gary Lee May (hereinafter referred to as “Mr May”) sold a Yamaha WR50 F motorcycle, which was subject to a hire-purchase agreement, for the sum of £1,250 in cash. Mr May believes, keeping in mind that he purchased the motorcycle on 22 December 2004 for £5,699 and the good condition thereof; its true value was approximately £3,500 at the date of the sale. None of the sale proceeds were paid to the HP-company and consequently, at the date of bankruptcy, £4,066 remained outstanding to the aforementioned finance company.”

None of the sale proceeds were paid to the HP-company and consequently, at the date of bankruptcy, £4,066 remained outstanding to the aforementioned finance company.”

[5]The application came before District Judge Henry on 19 December 2007. Mr May did not dispute any of the allegations in Mr MacLeay’s report. As already mentioned the District Judge dismissed the application. The entirety of her judgment reads as follows in the transcript:

“Mr MacLeay, I am rather hesitant about this particular case. I think that, as Mr May says, he is not someone who has been out to con people, and I believe him. It was obviously an act of desperation, and I do not think actually that I feel inclined to make a restrictions order in this case. It is at my discretion. Usually I look at the circumstances, and I think this is the first time I have not made such an order, but I am going to accept what Mr May has said, and it is unlikely to happen again. So I am not going to make a further order. So you are discharged from your bankruptcy.”

No criticism was suggested of this judgment for its conciseness; the workload of the District Judges is no doubt such as to require applications such as this to be dealt with very efficiently. I have also seen a copy of the District Judge’s own handwritten notes recording the judgment; these are as follows:

“facts not disputed – he had a 2nd hand vehicle business – sold a motorcycle at an undervalue without inf the hire purchase people – Mr May is involved in car sales business – the facts are undisputed – not dishonest – but it is a culpable action. Mr May described the circumstances and I felt the mitigation was genuine. No further order. Application refused.”

So I am not going to make a further order. So you are discharged from your bankruptcy.” No further order. Application refused.”

[6]As is clear from the terms of the judgment and her own notes, the District Judge accepted that Mr May had acted as alleged (this not being disputed), and accepted that this was a “culpable” act, but, in the belief that she had a discretion whether to make a BRO, decided not to do so because she accepted Mr May’s explanations for why he had acted as he did, accepted that he had not set out to defraud anyone and concluded that it was an act of desperation that was unlikely to happen again.

[7]Mr Nourse says that this was wrong. His submission is that, as decided by Mr Henderson QC in Randhawa, the Court does not have a general discretion whether to make a BRO or not. The Court’s function is to decide whether the conduct of the bankrupt is such as to justify imposing a BRO; if it concludes that it is, the Court has no choice but to impose a BRO for a minimum of 2 years.

[8]At this stage it is convenient to refer to the statutory material. The Court’s jurisdiction to impose a BRO is conferred by schedule 4A to the Insolvency Act 1986, which is given effect to by section 281A of the Act. These provisions were introduced by the Enterprise Act 2002 and came into force on 1 April 2004. The most relevant provisions of schedule 4A to the Insolvency Act 1986 are as follows: "Bankruptcy restrictions order 1(1) A bankruptcy restrictions order may be made by the court. (2) An order may be made only on the application of(a) the Secretary of State, or

(b) the official receiver acting on a direction of the Secretary of State. Grounds for making order 2(1) The court shall grant an application for a bankruptcy restrictions order if it thinks it appropriate having regard to the conduct of the bankrupt (whether before or after the making of the bankruptcy order). (2) The court shall, in particular, take into account any of the following kinds of behaviour on the part of the bankrupt: (a) failing to keep records which account for a loss of property by the bankrupt, or by a business carried on by him, where the loss occurred in the period beginning two years before petition and ending with the date of the application; (b) failing to produce records of that kind on demand by the official receiver or the trustee;

(d) giving a preference;

(e) making an excessive pension contribution;

(f) a failure to supply goods or services which were wholly or partly paid for which gave rise to a claim provable in the bankruptcy;

(g) trading at a time before commencement of the bankruptcy when the bankrupt knew or ought to have known that he was himself to be unable to pay his debts;

(h) incurring, before commencement of the bankruptcy, a debt which the bankrupt had no reasonable expectation of being able to pay;

(i) failing to account satisfactorily to the court, the official receiver or the trustee for a loss of property or for an insufficiency of property to meet bankruptcy debts;

