Official Receiver v May

A bankruptcy restrictions order is not a matter of general discretion. The court must evaluate the bankrupt’s conduct and decide whether it falls below the appropriate standard so that an order is appropriate. If it does, the court must make an order, subject to the statutory minimum period. Culpable conduct may justify an order even where the bankrupt acted under pressure, lacked dishonest intent, has no history of similar conduct and is unlikely to offend again. Those matters remain relevant to the duration of the order. The regime has both protective and deterrent purposes.

The bankrupt sold a hire-purchase motorcycle without the finance company’s authority, at a substantial undervalue, and used the proceeds for other debts and living expenses. The Official Receiver applied for a bankruptcy restrictions order under Schedule 4A to the Insolvency Act 1986. The Newbury County Court dismissed the application because the District Judge considered that she had a discretion whether to make an order.

The Official Receiver appealed. The central issue was whether the court’s function was discretionary or evaluative and mandatory once the bankrupt’s conduct made an order appropriate.

1. Appeal allowed. The District Judge had proceeded on the erroneous basis that she possessed a general discretion whether to make a bankruptcy restrictions order. Her decision was set aside.
2. Paragraph 2(1) of Schedule 4A to the Insolvency Act 1986 provides that the court shall grant an application if it thinks it appropriate having regard to the bankrupt’s conduct. The words require an evaluative judgment, but do not confer an unrestricted discretion. The court must decide whether the conduct is such as to merit an order. If it is, the court is obliged to make one.
3. The conduct contemplated by Schedule 4A includes misconduct, neglect or financial irresponsibility. Extenuating circumstances may be taken into account when evaluating conduct, but lack of dishonest intent, desperation, depression, subsequent co-operation and the unlikelihood of repetition do not prevent an order where the conduct falls significantly below the required standard.
4. The sale of property subject to hire purchase, without authority, at a substantial undervalue and without accounting for the proceeds, exposed the finance company to the risk of losing both the asset and its money. That conduct was culpable and sufficiently below the appropriate standard to justify an order.
5. The duration of a bankruptcy restrictions order should be assessed by analogy with directors’ disqualification principles. The case fell within the lowest band of two to five years. Taking account of the mitigating circumstances and the delay in imposing the order, the appropriate period was two years and six months.

A bankruptcy restrictions order was made for two years and six months. There was no order as to costs.

• Newbury County Court: District Judge Henry dismissed the Official Receiver’s application for a bankruptcy restrictions order on 19 December 2007, treating the jurisdiction as discretionary.
• High Court (Chancery Division): The appeal was allowed. The decision below was set aside and a bankruptcy restrictions order was made.