Fehily & Anor v Atkinson & Anor

A person’s capacity to enter an individual voluntary arrangement is decision-specific and time-specific. The question is whether the person could understand the transaction’s key features and effects, and its alternatives, if given the advice and assistance needed, expressed in broad terms and simple language. Capacity does not require understanding every detail, and it is not determined by the advice actually received. An approved IVA is not void merely because the debtor lacked mental capacity. Its essentially contractual character means that the contractual rules apply, subject to any separate issue concerning the creditors’ knowledge of the incapacity.

HMRC had presented bankruptcy petitions against Mr and Mrs Fehily in respect of tax said to be owed by a partnership. The petitions were dismissed after the parties entered individual voluntary arrangements. When Mr and Mrs Fehily failed to comply, bankruptcy orders were made. Mrs Fehily applied to annul her bankruptcy order, contending that she lacked capacity to enter the IVA and that she was not liable as a partner.

The County Court dismissed the application. On appeal, the High Court granted permission but considered the capacity issue and the proposed fresh evidence. The central questions were whether the District Judge had applied the correct legal test and whether, if Mrs Fehily lacked capacity, the IVA was void.

1. Appeal dismissed. The appellant had not established that the District Judge’s assessment of capacity was outside the permissible range. The appeal court could interfere only for an immaterial consideration, failure to consider a material matter, an error of principle, or a conclusion outside the generous ambit of reasonable disagreement: [2003] 1 WLR 577 and [2008] 1 WLR 748.
2. The correct test is issue-specific and, where relevant, time-specific. The person must be capable of absorbing, retaining, understanding, processing and weighing information about the key features and effects of the proposed transaction, and its alternatives, if explained in broad terms and simple language. Understanding every ancillary, incidental or procedural detail is unnecessary. The assessment concerns the understanding the person would be capable of having with the advice and assistance needed, rather than the advice actually received.
3. The burden of proof lay on Mrs Fehily. Except in a very clear case, the court should have expert medical evidence to guide its assessment. The District Judge was entitled to place weight on the contemporaneous medical letters, the evidence of the insolvency practitioner, and the later correspondence. The fresh evidence was refused because it could have been obtained below and would not probably have influenced the result.
4. Even assuming that Mrs Fehily lacked capacity, the IVA would remain binding. An IVA is created through a statutory process and is not a contract, but is closely analogous to one and gives rise to contractual rights. Under section 260(2) of the Insolvency Act 1986, an approved arrangement binds the relevant persons as if they were parties to it. The contractual rules on incapacity therefore apply, so incapacity alone does not make the IVA void. The court left open the consequences of creditors’ knowledge of incapacity and the possible application of section 262(8).
5. The partnership-liability issue was not determined because it was unnecessary to the result.

• High Court (Chancery Division): Mrs Fehily was granted permission to appeal from the County Court decision, but the appeal was dismissed.
• Ipswich County Court: District Judge Parnell dismissed the application to annul the bankruptcy order on 19 December 2014.