C & W Berry Ltd. v Armstrong-Moakes [2007] EWHC 2101 (QB)

[2007] EWHC 2101 (QB)Case No 1992 B NO 86IN THE HIGH COURT OF JUSTICEQUEEN'S BENCH DIVISIONCIVIL APPEALSVenue Royal Courts of Justice, Strand, London, WC2A 2LLDate 13/09/2007
Before
MR JUSTICE DAVID CLARKE
Between
STEPHANIE ARMSTRONG-MOAKESApplicant
Mr David Gilchrist (instructed by Napthens Solicitors) for Respondent/Judgment DebtorMrs Lisa Walmisley (instructed by Stephensons Solicitors) for ApplicantHearing Hearing date: 26 th July 2007
Approved JudgmentI direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic..............................MR JUSTICE DAVID CLARKE
[1]This is an appeal by C & W Berry Ltd (“Berry”) against the order of District Judge Wheeler, sitting at Preston on 1 June 2007, whereby he discharged the Charging Order Absolute made in favour of Berry on 22 July 1992 on the property 60 Broadway, Hindley, near Wigan.[2]The Respondent to the appeal is Mrs Stephanie Armstrong-Moakes (“SAM”), widow of the original judgment creditor Neil Armstrong-Moakes (“NAM”) and owner of the property, who applied for discharge of the charging order on the ground that it ought never to have been made in the light of NAM’s impending bankruptcy; it was made to the prejudice of other (unsecured) creditors. It was submitted alternatively that in the light of subsequent events in connection with the conduct of NAM’s bankruptcy, the charging order should be discharged in the exercise of the court’s discretion pursuant to section 3(5) of the Charging Orders Act 1979. By a further argument advanced before the District Judge, SAM contended that Berry had, by its conduct in relation to the bankruptcy, surrendered its security.[3]The District Judge, in a detailed and careful reserved judgment, rejected SAM’s argument that the charging order absolute should never have been made, but found in her favour on the other two issues. He held that Berry had surrendered its security, and that if he was wrong in this conclusion he would nevertheless have exercised his discretion under section 3(5). Both conclusions are challenged by Berry in this appeal. SAM, in her turn, contends by cross-appeal that the first issue should have been resolved in her favour.[4]The facts are somewhat complex but my task is eased by the comprehensive chronology contained in paragraph 3 of the judgment of the District Judge, which I am happy to adopt and shall not repeat.[5]Only one element of that chronology is in dispute, namely the date on which SAM first became aware of the existence of the charging order absolute. In paragraph 3 of her witness statement dated 14 November 2006, this is stated as having been in 1998, i.e. before the transaction by which she paid the Trustee in Bankruptcy £10,000 for her husband’s share of the property, this money subsequently forming part of the funds from which the Trustee paid a dividend to the unsecured creditors (including Berry). I was told by Mrs Walmisley that the correct date is 2001 and that 1998 was an error which went uncorrected in the court below.[6]Considering the sequence of events as disclosed by the correspondence, I am satisfied that SAM cannot have been aware of the existence of the charging order until some time after that payment was made. Furthermore, the witness statement is internally inconsistent, and obviously so; the reference in paragraph 3 to 1998 is inconsistent with what she says in paragraph 9. If SAM and her advisers had been aware of Berry’s secured priority at the time of the transfer of the Trustee’s interest in the property to her, it would inevitably have figured in the transaction at that time, whereas clearly it did not.[7]It is logical to deal first with the issue whether the charging order absolute should have been made in the first place, on which the District Judge found in favour of Berry. I can deal with this shortly, being satisfied that the District Judge was right to distinguish this case from Roberts Petroleum v Kenny [1983] 2 AC 192 and IDC Ltd v Marrons [2001] BPIR 600. Both were cases in which the relevant orders were made absolute in the knowledge of the pending insolvency proceedings, and knowingly had the effect of giving priority over unsecured creditors.[8]It is acknowledged that at the time of obtaining their judgment and charging order nisi and absolute in 1992, Berry had no knowledge of the bankruptcy petition presented by another trade creditor, nor of course of the impending bankruptcy order. Mrs Walmisley therefore relies on hindsight in support of her argument that the charging order absolute should not have been made. She refers me to section 1(5) of the Act of 1979, which provides that :
“In deciding whether to make a charging order the court shall consider all the circumstances of the case, and, in particular, any evidence before it as to (a) the personal circumstances of the debtor, and (b) whether any other creditor of the debtor would be likely to be unduly prejudiced by the making of the order.”
