The Official Receiver v Paul John Hollens

Section 303 of the Insolvency Act 1986, as modified by the Insolvent Partnerships Order 1994, gives the court a broad power to regulate insolvency proceedings where a bankrupt is a member of an insolvent partnership. The power is not confined to consolidating proceedings concerning a partnership already being wound up. It may permit the partnership to be administered as if its members had presented a joint bankruptcy petition, provided the partnership is insolvent and the proposed order could have been made on an actual joint petition.

A court should not refuse to wind up partnership assets because those assets might have been exempt tools of trade had the bankrupt traded individually. Partnership assets remain available for partnership creditors and, subject to those claims, the individual estates.

The Official Receiver appealed against orders made by District Judge Ashton in the Preston County Court in the separate bankruptcies of Paul John Hollens and Jennie Rose Hollens. The district judge refused directions sought under section 303(2A) to (2C) of the Insolvency Act 1986, as modified by article 14(2) of the Insolvent Partnerships Order 1994.

The debtors had traded in partnership through a mobile catering van. Both partners became bankrupt, the partnership was dissolved, and the partnership assets were left without anyone able to wind up its affairs. The central issues were whether section 303(2A) to (2C) permitted the requested administration and consolidation, and whether the district judge was entitled to refuse relief because the van might have been exempt if owned individually.

1. Appeals allowed. The district judge’s orders were set aside. The partnership proceedings were directed to be consolidated and the former partnership was to be administered as if the debtors had presented a joint bankruptcy petition. Article 11 and schedule 7 of the Insolvent Partnerships Order 1994 were directed to apply to the three estates.

2. Section 303(2A) is not restricted to consolidating insolvency proceedings relating to a partnership already being wound up. Its language permits the court to regulate the future conduct of insolvency proceedings and to apply provisions of the Insolvent Partnerships Order 1994 with necessary modifications. The references to an insolvent partnership and the joint estate do not impose a requirement that a winding-up order must already have been made.

3. The power is subject to limits. The partnership must be shown by evidence to be insolvent. Where the court is asked to administer it as if its members had presented a joint bankruptcy petition, the court must also be satisfied that the order could have been made on an actual joint petition. That required the partnership to be unable to pay its debts. The unpaid VAT liability established that condition.

4. The district judge adopted an incorrect approach by treating the loss of a possible tools-of-trade exemption as a reason to refuse relief. If a person trades through a partnership or limited company and the relevant tool is an asset of that entity, the asset is liable to realisation in an insolvent winding-up. The fact that an individual trader might have obtained an exemption does not justify leaving partnership assets outside the insolvency process.

5. The court retained jurisdiction notwithstanding the debtors’ subsequent discharges from bankruptcy. The partnership remained insolvent, and its assets remained available for partnership debts and for debts proved or provable in the individual bankruptcies. Section 303 provided a quick and inexpensive procedure suitable for these closely connected estates.

The appeals were brought from orders dated 28 July 2006 made by District Judge Ashton sitting in bankruptcy in the Preston County Court. The High Court set those orders aside and made the directions sought by the Official Receiver.