Legal Services Commission v Leonard

A bankruptcy petition cannot be founded on a judgment debt while execution of the judgment remains stayed. Until the stay is lifted, there is no presently payable debt and the petition is premature and may be an abuse of process. Under rule 6.25(2) of the Insolvency Rules, the court may stay or dismiss such a petition. A petitioning creditor’s advocate should draw a serious stay issue to the court’s attention, especially where the debtor is unrepresented. Misconduct or late reliance on a successful point may justify withholding a successful appellant’s costs, but not ordering that appellant to pay the respondent’s costs where the petition was misconceived from the outset.

The Legal Services Commission, formerly the Legal Aid Board, presented a bankruptcy petition to enforce sums arising from a legally aided claimant’s county court judgment against Christian Leonard. The judgment included a stay of execution pending taxation of both parties’ costs. The Commission petitioned under regulation 91(1) of the Civil Legal Aid (General) Regulations 1989.

Registrar Baister found that Leonard had received the costs-assessment commencement notice and adjourned the petition on terms. On appeal, Mr P Smith QC, sitting as a Deputy Judge of the Chancery Division Bankruptcy Court, accepted that the stay prevented the petition from proceeding and dismissed it, but ordered Leonard to pay the Commission’s costs up to 11 October 2001 because the stay argument had been raised late. The central issue before the Court of Appeal was whether that costs order was justified.

Lord Justice Simon Brown gave the leading judgment. Lord Justice Laws agreed. Lady Justice Arden agreed and added observations on bankruptcy procedure.

1. Stay and bankruptcy petition. The construction accepted by the deputy judge was correct. Judge Butter’s order stayed enforcement until the relevant costs had been taxed and the net balance determined. The stay remained in force because it had not been lifted by the District Judge. Consequently, there was no presently payable debt on which a bankruptcy petition could be founded. The petition was premature and misconceived from the outset.
2. Jurisdiction to determine the stay issue. Although the stay argument had not been determined by Registrar Baister and was raised late in the appeal, it was properly before the deputy judge. The Commission was seeking not merely dismissal of the appeal but a bankruptcy order. In any event, the deputy judge could dismiss the petition under the court’s inherent jurisdiction if its presentation before the stay was lifted constituted an abuse of process.
3. Costs. Leonard’s conduct was criticised. He had misled courts on two occasions, failed to pursue taxation of his own costs, and raised the stay point late. Those matters justified withholding his costs, but they did not justify ordering him to pay the Commission’s costs. The Commission would inevitably have failed at the substantive hearing on the stay issue and would then have been liable for the petition’s costs. It was therefore appropriate to interfere with the discretionary costs order.
4. Bankruptcy safeguards. Arden LJ observed that rule 6.25(2) of the Insolvency Rules prevents a bankruptcy order where the petition debt is a judgment debt whose execution has been stayed; the petition must instead be stayed or dismissed. Rule 6.25(1) requires investigation of the truth of the petition and the status of the debt. A serious stay issue should be raised by the petitioning creditor’s advocate, particularly where the debtor is unrepresented. A bankruptcy petition invokes a collective remedy and is not merely a debt-collection exercise.

The costs order was varied. There was no order as to the costs of the appeal before the deputy judge or of the petition. The costs order made by Registrar Baister for the service issue remained. The Commission was ordered to pay the costs of the Court of Appeal appeal.

1. Court of Appeal (Civil Division). On 1 May 2002, Simon Brown LJ, Laws LJ and Arden LJ allowed the appeal to the extent indicated and varied the costs order.
2. High Court, Chancery Division, Bankruptcy Court. On 18 October 2001, Mr P Smith QC, sitting as a Deputy Judge, allowed Leonard’s appeal from Registrar Baister’s order and dismissed the bankruptcy petition because the stay remained effective, but ordered Leonard to pay the Commission’s costs up to 11 October 2001.
3. Bankruptcy Court. On 2 May 2001, Registrar Baister found that Leonard had received the commencement notice and adjourned the petition generally on terms, ordering him to pay the costs of the service issue.