It may well be that had the Deputy District Judge in July 1992 received evidence as to the position of other creditors, particularly the petitioning creditor Acorn Minimix, he would not have made the order absolute. In my judgment, however, the crucial words in that section are “any evidence before it”, demonstrating that hindsight cannot be relied on in this context.[9]The primary argument advanced before me by Mr Gilchrist was an attack on the District Judge’s finding that Berry had surrendered its security. The grounds on which the District Judge made this finding are set out in paragraph 14 of his judgment. At the heart of this reasoning was the fact that Berry proved in the bankruptcy for the full amount of its debt and was in due course paid its dividend as an unsecured creditor for that full amount. Though the existence of the charging order was disclosed in the proof of debt form, no valuation of the security was provided (then or subsequently) and no mention of it was thereafter made in the course of the bankruptcy; the Trustee treated Berry throughout as an unsecured creditor, without demur.[10]It is clear, and was common ground, that there was no express surrender, in writing or otherwise; it is noticeable that the District Judge refers several times to the issue as being whether Berry had “surrendered or waived their security” (my emphasis), and he clearly based his conclusion on waiver rather than on any express act of surrender.[11]There were two strands to the argument of Mr Gilchrist. The first was based on property law. A charging order creates an interest in property which cannot be simply extinguished; for it to be lost, it has to be transferred somewhere. Counsel drew the analogy with the surrender of a lease; the property interest constituted by the lease passes back to the landlord and merges into the freehold. Thus, the surrender of a security constituted by a charging order is a transfer caught by section 53(1) of the Law of Property Act 1925 and must be in writing.[12]Counsel’s second argument was based on insolvency law, particularly certain provisions of the Insolvency Act 1986 and the Insolvency Rules. Berry did nothing which deprived it of its security. They did not realise it (rule 6.109(1)) or voluntarily surrender it for the benefit of creditors (6.109(2)); they did not omit to disclose it in their proof of debt (6.116). Their receipt of a dividend, albeit in respect of the full amount of their debt, did not deprive them of their security; under rule 11.9 they would be required to repay the dividend by way of adjustment following the realisation of the security.[13]Mrs Walmisley for SAM sought to uphold the District Judge’s reasoning. She did not accept that surrender necessarily required a formal transfer of the property interest. She argued that Berry’s conduct in proving in the bankruptcy for the full amount of their debt, and receiving their dividend as if they were an unsecured creditor although the amount of the equity in the property was sufficient to meet their debt in full, justified the finding of surrender. Berry knew that there was sufficient equity in the property to satisfy their debt in full, having seen the figures contained in the Official Receiver’s Report to Creditors. Counsel emphasised the absence of any valuation of the security in Berry’s proof of debt form, an important element of the process because of the importance of such a secured creditor in the context of the trustee’s conduct of the bankruptcy. She pointed out that the valuation of the security is not necessarily the amount of the debt but the creditor’s assessment of the value of the security constituted by the charging order, and its absence, together with the absence of any subsequent reference to it, clearly indicates surrender of the security.[14]On this part of the case I consider that Mr Gilchrist’s argument has force. I do not accept that a surrender cannot take place without a formal transfer akin to the tenant’s surrender of a lease. There are a number of ways in which the security can simply cease to exist, for example by voluntary surrender on the creditor’s part under rule 6.109(2) or 6.116(1) or by order of the court under section 3(5) of the 1979 Act. But I do conclude that in the absence of any express surrender of the security, the District Judge’s finding on the point of surrender cannot be upheld.[15]The argument before the District Judge was that the security had been surrendered, not merely waived. I notice that in her first skeleton argument at paragraph 26, Mrs Walmisley remarked that “It is not entirely clear whether the Claimant surrendered his security voluntarily or by operation of Rule 6.116”. There was no express surrender, voluntary or otherwise, and Berry did disclose their security in the proof of debt form (albeit without the required valuation), even though nothing was said about it throughout the ensuing course of events. Neither can rule 6.109(2) be relied on to establish surrender; what the rule does not say is that where a secured creditor proves for his whole debt as if it were unsecured, he voluntarily surrenders his security for the general benefit of creditors.[16]The concept of waiver is something less specific than surrender, apparently introduced as an alternative formulation by the District Judge himself. It seems to me that his conclusion at paragraph 14.4 would have sat more comfortably within the following section of his judgment where he dealt with the exercise of the discretion under section 3(5).[17]After the argument before the District Judge, at a time when his reserved judgment was in draft, Mr Gilchrist drew his attention to the decision of the Court of Appeal in Whitehead v Household Mortgage Corporation plc [2003] 1 WLR 1173. That case concerned a mortgage debt owed by a mortgagor whose financial affairs were the subject of an individual voluntary arrangement, in the course of which the mortgagee accepted a dividend in the distribution of assets. When the mortgagee subsequently realised its security, the mortgagor contended that the acceptance of the dividend had extinguished the mortgage debt and that it was an abuse of process not to have raised the issue at the time of the distribution. This argument was rejected by the lower court and the Court of Appeal.[18]Whitehead was belatedly cited in support of the contention that Berry’s conduct in the present case did not amount to a surrender of their security, and that they were entitled to rely on it despite having accepted a dividend in the distribution of unsecured assets. The District Judge held that it made no difference to his conclusion that surrender had occurred in this case. He distinguished it on the basis that the mortgagee participated in the distribution, properly valuing his security which may not be enough to satisfy the whole of his debt, in order to participate on a provisional basis in that distribution. In the present case Berry had no need to do so and provided no valuation of their security, but participated in the distribution to the full amount of their debt.[19]As I have said, my conclusion on this part of the case is that there was no surrender to be implied by conduct. To that extent my conclusion is in accordance with Whitehead. That case did not however involve a charging order, nor the judicial discretion to discharge it.[20]I therefore turn to the issue of discretion and section 3(5) of the Act of 1979, which reads as follows:
“(5) The court by which a charging order was made may at any time, on the application of the debtor or of any person interested in any property to which the order relates, make an order discharging or varying the charging order.”