(j) carrying on any gambling, rash and hazardous speculation or unreasonable extravagance which may have materially contributed to or increased the extent of the bankruptcy or which took place between presentation of the petition and commencement of the bankruptcy;

(k) neglect of business affairs of a kind which may have materially contributed to or increased the extent of the bankruptcy;

(l) fraud or fraudulent breach of trust;

(m) failing to co-operate with the official receiver or the trustee. (3) The court shall also, in particular, consider whether the bankrupt was an undischarged bankrupt at some time during the period of six years ending with the date of the bankruptcy to which the application relates. (4) ... ... Duration of order 4(1) A bankruptcy restrictions order (a) shall come into force when it is made, and (b) shall cease to have effect at the end of a date specified in the order.” (2) The date specified in a bankruptcy restrictions order under sub-paragraph (1)(b) must not be (a) before the end of the period of two years beginning with the date on which the order is made, or (b) after the end of the period of fifteen years beginning with that date.”

[9]In Randhawa it had been common ground before the District Judge that the jurisdiction to make a BRO was a discretionary one. Counsel for Mr Randhawa had based his submission to this effect on the use of the word “appropriate” in paragraph 1(2) of schedule 4A, and relied on the wording of paragraph 1(1) as also showing the discretionary nature of the jurisdiction, which the Official Receiver did not at that stage challenge (see at [26]). On appeal however the point was taken that the jurisdiction was not discretionary.

[10]Mr Henderson QC accepted this submission. His full reasons are set out at length in the judgment, to which reference should be made, but the key point for present purposes is the one he made at [65]. Having said (at [64]) that the use of the word “may” in paragraph 1(1) was merely an enabling provision and did not carry any implication that the jurisdiction was discretionary, he continued:

“65. Secondly, paragraph 2(1) provides in mandatory terms that the court shall grant an application for a BRO "if it thinks it appropriate having regard to the conduct of the bankrupt". The words "if it thinks it appropriate" clearly require the court to form a judgment, but the exercise that has to be carried out is not in my view properly characterised as the exercise of a discretion. The question whether it is appropriate to make a BRO is not at large, but has to be answered "having regard to the conduct of the bankrupt". It therefore requires the court to examine and evaluate the bankrupt's conduct and to form a view whether that conduct merits the making of a BRO. If the court concludes that it does, the court then has no choice in the matter and is obliged to make a BRO for at least the minimum period of two years.”

He went on to say (at [66]) that while the types of conduct to which the Court had to have regard were not exhaustively set out, the Court was obliged to have regard to conduct of the type set out in paragraph 2(2), all of which involved “some element of misconduct or neglect or financial irresponsibility” and (at [68]) that although no express guidance was given on the standards the Court was to apply “in general terms, however, it seems to me that what is envisaged is a failure in some significant respect to live up to proper standards of competence or probity in the conduct of one's financial affairs.” He then (at [69]) referred to the minimum period of 2 years for a BRO which he regarded as indicating that the jurisdiction was intended not just to protect the public, but to have a deterrent effect, saying:

“The minimum period suggests rather that Parliament intended to impose a substantial sanction in any case where the bankrupt's conduct was shown to have fallen below the appropriate standard, whether or not he still represented a danger to the public by the date of the hearing.”

[11]Mr Henderson QC then went on to compare the directors’ disqualification regime. He considered that an analogy could be drawn between paragraph 2(1) of schedule 4A to the Insolvency Act 1986 and section 6 of the Company Directors Disqualification Act 1986 which provides that the Court “shall make” a disqualification order where “it is satisfied” that a person’s conduct as a director makes him unfit to be concerned in the management of a company. He referred to the decision of the Court of Appeal in Secretary of State for Trade and Industry v Gray (sub nom in re Grayan Building Services Ltd (in liquidation)

[1995] Ch 241

) in which Hoffmann LJ rejected a submission that the Court in exercising its jurisdiction under section 6 was concerned with the question whether the public needed protection from the director and hence could consider whether he was likely to offend again, and held that the only question for the Court was whether the conduct relied on by the Secretary of State or Official Receiver, taking into account any extenuating circumstances, “has fallen below the standards of probity and competence appropriate for persons fit to be directors of companies.”

