Gittins v Serco Home Affairs

For an individual debtor, inability to pay debts under the Insolvency Act 1986 is primarily assessed by the cash-flow test: whether debts which have fallen due can be paid. A debt need not have been demanded before it is relevant. Future or contingent liabilities may have a limited relevance where the debtor’s use of assets for current purposes amounts to a fraud on future creditors. The court retains a discretion to annul a bankruptcy order even where the statutory ground is made out, but annulment is inappropriate where the debtor was unable to pay debts when they fell due. An order requiring uncertain contributions from a prisoner’s accounts was neither a valid instalment order nor enforceable by third-party debt order, charging order or set-off.

Mr Gittins, a serving prisoner, appealed against an order of District Judge Besford annulling a bankruptcy order made on his own petition. The petition followed a substantial costs liability owed to Serco after unsuccessful proceedings. A prior county court order required him to make four-weekly contributions calculated by reference to income and receipts, and directed Serco to deduct those contributions from his prison accounts.

The district judge concluded that Mr Gittins was able to pay his debt under that arrangement. The appeal raised questions concerning the meaning of inability to pay debts, the effect of the prior order, the court’s jurisdiction to make it, and the discretion to annul under the Insolvency Act 1986.

1. Appeal allowed. The bankruptcy order should not have been annulled.

2. Under sections 272 and 282(1) of the Insolvency Act 1986, the relevant inquiry was whether Mr Gittins could pay debts which had fallen due. The district judge’s formulation, which referred to debts being demanded, was erroneous. The primary test was commercial or cash-flow insolvency, rather than balance-sheet insolvency. There was a limited role for future liabilities where the debtor’s use of assets for current purposes amounted to a fraud on future creditors.

3. The court could examine the jurisdiction underlying the earlier county court order despite the absence of an appeal. The order’s validity was relevant to construction and discretion, and it would be pointless to annul the bankruptcy order if the result would be further proceedings to challenge an invalid order.

4. The order was not a valid instalment order under section 71 of the County Courts Act 1984 or CPR 40.11. It specified neither fixed instalments nor a fixed number of instalments, and instead required uncertain future contributions calculated by formula.

5. The direction to deduct money from the prisoner accounts was made without jurisdiction. It was not a third-party debt order under CPR 72.2, a charging order under the Charging Orders Act 1979, or an exercise of set-off. The accounts represented a debtor-creditor relationship, and the sums available were fluctuating and uncertain.

6. The balance of the costs judgment remained due, and Mr Gittins was plainly unable to pay it. He was also unable to pay the statutory interest, which was not included in the earlier order. His petition was therefore not an abuse of process, and the bankruptcy order ought to have been made.

1. High Court (Chancery Division) — Appeal from the order of District Judge Besford dated 5 December 2011. The appeal was allowed.
2. Kingston upon Hull County Court — Bankruptcy order made on 23 December 2010 and subsequently annulled by District Judge Besford. The annulment was set aside in consequence of the appeal.