[21]In his skeleton argument on behalf of Berry before the District Judge, Mr Gilchrist contended that section 346 of the Insolvency Act 1986 precluded the exercise of this discretion on the facts of the case. Because the charging order was made absolute before the commencement of NAM’s bankruptcy, Berry was entitled to retain its benefit. Neither the trustee in bankruptcy nor any other creditor could overturn it. Reliance was placed on Banque Nationale v Montman [2000] 1 BCLC 576.[22]The District Judge rejected this submission and it was not renewed before me. Mr Gilchrist acknowledged the breadth of the judicial discretion under section 3(5) and confined himself to arguing that the District Judge was wrong in his conclusion that (if necessary) he would have exercised it in SAM’s favour.[23]The District Judge’s reasoning was expressed at paragraph 17 of his judgment. He declined to attach weight to Berry’s delay, or (more accurately perhaps) inactivity in seeking to enforce the charging order. He evidently considered it pragmatic and sensible not to force the sale of this residential property, which was still occupied by SAM and (until his death in October 2004) by NAM.[24]The District Judge founded his decision on Berry’s conduct in relation to the bankruptcy, which he had set out in some detail in paragraph 14 and summarised in paragraph 19. Although they had mentioned the charging order in the proof of debt submitted in 1992, they had provided no valuation of that security and it was never mentioned throughout the prolonged sequence of events which followed, either before or after they received their dividend based on the full amount of the debt owed to them. They took no issue with the amount of their recovery, and made no attempt to revalue (or, rather, to value for the first time) their security so as to bring rule 11.9 into play. In my judgment these were factors which the District Judge was entitled to take into account in the exercise of the discretion.[25]The District Judge went on to consider the balance of disadvantage, and attached weight in SAM’s favour to her payment of £10,000 to the Trustee in bankruptcy which was applied by him in the distribution of dividends to creditors, including Berry.[26]Mr Gilchrist contends that the District Judge did not conduct a proper balancing exercise. In relying on SAM’s payment of £10,000, he failed to bear in mind that this sum was paid to prevent the Trustee from taking possession of the house and forcing its sale; thus she has already derived substantial benefit from it. The District Judge’s conclusion failed to give sufficient weight to the impact on Berry in losing its security, which should have led him to the opposite conclusion.[27]Mrs Walmisley relies on the fact that not only did Berry prove in the bankruptcy for the full amount of its debt and receive a dividend on that basis, but also on the clear fact that, in his conduct of the bankruptcy, the Trustee treated them as unsecured creditors and was never disabused.[28]No direct authority on the exercise of the discretion under section 3(5) was cited to me. As the District Judge recognised, a balance must be struck and a decision made as between two parties each claiming to be innocent of blame for the issue which arises between them. His conclusion was that “to allow the order to remain on the property (including accrued interest) with (SAM) having paid £10,000 towards her late husband’s creditors from which (Berry) benefited as against (Berry) losing what they considered their secure debt, would not have been a proper exercise of my discretion”.[29]In my judgment the District Judge reached a proper conclusion with which I should not interfere. The argument that SAM derived benefit from that payment does not carry sufficient weight to displace the factors in her favour in the exercise of the discretion. Furthermore, I consider that the District Judge’s conclusion in relation to delay was somewhat generous to Berry. I agree with him that they are not to be criticised for not seeking to enforce their security by order for sale. Mrs Walmisley argued with some force that they should not have proved in the bankruptcy in the first place, being secured by the charging order to the full extent of the debt. I do not go so far as to accept this, but I do attach importance to the fact that they never sought to value their security and never mentioned the existence of the charging order, or their intention to revert to reliance upon it, at any stage over many years. Whilst their conduct did not amount to surrender, in my judgment it does justify the exercise of the court’s discretion in favour of SAM.[30]I therefore dismiss the appeal.

Cited in 3 later judgments