[12]Mr Henderson QC concluded (at [74]):

“74 I accept Mr Nourse's submission that the reasoning of Hoffmann LJ in In re Grayan Building Services Ltd should be applied with the necessary modifications to the BRO regime, and I find in it confirmation of several of the points which I have already made in paras 64 to 69 above. It follows that I reject Mr Mithani's submissions about the discretionary nature of the BRO jurisdiction. In oral argument Mr Mithani made it clear that the sheet-anchor of his case was the use of the word "appropriate" in paragraph 2(1). However, for the reasons I have given I do not read this word as importing a general discretion, but rather as setting a standard by reference to which the court must judge whether or not the conduct specified by the official receiver merits the making of a BRO. The standard has to be fixed by the court, in the same way as the standard of unfitness to be a director is fixed by the court. I agree with Mr Nourse that if Parliament had intended to confer a general discretion it would not have used the mandatory word "shall" in paragraph 2(1).”

[13]In the course of argument I suggested to Mr Nourse that it was not immediately obvious to me that Mr Henderson QC’s decision in Randhawa was correct. At first blush there is something to be said for the argument that the words “if it thinks it appropriate” are apt to confer a discretion on the Court, as thought by both the District Judge in Randhawa and the present case. Mr Nourse accepted that I was not bound to follow Mr Henderson QC’s judgment and I therefore thought it appropriate to reserve my judgment so that I could consider it, especially as Mr May acted in person and was understandably not in a position to help with the technical aspects of the law.

[14]Having done so, however, I am left in no real doubt that I should follow Mr Henderson QC’s judgment. Although one puisne judge is not bound by the decision of another, it remains I think the practice for a second judge to follow a previous judgment of the same court unless satisfied that the earlier judgment is wrong: see the remarks of Lord Goddard CJ in Police Authority for Huddersfield v Watson

[1947] 1 KB 842

, 848 where he said that the modern practice was that a judge of first instance, although certainly not bound to follow the decision of a judge of equal jurisdiction, would follow the decision of another judge of first instance as a matter of judicial comity “unless he is convinced the judgment is wrong”. I have also found helpful the comments of Hobhouse J in Forsikringaktieselskapet Vesta v Butcher [1986] 2 AER 488, 508 where he said that “One judge does not gratuitously depart from, still less review, another's decisions. The law having been stated by one judge, another judge will not lightly differ from what he has said. Where the judgment in question is fully reasoned after full argument it will have very great persuasive authority which it may be difficult for any litigant at first instance to displace.”

[15]In the present case, Mr Henderson QC’s judgment is certainly fully reasoned after what appears to have been full argument. And in addition to the respect which I would in any event accord to his judgment, it seems to me that when the High Court is sitting in its appellate jurisdiction a second judge should be perhaps particularly slow to depart from an earlier judgment because to have conflicting decisions of the High Court would leave the District Judges who have to exercise this jurisdiction on a daily basis without clear guidance.

[16]I therefore approach this question on the basis that I should not depart from Mr Henderson QC’s judgment unless distinctly satisfied that it is wrong. Far from being so satisfied, I am persuaded on a careful consideration of the point that it is right. I have not myself found the analogy with section 6 of the Company Directors Disqualification Act 1986 compelling; the draftsman could have followed the language of section 6 much more closely and would certainly have made matters easier if he had, for example, provided that “the court shall grant an application for a bankruptcy restrictions order in any case where it is satisfied that the conduct of the bankrupt is such as to make it appropriate to do so.” This would have put beyond doubt both the mandatory nature of the Court’s duty, and the fact that all the Court is concerned with is whether the conduct of the bankrupt is such as to merit the making of a BRO. But I agree with Mr Henderson QC that the combination of the word “shall” in paragraph 2(1) of schedule 4, and the fact that what the Court has to do is not simply consider whether it is appropriate in all the circumstances to make a BRO, but consider whether it is appropriate to do so having regard to his conduct, leads to the conclusion that the exercise the Court has to carry out is to consider whether the conduct of the bankrupt is such as to make a BRO appropriate, and if it concludes that it is, the Court is obliged to make one.

[17]It follows that I accept Mr Nourse’s submission that the decision of the District Judge cannot stand, because she plainly proceeded on the basis that she had a discretion. As Mr Henderson QC’s judgment in Randhawa explains, the nature of the exercise the Court has to undertake is an evaluative one rather than a discretionary one. Since the District Judge herself said that she had a discretion, and since it seems clear that it was this that persuaded her not to make a BRO against Mr May despite finding the allegations of conduct made out, and despite accepting that his action was a culpable one, in my judgment it follows that her decision was made on a flawed basis and must be set aside. I will therefore allow the appeal.

