Sands (as trustee in bankruptcy) v Layne & Anor

Under section 375(1) of the Insolvency Act 1986, the High Court may review, rescind or vary an insolvency order which it previously made, whether at first instance or on appeal. The power respects the court hierarchy because it extends only to an order made by the same court.

A bankrupt retains the personal right to appeal against the bankruptcy order. A trustee should be joined to proceedings which may set that order aside, so that the trustee’s costs and expenses can be protected. The existence of other unpaid creditors does not necessarily prevent dismissal of a bankruptcy petition following an unreasonably rejected offer of security.

A county court made a bankruptcy order against Mr Layne on Wycombe District Council’s petition. Mr Layne appealed to the High Court. Before the hearing, he and Wycombe compromised the appeal, and the High Court made a consent order discharging the bankruptcy order and securing payment to Wycombe. The trustee in bankruptcy was not joined.

The trustee later sought rescission of that order. The deputy High Court judge refused the application, principally because he considered that section 375(1) of the Insolvency Act 1986 did not permit the High Court, sitting at first instance, to rescind an order which it had made in its appellate jurisdiction.

The trustee appealed. The principal issues concerned the scope of section 375(1), the bankrupt’s standing to appeal, the trustee’s entitlement to be joined, and the effect of other unpaid creditors.

1. Appeal allowed in part and matter remitted. Section 375(1) of the Insolvency Act 1986 permits the High Court to review, rescind or vary an insolvency order which it made while exercising either first-instance or appellate jurisdiction. The words “every court” include the High Court in both capacities. The words “order made by it” preserve the hierarchy of courts: the High Court cannot use section 375(1) to review a county court order, nor can the county court review a High Court order. Appleyard v Wewelwa [2012] EWHC 3302 (Ch) was disapproved on this point because its restrictive statement was obiter. The broader construction favoured in National Asset Loan Management Ltd v Cahillane [2015] EWHC 62 (Ch) was approved.

2. A bankrupt retains standing to appeal against the bankruptcy order. Although causes of action capable of recovering assets normally vest in the trustee under section 306, an appeal against the order creating the bankruptcy status is personal and of a different character. Common sense and fairness require the right to remain with the bankrupt.

3. The trustee ought to have been joined to the application for the consent order. Joinder was necessary so that provision could be made for the trustee’s proper costs and expenses from the assets held in the bankruptcy. It also protected against the practical risk that an uninformed trustee would continue incurring costs after the bankruptcy order had been discharged.

4. The petitioning creditor controls the petition, although a bankruptcy order creates a collective remedy for all provable debts. The court may permit that creditor to withdraw. Another creditor wishing to continue may be substituted under rule 6.30 of the Insolvency Rules.

   Section 271(3) also permits dismissal where a debtor has made a reasonable offer to secure or compound the petition debt and the creditor has unreasonably refused it. That power can be exercised even though the debtor is insolvent or has other unpaid creditors. The trustee therefore could not have defeated the consent order merely by showing potential prejudice to other creditors. McCombe LJ cautioned that this would not inevitably be the result in every case.

5. The High Court’s order was displaced only to the extent necessary to determine payment of the trustee’s proper costs and expenses. The remaining grounds of appeal were dismissed, and delay did not require determination.

1. Court of Appeal (Civil Division): In [2016] EWCA Civ 1159, allowed the trustee’s appeal in part and remitted the matter to the High Court to determine payment of the trustee’s proper costs and expenses. The remainder of the appeal was dismissed.
2. High Court, Chancery Division: A deputy High Court judge refused the trustee’s application to rescind the consent order. He held that section 375(1) of the Insolvency Act 1986 did not extend to an order made in the High Court’s appellate jurisdiction and rejected the application on additional grounds.
3. Aylesbury County Court: The county court held that it lacked jurisdiction to rescind the High Court order and transferred the trustee’s application to the High Court. The original bankruptcy order had also been made in the county court.