Levy v Legal Services Commission

An obligation arising under an order made in family proceedings includes an obligation to pay costs. Such an obligation is therefore not a provable debt in bankruptcy. A creditor with a non-provable debt may present a bankruptcy petition, but the court will make a bankruptcy order only in wholly exceptional circumstances. Misconduct by the debtor and the possibility of a surplus after provable creditors have been paid do not ordinarily justify such an order. It is an abuse of the bankruptcy process to use it for that collateral purpose. Where there is no realistic prospect of a bankruptcy order, the statutory demand may be set aside under Rule 6.5(4)(d) of the Insolvency Rules 1986.

Mr Levy was ordered to pay his former wife's costs in ancillary relief proceedings. The Legal Services Commission, exercising its statutory enforcement power, served a statutory demand for those costs and presented a bankruptcy petition.

The District Judge refused to set aside the demand. Evans-Lombe J dismissed Mr Levy's appeal, holding that costs were provable debts and, alternatively, that any challenge based on non-provability was premature. The Court of Appeal considered whether costs fell within the family-proceedings exception to provability and whether the statutory demand should remain in force where the debt was non-provable.

1. Construction. The words “any obligation arising under an order made in family proceedings” in Rule 12.3(2)(a) of the Insolvency Rules 1986 could not be read as excluding costs orders. Such a reading would rewrite the Rule. The ejusdem generis rule did not assist, because the provision contained no relevant genus. The costs obligation was therefore non-provable. Lord Justice Jonathan Parker rejected the contrary indication in Russell v Russell [1998] BPIR 259 and preferred the view expressed in Re a Debtor; JP v A Debtor [1999] BPIR 206. Lord Justice Peter Gibson agreed.
2. Jurisdiction. A non-provable debt remains a bankruptcy debt under section 382(1) of the Insolvency Act 1986. It can therefore support presentation of a bankruptcy petition and gives the court jurisdiction to make a bankruptcy order.
3. Discretion. Such an order is anomalous because the trustee has no functions concerning the petitioning creditor. Misconduct or failure to pay other debts does not ordinarily constitute a sufficient special circumstance. Using bankruptcy merely to produce a surplus for a creditor whose debt is non-provable is an abuse of process. Only wholly exceptional circumstances might justify an order, with a possible change-of-carriage situation under Rule 6.31 being identified cautiously.
4. Statutory demand. Where, as here, no special circumstances were suggested and there was no realistic prospect of a bankruptcy order, the “wait and see” approach was inappropriate. Rule 6.5(4)(d) was intended to prevent bankruptcy petitions with no real prospect of success. The statutory demand was set aside and the appeal allowed. Lord Justice Waller agreed with both judgments.

• Court of Appeal (Civil Division): allowed the appeal, set aside the orders of the District Judge and Evans-Lombe J, and set aside the statutory demand.
• High Court, Chancery Division: Evans-Lombe J dismissed Mr Levy's appeal from the District Judge.
• District Judge: dismissed the application to set aside the statutory demand.