[18]That means that it now falls to me to consider whether to make a BRO. Consistently with the views I have expressed, this requires me to examine and evaluate Mr May’s conduct as specified in Mr MacLeay’s report and decide whether it falls below the appropriate standard such as to merit the making of a BRO. The standard is not specified by the legislation but I agree with Mr Henderson QC that it is apparent from the list in paragraph 2(2) that what is required is some form of misconduct or neglect or financial irresponsibility.

[19]Mr Nourse relied on the combination of three matters: the fact that Mr May sold the motorcycle without the authority of the finance company which owned it, the fact that he sold it at an undervalue, and the fact that he failed to account for the proceeds. As I have already said these facts have never been disputed.

[20]I accept, as the District Judge did, that Mr May acted as he did because he was being pursued by bailiffs and was desperate; I accept, as the District Judge did, that he did not intend, as she put it, to con anyone and that he intended to pay the finance company the full amount due on the bike (and indeed continued making payments to them as he could even after he sold it); I accept, as he told me, that he sold the bike with genuine reluctance. I also take into account that there is nothing to suggest that this was anything other than a one-off incident and that Mr May made no attempts to hide what he had done when he became bankrupt. I am also prepared to assume that he was suffering from depression at the time which may have affected his ability to make sensible decisions: I have a letter from his doctor confirming that Mr May has been receiving treatment for depression since March 2006, and Mr May told me that he was seriously depressed in May 2005 when he sold the bike.

[21]It appears from Hoffmann LJ’s judgment in re Grayan that extenuating circumstances can be taken into account in evaluating the conduct (of the director or bankrupt as the case may be). Nevertheless it seems to me that even taking all these matters into account, Mr Nourse is right when he submits that Mr May’s conduct did fall significantly below the appropriate standard of conduct. The bike was not his to sell, and he knew it; by selling it without authority and using the proceeds to pay other debts and for his own living expenses, he exposed the finance company to the risk that they would neither recover their money nor be able to recover the bike. However much he genuinely intended to pay them, this was not something he had any right to do. To his credit, Mr May himself squarely accepted before me that it was a wrong thing to do.

[22]In my judgment therefore the conduct alleged in Mr MacLeay’s report, which is made out, is such as to make it appropriate to impose a BRO on Mr May.

[23]So far as the length is concerned, Mr Nourse helpfully drew my attention to what is by now a consensus in the authorities that the principles which have been established in relation to directors’ disqualification cases should be applied by analogy to the length of a BRO; and in particular that the three bands outlined in re Sevenoaks Stationers (Retail) Ltd

[1991] Ch 164

at 174 per Dillon LJ should be adapted to BRO cases: see Randhawa at [87], Official Receiver v Pyman

[2007] EWHC 2002

at [14]-[24] per Mr Stuart Isaacs QC, Official Receiver v Bathurst (14.5.08) at [22] per Morritt C.

[24]Mr Nourse accepted that in applying these principles, Mr May’s conduct fell into the lowest band, for which the established bracket is 2 to 5 years; and submitted that an order of the length of 3 to 4 years would be appropriate in all the circumstances. The jurisdiction is one that is to be exercised “with a fairly broad brush and without undue refinement or technicality” (per Mr Henderson QC in Randhawa at [88]). In reaching my decision, I have taken account of all the various matters which I have referred to above; I have also taken account of what Mr May told me about the support his parents have given him and how he has learnt from his mistakes and I accept, as the District Judge did, that he is unlikely to offend again. This does not mean a BRO is inappropriate as it is clear that a BRO is intended not just to protect the public but to act as a deterrent to others; but I consider I can take it into account in fixing the length of the BRO. I am also conscious that through no fault of Mr May’s, the BRO will now start from the date when this judgment is handed down rather than from last December when the application came before the District Judge.

[25]Taking all these various matters into account, I consider that this is a case where the BRO can properly be made to run for a shorter period than might otherwise have been appropriate. I will therefore fix the period of the BRO at 2 years and 6 months. I will make an Order accordingly. Mr Nourse does not ask for costs, and there will therefore be no order for costs.

Official Receiver v May [2008] EWHC 1778 (Ch)

Cited in 2 later judgments